Mortgage Questions, Answered: How to Qualify For & Obtain Home Financing
Have mortgage questions? You’re not alone! Although common, getting a mortgage is a complicated process that few thoroughly understand.
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A mortgage is one of the least expensive ways to finance your home purchase — second only to an interest-free loan from the Bank of Mom & Dad. A mortgage is also one of the best ways to finance your investment property purchase — historically low interest rates maximize your buying power.
But getting a mortgage isn’t as easy as walking into the bank, asking for money, and leaving a few minutes later with a check. Besides the mortgage questions most folks have, today getting a mortgage is significantly harder than it used to be. Thanks to the housing crash in 2008, lending guidelines are far more restrictive these days — no more NINJA loans (No-Income No-Job Applicant). If you want a mortgage, you have to meet some fairly strict requirements — so you better get your mortgage questions answered before you apply. If you’re just hitting the bare minimums, you’ll be paying higher interest rates and Private Mortgage Insurance.
Mortgage Questions: What is a Mortgage?
A mortgage is a loan, secured by a specific piece of real estate, used to finance the purchase of that real estate. Once the borrower secures a mortgage, they make regular, monthly payments to the lender for the life of the loan. Typical mortgages are for 15, 20, 30, and even 40 years.
If the borrower stops making these payments, the lender will seek foreclosure, which is the legal process of taking possession of the property.
Typical mortgage issuers are banks — both local community banks and national chains, credit unions, and mortgage brokers — who qualify you and fund the loan, then sell the loan on the secondary market, usually to Fannie Mae/Freddie Mac, private entities supported by the Federal Government. Fannie and Freddie purchase loans from the lenders who originate them — provided they meet their lending requirements — then either keep them in their own portfolio or bundle them with other loans and sell them as mortgage-backed securities.
Loans can be sold at any time. If this happens, the borrower receives notice of the sale and a date on which the payment is now due to the new lender. There is no limit to the amount of times a mortgage can be sold, but the original terms of the mortgage remain intact.
So let’s look at the steps to getting a mortgage and cover some common mortgage questions.
Know Your Credit Score
Before you start looking for a mortgage, before you even start looking for a property to purchase with that mortgage or getting answers to mortgage questions, you need to know how much money you can spend. Your lender will ultimately give you that dollar figure, and one of the top factors they consider is your credit score. Your lender will run your credit report to see what sort of credit risk you pose. Before you talk to a lender, it’s best to know what they’re going to see on that report, so you can make adjustments and remove any inaccurate information.
Your credit report is the history of how you have used credit — on-time payments and low credit utilization shows lenders that you are a good loan candidate. The higher your credit score, the lower your interest rate will be. The best rates go to borrowers with scores of 740 or higher.
On-time payments make up 35% of your score. Credit utilization makes up another 30%. That’s already two thirds of your credit score, so making payments on-time every month and keeping your balances low are two of the best things you can do to improve your credit score or keep it up if it’s already high.
What is a Good Credit Score?
In your search for answers to mortgage questions, it’s important to learn the role that credit score plays.
While there are a few different credit scoring companies, most lenders look at your FICO score. FICO stands for Fair Isaac COrporation. They’ve been around since the dawn of time and are considered the Gold Standard of credit scoring. Their system ranges from a low of 300 to a high of 850 — but that scale is skewed toward the high end. Here’s how it shakes out:
- Excellent: 750+
- Good: 700–749
- Fair: 650–699
- Poor: 600–649
- Bad: 599 and under
Like I said above, the best rates go to borrowers with a score of 740 or higher. Most lenders stop at 620, although a few will go down to 580 for owner-occupants. The lower your score, the higher your interest rate will be, effectively lowering your buying power.
Related: How to Improve Your Credit Score
Minimize Credit Issues
One of the most important mortgage questions to answer is how to get your credit score to where it needs to be. If you aren’t in the “excellent” or “good” categories, now is the time to try to get there. You can simultaneously work on improving your credit score while you are looking for a property to purchase. But let’s get to the root of the problem — what makes your score so low?
Are you consistently making late payments?
On-time payments make up 35% of your credit score. If you find yourself continually making late payments, there are several ways to fix that.
- Sign up for automatic payments/withdrawals. Most companies have an automatic payment option — where you give them either a credit card or bank account number — and they schedule the payment for you. This works great for most situations, but not for everyone. Both my husband and I work from home, necessitating internet access. The only current option is the local cable company, who isn’t known for great customer service. I write them a check every month to pay the bill because when it comes time to cancel, I don’t trust them. My city is installing a fiber optic network, which will provide lightning fast internet service. As soon as it goes live in my neighborhood, I’m cutting the cable — and I want as little hassle as possible when I do.
- Pay bills when they arrive. I used to open my bills and put them to the side, intending on paying them when they were due. Instead, I forgot about them and paid them late. It wasn’t a question of having the money to pay them; it just slipped my mind. I paid several late fees before I started paying them the day they arrive. I open them up, write the check, and put it into the outgoing mail right away. I haven’t paid a late fee since implementing this practice.
- Schedule payments on your electronic calendar. For those bills you don’t want to automatically pay but you also don’t want to send in as soon as you get, schedule them on your electronic calendar. Google has a great calendar for Android, Apple has a great calendar for iPhone — and they will both send you a notification.
Is your debt-to-credit ratio high?
Your score is also affected by how much of your credit you use. Let’s say your credit card has given you a $1,000 limit, and your current balance is $800. You are using 80% of your available credit — and lenders don’t like that. They much prefer a credit utilization rate of under 30%, or a balance of $300 on a $1,000 limit.
Start paying off your credit cards. If buying a property is a priority, take all your extra money and throw it at your cards to bring your debt to credit ratio down as much as possible.
Before You Apply
Have mortgage questions regarding the application process? First, there are a number of things that you can do to make your mortgage application the best it can be. A great credit score is just the start.
Put your spending on hold.
When you’re trying to get a mortgage, hold off on spending money. Unless your car dies or the furnace goes out, don’t make any large purchases until after the loan closes. If you are just barely qualifying, you don’t want to make an unnecessary large purchase and throw your credit utilization out of whack, effectively ruining the deal.
This is also not the time to go opening new credit cards. Before approving your application, the card-issuer runs a credit check. This gives you a hard inquiry into your credit history, and a hard inquiry will knock a few points off your score.
The mortgage industry is tight-lipped about exactly how it analyzes your qualifications and determines the limit on your loan. Play it safe and make as few purchases as possible until after the loan closes.
Put large transfers on hold, too.
When applying for a loan, your lender wants to see documentation about everything financial. Routine or easily-explained transfers of money into and out of your account are fine and expected, but large or unusual transfers are questioned, and documentation isn’t always easy to provide.
Once the money has been in your account for 3-6 months, it’s considered yours, and no documentation is necessary. The last time I got a mortgage, in a weird turn of events — and poor timing on my part — I had a fairly large deposit leaving my primary checking account to an online, higher-interest account. I left some of the money in the online account when I transferred it back to the checking account, and the entire thing happened between statements, so it didn’t appear correctly on the documentation. This whole situation jeopardized my loan, and it took literally hours of phone calls to the various institutions to get the whole mess sorted out.
Learn from my mistake and get everything in order before you even apply for the loan. The pennies you miss on the interest are more than made up for by the lack of hassle during the loan qualification. It’s definitely worth getting mortgage questions regarding transferred answered before you start the process so you can learn how to avoid missteps.
Find a lender.
If one of your mortgage questions isn’t “how can I shop around for mortgage rates?” you should add it to your list.
The cost of getting a mortgage varies from lender to lender, so you’ll need to ask mortgage questions related to lender choice before anything else. Some lenders may have a decent rate with high closing costs, while another might have a higher rate with significantly lower closing costs. The key to finding the best deal is to compare apples to apples. When seeking to get your mortgage questions answered, be sure to get rate quotes from at least three lenders — five is better, and the more quotes you get, the better rate/terms you can find. Take a look at local institutions like credit unions, as well as national options like mortgage brokers.
You shop around for the best price on tires and groceries, right? Why wouldn’t you shop around for the best price for your mortgage?
Put all the information in a spreadsheet with headers like “Lender Name,” “Interest Rate,” “Loan Term,” and “Closing Costs.” A lower interest rate with higher closing costs can actually cost you more money.
You’ll want to get all your quotes within a tight timeframe — myfico.com says for lenders using the older scoring method, that means 14 days. For lenders using the newer scoring method, it opens up to 45 days. (Lucky for you, your lender probably won’t tell you which method they will use, so play it safe.)
Getting mortgage quotes from several different lenders doesn’t (usually) mean you are looking for several different mortgages — it’s interpreted by the credit bureaus as you shopping for the best rate. The multiple inquiries get lumped into one hard inquiry and don’t have the negative impact on your score that multiple hard inquiries typically would.
According to a report from the Consumer Financial Protection Bureau, 47% of homebuyers didn’t shop around for their mortgage. Speaking to just three different lenders can save you thousands of dollars in mortgage costs. Why wouldn’t you shop around and get mortgage questions regarding different costs answered first?
Most real estate markets have come back with a bang, and competition for properties can be fierce. In tight markets, offers won’t even be given a second glance unless accompanied by a pre-qualification letter or a pre-approval letter. In ultra-tight markets, the more thorough pre-approval letter is the best way to go.
What’s the difference between a pre-qualification and a pre-approval?
Pre-qualification means the lender has taken your current income and debt into consideration and determined that if those items are found to be valid, you could qualify for a loan of up to $X. Pre-qualification can be done in about an hour.
Pre-approval, however, means that the lender has looked much deeper into your background. They’ve been given proof of your income, debts, and assets, run a background check, and submitted the whole business to underwriting for their approval. Pre-approval takes about a week and is a much more in-depth investigation into your financial history and current situation.
A pre-approval letter is valid for about 120 days, so you want to get this paperwork started in the beginning of your home search.
So, how do I get a pre-approval letter?
Once you have decided on a lender, based on their rates, closing costs, and ability to get the loan approved within your timeframe, ask them for a pre-approval letter.
Start this process as close to the start of your home search as possible — you want to give them time to have the letter written up, and you want to give yourself time to look for a home. Remember, these letters are typically only good for 120 days. If you’re in a hot market, it might take that long or longer to find a home you want to buy.
A pre-approval letter is easy to get because it’s not binding — it isn’t a guarantee that you will receive a loan. It’s a letter that tells how much money you have been preliminarily qualified for. Pro tip: I like to have my lender adjust the pre-approval letter dollar amount to the amount I am offering, making it seem like I am offering at my limit. I don’t want the seller to know I am approved for a higher amount — they might feel like there is more room to negotiate.
My sister is currently selling her house and buying a new one, so I borrowed her pre-approval letter. Here’s what has to happen before her pre-approval turns into approval:
Specific conditions required for final approval include the following:
- A valid sales contract on the subject property
- Acceptable appraisal supporting loan value
- Evidence of hazard insurance and flood insurance (if required)
- No changes in employment, income, credit, and asset information submitted
- Satisfaction of any final secondary market/investor requirements
- Satisfactory verification of employment, income, credit, and asset information submitted
- An acceptable preliminary title commitment issued on the subject property
So in order for her to actually be given the money to purchase the house, seven different contingencies have to be met.
How to Get a Mortgage: The Mortgage Application
After you have gotten your mortgage questions answered, viewed your credit report, decided on your lender, and found a house you want to buy, the fun really starts. Typical residential real estate contracts allow for 30-45 days for the mortgage to be approved, the home to be inspected and any problems resolved, insurance obtained, appraisal, flood certification if necessary, etc.
In addition to the tax returns and pay stubs, there are a whole host of other documents your lender may ask for including 3-6 months of bank statements, proof of any other income like rent or alimony, and paperwork regarding monetary gifts used for down payments. Be prepared to discuss the most minute details of your financial life, and have explanations ready for any odd ducks that may pop up.
The more documentation you can provide up front and mortgage questions you can get answered, the lower your chances are for a last-minute document dash to satisfy the underwriters — or worse a last-minute denial.
Cash for Closing
Buying a house is expensive. In addition to the down payment, there are a multitude of other costs you will be expected to cover — and the amount of cash at closing will be considerably more than just your down payment.
You have to either come up with the entire down payment yourself or have it gifted to you. If you are receiving a gift, the person giving the money has to sign a paper stating it was a gift and that they do not expect to be repaid. They may also be asked to provide proof of funds like a bank statement.
If you’re purchasing a property for your primary residence, you can qualify for a loan with as little as 3.5% down. Think $3,500 for every $100,000 in purchase price.
If you’re purchasing an investment property, lenders typically want a 25% down payment. That’s $25,000 for every $100,000 in purchase price. You can turn an investment property into a primary residence easily with a little thing we like to call house hacking.
Purchase a property with either more bedrooms than you need and rent out the extra space or purchase a multifamily property with more units than you need and rent out the extras. You can qualify for a residential mortgage on multifamily properties up to four units.
Your lender will run a thorough credit report on you and all other persons who will be named on the mortgage. They want to see how timely your debt payments have been in the past, which gives them an idea of how timely you will be making your payments to them in the future. This should only cost around $25.
Your lender will require you to pay for a title insurance policy, which covers their interests in the property. You will have to pay for an additional title insurance policy to cover your own interests in the property — if you do not and an issue arises down the road, you are not covered and can lose your entire investment.
The lender’s policy is based on several things, such as the price of the home, when the last title policy was written, and any extended coverage. The title policy that covers your interests will be more expensive than the one covering the lender’s interests. That policy will come at a discount when purchased and bundled with the owner’s policy.
For my most recent retail transaction, the owner’s policy on a $312,000 sales price was $1,006. The lender’s policy was $400 because it was bundled with the other policy. The owner’s policy comes at a discount 70% re-issue rate because the previous policy was written within the last 5 years.
There is an inspection period in your contract, typically 7-10 days from the time that both parties have signed it. During this time, you may get an inspection on the home to give you an idea of the condition of the property. The purpose of the inspection is not to nitpick obvious items, like a dirty floor or cracked walls.
The inspector walks the entire home and tests all the major systems like furnace, electrical, plumbing. They don’t guarantee the system, but they can tell you the age and general condition of it, along with the average lifespan for that system.
A water heater’s average lifespan is 12-15 years. My most recent inspector told me he’s seen water heaters that have died after 5 years, and others that are still working fine at 19 years.
After the inspection is finished, the inspector will show you the things he found, pointing out both the urgent items that need repair immediately, as well as less significant items.
The inspector will write up everything in a report and share it with you, either via email, in print, or both. My most recent inspector had a portable printer with him and printed it while we were still in the home, in addition to emailing it while we were talking.
Your home inspection will cost between $300 and $1,000, depending on how big the house is and what extra services you choose, such as infrared cameras, sewer scopes, radon testing, etc.
The lender will order an appraisal for your property to make sure it is worth what you are paying for it. The economic downturn and housing crash was due in large part to bad appraisals to approve bad borrowers. Guidelines are far more stringent now. The lender can no longer specify an appraiser.
The appraiser comes to the property and walks around it, making note of features, improvements, and general condition. The appraiser then compares it to similar homes within a small area surrounding the subject property — typically within a half mile or less — that have sold recently.
FEMA (Federal Emergency Management Agency) has drawn up maps around the United States to determine areas that are more prone to flooding. As you can imagine, these areas are typically located near waterways. If a property is located in a FEMA-designated Flood Zone, the lender may require the homeowner to obtain flood insurance as a condition of the loan.
Flood insurance is only available through the federal government and typically has a waiting period of 30 days before it is active; however, if you purchase flood insurance at the same time you purchase the property, your waiting period is waived.
At the Closing Table
Now that we’re at the closing tables and all your mortgage questions have been answered, everything is smooth sailing, right? HAHAHAHA!
Again, the more work you do up front and mortgage questions you get answered, the less likely you are to have issues at the closing table. At least on your side. The seller still has the opportunity to throw a monkey wrench into the whole thing.
Your closing agent, real estate agent, or attorney will let you know when the closing is scheduled to happen. Bring your state-issued ID card, the funds in the correct form of payment, and patience. Wait, back up a comma. The funds in the correct form of payment. This is kind of big. My last closing, where I represented the buyer, I missed a crucial line in an email. Funds over $50,000 were only accepted through wire transfer. Not a big problem, except that the closing agent reminded me of this when she still hadn’t received my funds at 3:00 p.m. the day before closing.
Now, I was the one who missed the line in the email. I’m not trying to shirk blame. This one was all on me. But I’ve never heard of a closing company who wouldn’t take a cashier’s check for the buyer’s portion of the purchase. And I had said more than once, “The lender will wire their portion on time and we’ll bring a check to closing.”
So “the funds in the correct form of payment” is actually very important. That and an ID card.
Have mortgage questions regarding closing documents?
It’s no surprise to anyone who has ever gotten a mortgage that the documents are difficult to read and understand, even after you’ve gotten mortgage questions regarding the process answered. Even better, these documents were frequently delivered the night before or even the morning of closing, giving the borrower little time to review them before closing.
The government tried to clear up the process by redesigning the forms used at closing and amending the timeline for delivery. These new forms clearly state the loan amount, as well as terms and details specific to the loan, such as origination fees, prepayment penalties, any points, etc.
The new timeline makes it mandatory for the lender to provide a Good Faith Estimate no more than three business days from application, and a HUD-1 no less than three business days before closing.
On the HUD-1 statement, you will be given an exact account of where each dollar in the transaction is going or where it came from. As the buyer, you will be given a dollar figure to bring with you to the closing table — or to have wired prior to closing.
You’ll also get an accounting of how that money is spent, including any concessions the seller is offering or any money owed you for fees for that they are responsible during their ownership, but won’t become payable until you own the property.
You’ll also get an accounting of items you will prepay.
Mortgage interest is paid in arrears, meaning your June 1 payment covers the month of May. Depending on the day of the month you close, you will prepay the interest for the current month at the closing table. It is important that you get mortgage questions related to payments you’ll owe answered beforehand so you know what to expect.
Closing within the first week of the month usually means your first mortgage payment is due on the first of the next month. An early June closing means a July 1st payment. Closing during the last three weeks of the month will typically mean that your first mortgage payment isn’t due until the following month, so a late June close means your first payment is due August 1.
When you’re closing in the later part of the month, you’ll prepay all your interest for the month you close. The later in the month you close, the less money you bring to the closing table. If you close on June 15, you’ll prepay for June 16-30. If you close on the 26th, you’re only prepaying June 27-30.
Prepaid Insurance/Taxes -Escrow
Property taxes are also paid in arrears, and are typically collected monthly along with your mortgage payment and held in an Escrow account. Using the same theoretical closing date of June 15, 2016, you will prepay your taxes from January 1 – June 15. Actually, you’ll receive a credit from the sellers, who will be responsible for paying the taxes for the days they owned the property.
Signed, Sealed, Delivered — It’s Yours!
A smooth closing will take around two hours to complete. As the buyer, you will sign your name about 96,000 times. The closing officer will explain each document to you before you sign. To be honest, most people don’t read the documents before they sign them, and the closing officer usually does a good job of explaining them.
If you’d like to read each document — and I encourage you to do so in order to get all your mortgage questions answered — it will push your closing time back significantly. You may want to ask for a copy of the documents before you get to the closing table so you can read them at your own pace.
Two short hours — and a couple of hand cramps — later, you are now the official owner of that new property.
Have any details about the mortgage process you’d add? Did this article answer all your mortgage questions?
Leave your comments below!