Mortgages + Lending
Getting Pre-Approved
When you’re ready to start house hunting, it’s time to get pre-approved for a mortgage. To get preapproved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.
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Debt-to-income ratio is a financial instrument lenders use to evaluate your loan application. DTI helps your lender see how much of your monthly income is already going to debt so they can evaluate the amount of mortgage debt you can take on.
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Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how risky you are to lend money to.
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Buying a home with no money down is possible but most homeowners need to have some cash for a down payment. A down payment is the first major payment you make on your loan. The amount of money you’ll need to save depends on your loan type and how much money you borrow.
Many home buyers believe that they need a 20% down payment to buy a home. This isn’t true – you can buy a home with as little as 3% down (0% if you are a veteran).
If you do put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance. PMI protects your lender if you default on your loan.
You’ll also need to pay for closing costs before you move into your new home. The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to save 3% – 6% of your home’s value for closing costs.
Types of Mortgages
Several types of mortgage loans are available. Your lender will help you determine which is best for you and your circumstance.
01— Conventional Mortgage
The first step to selling your home is to evaluate the home's condition. It will be important to address any cosmetic or functional problems and discuss potential upgrades or improvements that may bring additional value to your sale. Note that some problems may require disclosure to potential buyers. We will discuss the findings and available options to help ensure your home is in the best condition possible for attracting buyers.
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When you calculate interest and fees, your total cost is lower than an unconventional loan.
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Conventional loans aren’t backed by the government, so lenders can charge a higher interest rate or require a higher down payment compared to unconventional loans. This type of loan also requires you to pay private mortgage insurance (PMI) if your down payment is less than 20% of the home’s value.
02— Federal Housing Administration Mortgage (FHA)
There are many important factors to consider in determining a competitive list price for your home, such as location, condition, age, supply and demand, as well as local market conditions. It will also be valuable to conduct a Comparative Market Analysis (CMA) of similar homes that have recently sold in your area. You may also choose to have a professional appraisal of your home conducted in advance. Understanding what the market will pay is a critical part of achieving a successful sale, and all of these factors will help guide your decision to establish a list price.
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With Federal Housing Administration (FHA) loans, you can get a mortgage with as little as a 3.5% down payment and low
interest rates.
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You’re required to pay a mortgage insurance premium (MIP). This is a fee similar to PMI, except that you have to pay it for the life of the loan, or until equity reaches 20% (or refinance later).
03— VA Mortgage
Preparing your home to sell can make a big difference in what a buyer is willing to pay for it. Depending on the condition of the home, there are three key considerations: maintenance and repairs, renovations and upgrades, and staging. Getting market-ready may include a variety of tasks, from reducing clutter and fixing maintenance concerns to updating paint colors and addressing landscaping needs. It may also be advantageous to have the home professionally staged. The focus of this process is to prepare your home to make a great impression and invite the most attractive offers possible.
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With Department of Veterans Affairs (VA) loans, military veterans can buy a home with virtually no down payment or mortgage insurance.
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VA loans also come with a funding fee. This fee can range anywhere from 1.25% to 3.3% of your loan, depending on your military status, down payment amount, and whether it’s your first time financing a home with a VA loan.
04— USDA/RHS Loans
A USDA loan is a zero-down mortgage that is offered by most lenders and backed by the U.S. Department of Agriculture. Their purpose is to spur economic activity and homeownership outside of major cities. They are not for farms or even homes with large acreage. They are for standard everyday homes that happen to be located in less-dense areas.
An RHS loan is a type of financing offered through the Rural Housing Service (RHS), which operates as part of the United States Department of Agriculture (USDA). RHS loans falls under the USDA loan umbrella but come with slightly different requirements and benefits.
While the RHS offers a variety of loan programs, most borrowers are interested in the agency’s single-family housing program.
These Rural Development loans allow qualified borrowers to purchase eligible rural properties with no money down. In some cases, these mortgages can come with subsidized interest rates. Even for applicants not eligible for subsidies, rates tend to be lower than conventional alternatives, thanks to the program's strong government backing.
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USDA loans have some great benefits for those who qualify. Most importantly, they require no down payment. Compared to other loan programs — which may require anywhere from 3% to 20% down, this can mean significant savings come closing day.
There’s also no hard-and-fast credit score requirement — at least not from the USDA. You’ll technically need a 640 score to be approved through the USDA’s automatic underwriting system, but if your score lower, there’s a good chance you can still be approved. The loan will just go through a manual underwriting process instead.
Interest rates for USDA loans are typically low. Because the U.S. government guarantees the loans, lenders can offer low rates — even to borrowers with less-than-perfect credit scores.
Finally, USDA loans have lower mortgage insurance rates than many other loan options. With a USDA loan, you’ll pay a 1% upfront funding fee and 0.35% every year of the loan. For comparison, FHA borrowers pay 1.75% upfront and 0.80% to 1.05% annually.
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USDA loans aren’t perfect, and they do come with some drawbacks for those who choose to use them. For one, they’re not available everywhere — or to everyone. Only borrowers located in certain geographic areas who meet strict income requirements can qualify.
Additionally, the loans can only be used on primary residences — not second homes or vacation properties. Homes purchased with a USDA loan can’t be used for income-producing activities either.
There are also the insurance and fees to think about. While USDA mortgage insurance may be lower than some other options, it still comes with a sizable upfront cost. But, you may be able to roll them into your loan balance if you’re unable to afford the fees.
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RHS-guaranteed loans always have fixed rates – adjustable-rate mortgages are not offered under program guidelines – and must be for a term of 30 years.
RHS single-family housing guaranteed loans have interest rates based on current market trends. However, because of their government backing, borrowers may qualify for lower rates than with comparable conventional mortgages.
The Mortgage Process
The very first step of the home buying process is to get a pre-approval letter from a lender stating how much you are qualified for. It's important to ask your potential lenders some questions to make sure they are a good fit for you.
Don’t understand something your lender says? Stop and ask for clarification. This is your home buying journey, and you deserve to understand the process every step of the way.
A pre-approval is only valid for 30-90 days, so while you can start talking to lenders, you’ll want to wait on getting that pre-approval letter closer to when you’re ready to buy.
Questions to Ask Potential Lenders
1. What type of loan do you recommend for me? Why? There’s no one type of mortgage loan that’s superior to another—but whichever you choose, you need to know why it’s best and how it works.
2. Will my down payment vary based on the loan I choose? If you’re tight on cash or don’t want to be cash poor, let your lender know. Loans vary in their down payment requirements.
3. What is the interest rate and the annual percentage rate (APR)? Everyone talks about the interest rate, but the APR is just as important. It combines the interest rate with the fees a lender charges to originate your loan.
4. Can I lock-in an interest rate? If so, for how long? If you think rates will be moving up, ask if you can lock it in for a set period of time.
5. What will my closing costs be? Are they a part of my loan, or will I pay them in cash at closing? Remember, closing costs usually run 3-6% of your loan value so you need to know how they’ll be covered.