The home loan process has three stages and the first stage is qualifying for a mortgage. The first (semi-unofficial) step in the “qualifying for a mortgage” page is doing your homework. This page the result of thousands of introductory phone calls with potential borrowers and was created to address many of the common questions. First time home buyers may want to visit Home Buying 101 for topics covering credit scores, the do’s and don’ts of mortgages, and other helpful information.
The next step (after you conduct your independent research) is to get pre-approved and provide your supporting mortgage documents required for the mortgage loan process. We recommend self-employed borrowers tackle the paperwork immediately as it can often involve your CPA.
Home Loan Basics
“The three most common questions when starting the home loan process are: “What are the rates?”, “What are the fees?”, and “What are the payments?”
1. Monthly Payments
Monthly mortgage payments consist of Principal, Interest, Taxes, Insurance. If all of these components are paid in one monthly payment it’s called “PITI” (pronounced “P.I.T.I” – on “pity”). If only the Principal and Interest are paid each month then it’s called a “P&I” payment (pronounced “P and I”). The loan structure’s and whether there is an escrow account determines if the payment is PITI or P&I.
It’s worth noting that Mortgage Insurance (MI) can be part of a PITI payment; however, it is still called “PITI” regardless of whether there’s MI or not.
Down Payment Options
The mortgage down payment options (and our recommendations) vary based on the loan program. A few generic recommendations are:
- For conventional loans we recommend either 3%, 5%, 10%, 15%, or 20% down
- For FHA financing we typically like 3.5% or 5%.
- For VA, USDA, and Bond loans the 0% is hard to beat
Please call the Mortgage Mark Team if you have any questions.
2. Closing Costs & Prepaids
Our Closing Cost Overview page provides estimated closing costs for purchases, refinances, and new construction loans. Because of the large amount of information on that pages we’re not including any additional links here. That page will provide our lender fees, explain mortgage points, discuss different methods to pay for closing costs, etc..
Typically there aren’t any upfront costs to the lender in the mortgage loan process. The only out-of-pocket costs when buying a home come immediately after executing a purchase. The upfront costs are typically for:
- Checks you write for your option and earnest money
- Inspections you choose to preform on the home (like a home inspection)
- (if applicable) Money for a condo questionnaire (ask your Realtor or Lender)
- Credit card charge to pay for the appraisal
All other money for the down payment, closing cost, and prepaids are paid at the time of closing to the title company.
Sellers may incur upfront costs depending on their situation. Seller should select a Realtor that will provide solid counsel and set expectations throughout the process.
3. Interest Rates
Mortgage interest rates change daily. Your interest rate will be determined by the financial markets at the time of locking and your mortgage profile. Our lock and interest rate page provides details surrounding the market and how to lock an interest rate.
Interest Rate Factors
The main factors that impact an interest rate (aside from the financial market) are the borrower’s loan details. Contrary to popular belief the Debt to Income (DTI) does not impact the interest rate. This means your annual income and amount of debt don’t impact the rate. When it comes to DTI you either qualify or you don’t.
Below are the influencing factors on interest rates (listed in alphabetical order).
A borrower’s credit is one of the most influencing factors on a mortgage interest rate. This is obvious. Generically speaking the higher the credit score the lower the interest rate. Interest-rate adjustments relating to credit typically operate in tiers of 20 point adjustments. Ex: someone with a credit score between 680 and 699 will typically have a better mortgage rate than someone with a credit score between 660-679. The adjustment amounts and tiers vary from program to program but the principle holds true.
Higher loan amounts can often have lower interest rates compared to loans with lower loan amounts. Here’s why. Let’s assume a lender wants to make $1,000 for originating a loan. For a $400,000 loan amount the lender will need to add 25 basis points (.25%) to pricing to make the $1,000. (400,000 x .0025). For contrast, let’s now use a $50,000 loan amount. To make the same $1,000 the lender will need to add 200 basis points (2%) in pricing. (50,000 x .02). As a result, the lower loan amount with 200 basis points factored into pricing will most likely have a higher interest rate than the same loan profile with a $400,000 loan amount.
The type of loan program influences the interest rate. Different programs have different rates. Which program is best for you is determined by your mortgage profile and what you’re trying to accomplish. Call the Mortgage Mark Team and we’ll be happy to explore options with you.
Purchase loans and rate and term refinances typically have comparable rates. Home improvement purchases and other types of refinances will have higher interest rates.
Loan to Value (LTV)
The Loan to Value (LTV) is calculated by taking the loan amount and dividing it by the home’s sales price (or appraised value for refinances). For purchase loans the loan amount is determined by the mortgage down payment; for refinances the loan amount is most often determined by the borrower. Different loan programs have different adjustments for LTVs. They are too dynamic and too vast in number to list here. Just know that lower LTVs don’t always translate to lower rates. Don’t believe us? Check out Fannie Mae’s LLPA charts for examples.
Mortgage interest rates are typically locked with a 30-day duration. This means the loan must close and fund within 30 days after locking in the interest rate. Rate locks typically (but not always) work in 15 days intervals. The shorter the lock period (like a 15-day lock) the better the rate. Conversely, the longer that lock period the higher the rate. Most lenders will go out to 75 to 90 days without requiring upfront money for an extended lock.
Primary home loans have lower interest rates than loans for non-owner occupied investment properties. Mortgages for second homes (i.e. vacation homes) have interest rates comparable to loans on a primary homes. But unlike a loan for a primary home, the minimum down payment for a second home is typically higher to reduce the lender’s risk.
The best way to follow rates (in our opinion) is to follow www.FreddieMac.com. Freddie Mac is Fannie Mae’s little brother. Freddie, like Fannie, does not originate mortgages which means their published rates are not advertisements to make the phone ring. Their rates update weekly on Thursdays. While it’s not real-time information it’s still a great indicator of rates. Freddie Mac’s website does show rates with partial mortgage points; however, you can add .2%(ish) to the rate for the equivalent of a no-point rate.
Interest Rate Locks
The timing of when a borrower can lock a mortgage interest rate varies from lender to lender. Below are generic standards that practiced by most lenders.
Buyers can lock an interest rate once they have been pre-approved and execute a purchase contract with a seller to buy a home.
For refinances, it is typical for a lender to require all supporting paperwork from the mortgage document checklist to be submitted before locking the interest rate.
Locking new construction interest rates require a definitive closing date be provided from the builder. We need a closing date to be set because interest rates have expiration dates. It’s expensive for the buyer to pay for rate extensions should the lock expire before the closing date.
Loan Officer, NMLS # 729612