Home ownership is the foundation of the American dream and a top financial goal for many people. But with the median listing price for homes on the market at just over $250,000, according to Zillow, most homebuyers need to finance their purchase with a mortgage instead of paying cash.
Finding the right mortgage loan is arguably just as important as finding the right property. You’ll be paying off your mortgage for years, and the best terms can save you thousands of dollars over time.
This guide explains how mortgages work, the basics of mortgage fees and the mortgage process, and the different types of loans available. You’ll get an overview of the top mortgage lenders in the United States so you can find the best deal for your loan.
How Mortgages Work
When you take out a mortgage, you borrow money from a bank or other lender to buy your home. A mortgage is a secured loan with your home as collateral, so the lender will hold the title to the property until the loan is paid in full. You will make payments on the loan each month, including interest, until it is paid off. After you pay off the mortgage, the lender will give you the title to the property, and you’ll own your home outright.
When you choose a mortgage, you have four major decisions to make: the lender, loan type, loan term and interest rate type.
Types of Mortgage Loans
There are two major types of mortgage loans: government-backed and conventional. Government-backed mortgage programs offer guarantees to lenders that reduce their risk and can make it easier for borrowers to qualify for a mortgage. Conventional loans do not offer the same guarantees but may have lower interest rates.
FHA 203(b) loans. The Federal Housing Administration, part of the U.S. Department of Housing and Urban Development, offers the Basic Home Mortgage Loan 203(b) government-insured mortgage program, which makes it easier for homebuyers to qualify for mortgages. The FHA doesn’t lend money; instead, it insures mortgages and reimburses lenders if borrowers default on the loan.
With government backing, it’s easier to qualify for FHA loans than conventional ones. You could qualify with a lower credit score and a smaller down payment, as little as 3.5 percent. However, you need to pay the FHA an upfront fee of 1.75 percent of the loan amount, plus annual mortgage insurance for at least 11 years. With these fees, FHA loans can be more expensive than conventional ones.
FHA 203(k) loans. If you purchase a fixer-upper, you could get a home renovation loanwith the FHA 203(k) Rehabilitation Mortgage Insurance program. These loans let you finance up to the maximum FHA loan limit (more than $1 million in some locations) into your mortgage to pay for renovations and improvements. The amount is combined with the home purchase under one mortgage. Fannie Mae offers a similar program, the HomeStyle Renovation Mortgage.
Lenders may be more willing to move forward on properties under this program that they wouldn’t accept with a conventional mortgage. Lenders don’t want to get stuck with a run-down property if a borrower defaults on the loan, but they’ll accept these deals because of guarantees from the FHA or Fannie Mae.
Bob Blackhurst, a Realtor with BHHS Fox & Roach Real Estate Agents & Associates in Greenville, Delaware, finds these loans come in handy for many of his clients. “Housing inventory is tight, and it’s not easy to find properties in perfect condition. The FHA 203(k) loan program is a great tool to have at your disposal.”
VA loans. The Veterans Affairs Purchase Loan program helps active-duty members of the military, veterans and their surviving spouses qualify for mortgages. The VA insures the loan so these mortgages are easier to qualify for, and lenders typically charge a lower interest rate than they do on conventional loans. There are zero-down-payment VA loans. However, funding fees are higher the smaller your down payment.
USDA guaranteed home loans. The U.S. Department of Agriculture Single Family Housing Guaranteed Loan Program encourages people to purchase homes in rural areas. Borrowers in these areas can qualify more easily for these loans and at a lower interest rate because the USDA guarantees the loan. However, USDA loans are only available in certain rural areas. They require an upfront fee of up to 3.5 percent of the mortgage amount and an annual fee of up to 0.5 percent of the unpaid balance.
State and local mortgage programs. State and local governments often have their own mortgage programs to help people buy homes. There are programs that help first-time buyers, encourage buyers in underdeveloped areas and support public sector employees such as firefighters and teachers. Check with your state or local housing department to see what programs are available in your area.
Conventional mortgages aren’t part of a government program. They’re a contract between homebuyers and private lenders. These loans can be more difficult to qualify for because they don’t have a guarantee if you default. However, they don’t have any rules limiting who can apply.
Conventional mortgage lenders typically require a down payment from 5 to 20 percent, though some offer loans with a down payment as low as 3 percent, according to the Consumer Financial Protection Bureau. If you have a down payment of less than 20 percent, your lender will likely require you to buy private mortgage insurance, which pays the lender if you default.
Loan term. Loan term is the length of your mortgage, or how long you are scheduled to make payments. Mortgage loan terms typically range from five years up to 50 years and increase by increments of five years. Lenders don’t usually offer every loan term, so your term options will depend on your lender. The most common terms are 15- and 30-year mortgages. A 30-year mortgage is the industry standard.
Your loan term significantly influences how much you pay per month. With a longer mortgage term, your monthly payments are smaller because you have more time to pay the loan back. However, a longer term will cost more in total interest, and long-term mortgage interest rates are usually higher than short-term ones.
For example, compare a $200,000 mortgage with a 15- or 30-year term. Each loan charges a 3.5 percent interest rate. With the 15-year mortgage, the monthly payment is $1,430 with $57,358 in total interest. With the 30-year mortgage, the monthly payment is $898. However, the total interest is $123,312, more than twice as much as the 15-year loan’s interest.
Interest Rate Type
Fixed rate. A fixed-rate mortgage keeps the same interest rate throughout the entire term. Your monthly payment will always stay the same, and it is easy to budget. You will know exactly what your mortgage payments are going to be for the entire term and won’t have to worry about costs going up.
However, your mortgage payment will never go down, even if market interest rates fall. If you want to take advantage of lower interest rates, you’ll need to refinance to a new mortgage, which incurs closing costs.
The monthly payments on a fixed-rate mortgage are typically higher than the initial monthly payments on an adjustable-rate mortgage. Lenders charge higher interest rates on fixed-rate mortgages because they can’t increase your interest rate later. Over time, the payments on an adjustable-rate mortgage could go higher, but they will generally start lower than on a fixed-rate mortgage.
Adjustable rate. The interest rate on an adjustable-rate mortgage can change over time, which means your monthly payments can change depending on market interest rates. Lenders may offer teaser deals with large discounts to attract new borrowers. Adjustable-rate mortgages are based on a benchmark rate, such as the Libor or the weekly constant maturity yield on the one-year Treasury bill. When these rates go up, the interest rate and monthly payment for your mortgage go up. When they do down, so will your interest rate and monthly payment.
Adjustable-rate mortgages have rules for how often the interest rate can change. For example, 5/1 ARMs are the most common. These mortgages keep the same rate for the first five years and adjust only once per year after that. Similarly, 3/1 ARMs keep the same interest rate for the first three years and can adjust once per year after that.
There are caps on how much your interest rate can change. There is an initial cap, which sets a limit on how much the rate can change the first time, such as after the initial five-year period on a 5/1 ARM. There are subsequent adjustment caps, which limit how much the rate can change each year after the initial adjustment. Finally, there is a lifetime cap, which sets a maximum limit on how much your rate can increase overall.
For example, the 5/1 adjustable-rate mortgages at Bank of America currently have an initial cap of 2 percent, a subsequent cap of 2 percent and a lifetime cap of 6 percent. The first increase can be no more than 2 percent. After that, the annual increases can be no more than 2 percent, and the total increases can be no more than 6 percent over the initial rate. If your initial rate is 3 percent, it could never go higher than 9 percent because of the lifetime cap of 6 percent.
Before signing up, calculate how much the payments would be if the ARM hits the maximum rate under the lifetime cap. Consider whether you can still afford the loan payments even in the most expensive scenario.
ARMs are more complicated to understand, and some borrowers don’t realize how much their payments can change. If you sign up for an adjustable-rate mortgage, make sure you understand all the conditions.
Understanding Mortgage Interest Interest Rate Factors
When lenders set your mortgage interest rate, they consider a wide range of factors, including your credit, loan term, home price and down payment, and whether it’s a fixed- or adjustable-rate mortgage. Knowing these factors can help you figure out how to qualify for a better rate.
The Consumer Financial Protection Bureau offers a calculator for average interest ratesbased on your credit score, state, house price, down payment and other factors.
Credit score. When you apply for a mortgage, the lender considers your credit score. Your credit score is based on your credit history and represents how safe you are as a borrower. FICO, the most commonly used credit score, ranges from 300 to 850. The higher your score, the better the chances you’ll qualify for a low interest rate.
You need a minimum credit score of 620 to qualify for a mortgage under Fannie Mae or a score of at least 500 to qualify for an FHA mortgage. If your score is between 500 and 579, you could qualify for an FHA loan, but with a down payment of at least 10 percent. If your score is higher than 580, your down payment can be as low as 3.5 percent. VA loansdo not have a minimum credit score requirement as lenders will consider your entire financial situation to make a decision. USDA loans require a minimum credit score of 640 for automated underwriting, though you may be able to qualify with a lower score if the lender manually underwrites your application.
Home price and loan amount. The more money you borrow for your loan, the higher the interest rate will likely be. Lenders are risking more money with larger mortgages, so they may charge a higher interest rate. There are maximum limits for loans. FHA loan limitsvary by area and can be as low as $275,655 and as high as $636,150, depending on the cost of living in each area of the country.
The maximum loan amount for conventional mortgages in most of the country is $424,100, though this can be higher in certain areas or for multiunit properties. If you want to buy a property that costs more than these limits, you can apply for a jumbo loan, also known as a nonconforming loan. Jumbo loans typically charge a higher interest rate because there is a higher amount at risk.
Down payment. Your down payment is the amount you pay upfront for the property, while the mortgage covers the rest. A larger down payment leads to a lower interest rate on your mortgage. You’ll be borrowing less money, so lenders are taking on less of a risk.
If your down payment is less than 20 percent of the house price, you’ll need to buy private mortgage insurance and pay the premiums as part of your mortgage payments. This insurance reimburses the lender if you default on the mortgage.
Loan term. The longer the length of your loan, the higher the interest rate may be. Rates are higher on a 30-year mortgage compared to a 15-year mortgage.
Interest Rate Type
Interest rate type refers to whether your mortgage is fixed or adjustable. At the beginning, lenders charge a higher rate on fixed-rate mortgages.
Loan type. Government-backed loans typically charge lower rates than conventional mortgages, but FHA loans can be more expensive once you factor in other fees, like mortgage insurance.
Points. Mortgage points are a fee you can pay at the start of the mortgage to lower your interest rate for the duration of your fixed-rate mortgage. Each point costs 1 percent of your total loan amount. The interest rate reduction depends on the lender, but it is common to lower your interest rate by 0.25 percent in exchange for every point purchased.
You can also purchase points to lower the initial interest rate on an adjustable-rate mortgage. On a 5/1 ARM, buying points would lower the interest rate for the first five years before the rate adjusts.
The longer you plan on staying in a property, the more it makes sense to pay points. You’ll benefit from the lower interest rate for a longer period of time.
Lenders change their interest rate depending on the type of property. Single-family homes are considered less risky and have lower rates. Multifamily properties, condos, co-ops and mobile homes are considered riskier, so mortgages for these properties often have a higher interest rate.
Property use. If you plan on using the property as your primary residence, you’ll get a lower rate because people are less likely to default on their homes. On the other hand, if you’re buying a property as an investment or a vacation home, your interest rate will be higher. People are more likely to default on these properties because they’ll still have their primary residence to live in.
Market interest rates. Lenders base their interest rates on market benchmarks such as the Libor or the weekly constant maturity yield on the one-year Treasury bill. Lenders use these rates to compare mortgages to other investment opportunities, such as bonds or lending to the government instead.
Interest variations by state. Where you plan on buying a home can have an impact on your mortgage interest rate. There’s a significant difference between states. Counties, cities and even neighborhoods can have different mortgage rates as well.
Interest rate vs. APR. Lenders are required to provide the annual percentage rate and loan interest rate. When you’re comparing different mortgages, you should consider both the interest rate and APR as you make a decision.
The interest rate is the percentage of the loan you pay for borrowing the money. The APR includes the interest rate and the upfront costs of taking out the mortgage, such as loan underwriting fees, origination fees and points. If you need mortgage insurance, those premiums should be included in the APR.
The APR spreads these expenses over the life of the loan, so you can see how much it costs per year to borrow money once you factor in these charges. A loan with a 3.5 percent interest rate might have an APR of 3.65 percent after it adds in the other expenses.
Amortization. Amortization is how a loan is paid off over time. When you take out a mortgage, the payment schedule is set up so that at the beginning, most of your payment goes to paying interest, not paying down the principal. Later on, more of your money goes to paying off the principal and less to interest.
This mix has an impact on your finances. You get a tax deduction for paying interest on a mortgage for your primary residence, but there’s no deduction for paying off the principal. However, as you pay off your principal, you own more of the property outright, which builds your net worth. Paying off interest does not build your net worth.
Additional Mortgage Costs
Your mortgage will have other costs on top of the principal and interest. You’ll have additional expenses to close the mortgage and maintain your loan. These expenses include homeowners insurance, property taxes, closing costs and local fees.
Homeowners insurance. Lenders usually require you to buy homeowners insurance as part of your mortgage. This insurance would pay to repair damages after problems like fires, lightning strikes and vandalism. Lenders use your home as collateral in case you default, so they require insurance to protect their investment.
Property taxes. Local governments charge property taxes to fund their operations. Property taxes can be a substantial part of your monthly payment and, in some areas, may be more than what you’re paying for the loan. Be sure to research local property tax rates before buying a home.
Association fees. If you buy a property in a planned development, there may be a homeowners association that maintains the neighborhood. You will pay the association a fee to cover your share of the maintenance.
Private mortgage insurance. If your down payment is less than 20 percent of the total purchase, the lender will likely require you to buy private mortgage insurance. This insurance pays the lender if you stop making payments and default on your mortgage. You’ll need to pay private mortgage insurance premiums as part of your mortgage payment.
Once you’ve paid off 20 percent of the property, you can request that the lender end the PMI. The lender is legally required to remove the insurance requirement once you’ve paid off 22 percent of the property. Make sure to ask once you’ve paid off 20 percent so you don’t pay for this insurance any longer than you have to.
FHA, VA or USDA fees. If you take out a mortgage through the FHA, VA or USDA, the government agencies will charge their own fees to support the program. Even with these fees, VA and USDA loans are typically less expensive than conventional mortgages. However, the extra FHA fees can make these loans more expensive than conventional mortgages.
Additional Costs Can Add Up
Mortgage insurance can cost between 0.3 to 1.5 percent of the original loan amount per year. Homeowners insurance costs on average about $1,000 or more per year. Median property tax rates range from 0.18 to 1.89 percent, depending on the state, according to Tax-Rates.org.
For example, if you take out a $200,000 mortgage with a 30-year term and 3.5 percent fixed rate, your mortgage payment will be $898 per month and $10,776 per year. Additionally, if you pay 1 percent for property tax, 0.75 percent for mortgage insurance and $400 a year for homeowners insurance, you will pay an additional $3,900 annually, increasing your costs by 36 percent each year. Make sure you budget for these other expenses.
Mortgage Closing Fees and Property Evaluation Fees
Appraisal fee. Your lender will hire an appraiser to estimate the fair market value of the property as it evaluates your mortgage application. It could charge you for the expense. The average appraisal costs about $300 to $700, according to the Federal Reserve.
Survey fee. You may need to pay for a survey to transfer the title. The survey maps out the exact borders of your property to show what you’re buying. This costs roughly $200 to $800.
Home inspection. While lenders typically do not require it, a home inspection is recommended. The inspector can identify problems with the property so you can make an informed purchase. A home inspection costs about $250 to $400.
Flood determination assessment. If you’re in an area where flooding could be an issue, the lender could ask you to make an assessment to determine whether your property is in a flood zone.
Application fee. Some lenders will ask that you pay an upfront application fee before they will review your mortgage application. They may include the appraisal as part of this fee so that can get started right away. The typical application fee costs about $100.
Credit report fee. It costs money to access your credit report, so lenders may ask you to pay the fee. Others will include it as part of their application fee.
Origination fee. Once your mortgage has been approved, the lender will charge an origination fee to set up the loan. This is a percentage of your entire loan and usually ranges from zero to 1.5 percent of your mortgage amount.
Attorney fees. Some states require you to have an attorney present when you close your mortgage. Even if you aren’t required to hire one, attorneys can help you review the documents to make sure the deal is fair. This fee depends on the attorney’s rates.
Mortgage broker fee. If you worked with a mortgage broker to find your loan, her or she will charge a fee. The fee is a percentage of the total loan, typically 1 to 2 percent. Either you, the lender or the seller will pay the fee, depending on what you negotiate.
Prepaid interest. After you close your loan, there will likely be a gap of several days or weeks before your first mortgage payment is due. The lender will ask you to prepay the mortgage interest for that period of time so you’re up to date on interest by the time you make your first loan payment.
Lender’s title insurance. Lender’s title insurance protects the lender in case of legal issues with ownership of the property. For example, if someone files a lawsuit alleging the previous owner wasn’t legally allowed to sell the property, title insurance covers the lender’s legal expenses. Lenders usually require you to purchase this insurance on their behalf. The average lender-only policy costs about $1,000.
Owner’s title insurance. If you want to protect yourself against legal issues from transferring the title, you can buy owner’s title insurance. It would cover the legal costs in case of future issues with the title.
Before You Apply for a Mortgage
Before you apply for a mortgage, you should make sure you’re in a good position to qualify for the best loan possible. It’s a good idea to check and improve your credit, compare lenders, get preapproved and make a plan for your down payment.
1. Check and improve your credit report. Lenders will check your credit report, so you want to identify and fix problems with your credit report before you apply.
Order a free copy of your credit report at AnnualCreditReport.com. Your report will list your borrowing history, including any negative marks. You can pay extra to access your credit score with your report. Alternatively, some websites, banks and credit card issuers give customers free credit score access.
Check your report for errors and contact the credit bureau if you find any. You can take steps to improve your credit score, such as always making your monthly payments on time, paying down your balances and not applying for other loans and credit cards.
Although improving your credit before applying for a mortgage can help you with approval and better terms, don’t rule yourself out of applying just because you have a less-than-perfect credit score, says Rob Sickler, loan originator with Mortgage Network Solutions. You can make up ground by finding the right lender and putting together a solid mortgage application.
2. Get preapproved. You should get preapproved for a mortgage before you start looking at properties. It speeds up the closing process because it helps you narrow down your search. The lender will tell you the maximum amount you’re preapproved for, so you can avoid looking at houses that are out of your loan range. A preapproval can make you more attractive as a buyer. You can show sellers your preapproval letter to prove you can afford their property.
3. Compare multiple lenders. Don’t sign up with the first lender you speak with unless you’ve researched others. Getting multiple quotes increases the chance you’ll find the best rate for your situation. You can get preapproved with multiple lenders without getting locked into a commitment.
4. Submit mortgage applications within a short window. When you apply for a loan, the lender will pull your credit report and score to evaluate your application. The resulting hard inquiry remains on your credit reports for up to two years and may negatively impact your credit score. However, you can minimize the impact on your score by applying for multiple loans within a short window. Depending on the scoring model, multiple hard inquiries for the same type of loan that occur within a 14- to 45-day window are treated as a single inquiry. Additionally, inquiries from the last 30 days don’t get factored into your credit score.
While a prequalification typically only results in a soft pull of your credit, your credit may be hard pulled when you apply for a preapproval, apply for the mortgage and right before the closing. To limit the potential negative impact on your score and increase your chances of securing better terms, you may want to try to shop for a loan in a short period of time.
5. Don’t apply for other loans and credit cards. In the months leading up to your mortgage application, do not apply for any new loans or credit cards. Each application can shave a few points off your score, which could prevent you from qualifying for the best mortgage rates. Hold off until after you’ve bought your home.
6. Don’t spend all your savings on the down payment. Maximizing your down payment gets you closer to owning your home outright. However, you might need to fall back on your savings for repairs or underestimated costs, or if you lose your job.
Often, things go wrong with a house within the first six months of ownership, says Blackhurst. “The house might have been vacant for a few months, which means water hasn’t been going through the pipes. If the seasons have changed, the different temperatures could create trouble for the heating and AC units.”
He points out that you’ll need money for expenses like new furniture, painting the living room and landscaping, in addition to repairs.
You should also budget for property taxes, homeowners insurance, private mortgage insurance, association dues and utilities.
7. Beware of scams. As you go through the mortgage process, be on the lookout for scams. For example, the Federal Trade Commission warns of a scam where thieves email you pretending to be someone involved in your deal, like the real estate agent or a representative from the title company.
They may even break into a company email account so the email looks legitimate. They could ask you to send over private financial information, open an attachment with a virus or wire them money.
To avoid becoming a victim, you should:
* Never send confidential information by email.
* Contact the lender or title company directly before sending any money.
* Don’t open email attachments unless you know what they’re for.
* If you sent money as part of a scam, contact your bank or money transfer company immediately to try to cancel the payment.
The Mortgage Loan Process
Obtaining a mortgage requires several steps, including preapproval, appraisal and underwriting, before you’re ready for closing.
1. Prequalification: Prequalification will give you a quick estimate of how much you can borrow for your mortgage. You’ll share basic financial information, including your income, savings and outstanding debts. There’s usually no fee to get prequalified, and you can apply quickly by phone or online. However, getting prequalified doesn’t guarantee you’ll qualify for the mortgage.
2. Preapproval: Preapproval is much more thorough than prequalification. The lender will review your financial situation, similar to when you officially apply for a mortgage. You may be required to pay an application fee.
Expect to submit complete financial documents, including:
* W-2s for the previous two years
* Pay stubs
* Proof of bonuses
* Your most recent federal tax return
* Two to three months of bank and investment statements (such as brokerage, 401(k), IRA, Roth IRA, 403(b) and pension statements)
* Profit and loss statements or 1099 forms (if you own a business)
* A list of your debts, including credit cards, car loans and student loans, along with your minimum monthly payment for each
* Canceled checks for your current rent or mortgage
* Social Security or disability statements
* Alimony and child support payments
* Bankruptcy discharge paperwork
The lender will review your credit report during preapproval. With a preapproval, you’ll learn the maximum amount you can borrow for a mortgage. There could be restrictions to the agreement, such as the lender may need to approve the property, and the preapproval may be rescinded if you lose your job. However, getting preapproved shows your financial situation is most likely strong enough to qualify for a loan.
Getting preapproved will save you time after you find your property because most of the work is complete.
3. Application: After you’ve found your property, you can formally apply for a mortgage. The mortgage application will ask you questions about the property and your financial situation. A typical application could ask for:
* The address of the home you want to purchase
* The type of home
* The size of the property
* The expected sale price
* An estimate of the home's value
* The annual property taxes
* The homeowners association dues
* The loan amount you want to borrow
If you’ve been preapproved, the lender has already reviewed your financial documents and checked your credit. Otherwise, you’ll need to send in the documents listed for preapproval as part of your application.
Sickler recommends that you be as upfront and accurate with your application as possible, especially with financial issues. That way, you can avoid delays. For example, you may report your W-2 income as $50,000, but it could be lower if you took a few months off for disability. The lender will identify this discrepancy eventually, so it’s best to be clear from the start.
4. Loan estimate: After you send in your application and documents, the lender must give you a loan estimate within three days of completion as required by federal law, according to the Consumer Financial Protection Bureau. The loan estimate gives you an overview of the mortgage that the lender would give you, based on a preliminary inspection of your application.
This estimate will include the interest rate, monthly payment, total closing costs, estimated taxes, insurance fees and other details of the proposed loan.
The loan estimate is not an official offer, but a prediction. The lender still needs to verify your information, so the actual loan could be different. You have 10 business days to make a decision on the loan estimate.
5. Processing: If you accept the estimate, the lender will send your application, credit report and financial documents to be reviewed by a mortgage processor. This company will review your financial documents to make sure they’re accurate, as well as the property title to make sure the house can be legally sold.
If there are any financial red flags, such as missed payments on other loans, the processor will ask you to explain the situation in a letter of circumstances.
6. Additional documentation: The mortgage processor could ask you to submit other documents as part of its review, sometimes due to errors such as a missing page from your tax return.
Government programs may ask for additional documents that aren’t part of the typical application. For example, with VA loans, you’ll be asked for a certificate of eligibility to prove your military service. Be sure to send in these documents as soon as possible to keep your application on schedule.
“Delays happen here because clients didn’t know what to report,” says Sickler. “For example, someone sends in their paycheck, but doesn’t mention they’re paying alimony and child support. The processor’s going to need this information before they can move forward.”
Ideally, your loan officer or mortgage broker will verify that you submitted all the proper documents, but if the processor is missing anything, he or she will ask for it at this point.
7. Appraisal: The lender will hire a professional to complete an appraisal of the property. The appraiser inspects the property to come up with an opinion of how much it’s worth. This could be different than the price you agreed to with the seller.
The appraiser will look at the house size, location, amenities and physical condition to determine the value. You’ll receive a copy of the appraised value of the house within three days of the appraisal. This report will explain how the appraiser determined the value of the house and how it compares with similar properties in the area.
The lender could deny your mortgage if the appraised value is less than the agreed sales price because the property might not be enough collateral for your loan. In this situation, you can make a larger down payment to cover the difference between the sales price and appraisal, negotiate to a lower sales price or ask the seller to lend you the money through a second mortgage. Another option is challenging the appraisal.
“Appraisers typically do a great job, but sometimes they make mistakes, especially if the appraiser isn’t local and doesn’t know the area,” says Blackhurst. “If you think an appraisal is off, you could make a list of comparable sales in your area to show what the price should actually be. There’s no guarantee it’ll work, but it happens.”
8. Underwriting: Once the mortgage processor has finished the review, a report goes back to the lender so it can decide whether to approve the loan. The lender might approve your mortgage, deny it or ask you for more information. If the lender is satisfied, it will approve your loan after underwriting.
9. Closing disclosure: After the lender has approved your mortgage, it must send you a closing disclosure document. This document is similar to the loan estimate. The difference is that the numbers on this document are no longer estimates. It lists information about the mortgage including the monthly payment, interest rate and closing costs.
You should compare the closing disclosure to your loan estimate. The Consumer Financial Protection Bureau offers a free tool that you can use to analyze your disclosure. If the numbers are significantly different and throw off your budget, you may need to rethink the purchase. The lender must give you the closing disclosure at least three business days before your closing date so you have time to review before finalizing the sale.
10. Insurance: Most lenders will ask you to buy homeowners insurance to protect their investment.You’ll need to apply for insurance after you’re approved for the loan. The insurance company might not have enough time to complete your application before the closing date. In this case, you’ll receive an insurance binder, which is temporary coverage for the property that lasts 30 days. With an insurance binder, you can close the deal and your regular insurance policy will be ready after the sale.
11. Closing: Closing is the last step of the entire process. You’ll have one last closing meeting with the seller, the real estate agents, a title company representative and possibly a representative from the lender. You may need to have an attorney present, depending on the rules in your state.
During this meeting, you’ll review the final documents for the sale, sign the necessary forms to complete the transfer and pay your down payment plus the closing costs. You should bring your ID, proof of homeowners insurance and a cashier’s check for the payment. You could also set up a wire transfer to pay before closing. However, a personal check will not be accepted.
Once you close, you’ll be given the keys to your new home.
Choosing a Mortgage Lender
There are many mortgage lenders to choose from. You should evaluate lenders on four key factors:
* Interest rates
* Closing costs
* Product offerings
* Customer satisfaction
Interest rates. Lenders charge different interest rates, so by shopping around, you could find a better deal for your mortgage.
Interest rates are fairly consistent between lenders for fixed-rate mortgages, as lenders all base their rates on the national average and other factors. However, choosing a lender with a rate a few tenths of a percentage lower could still save you hundreds, potentially thousands, over the course of the loan.
There are more differences between lenders with adjustable-rate mortgages. Lenders customize these loans because they have more flexibility to increase rates later. You should spend more time comparing lenders for an adjustable-rate mortgage because you have a better chance of finding a better deal.
Closing costs. When you factor in closing costs, including the application, appraisal and loan origination fees, the lender with the lowest interest rate may not offer the best deal. Compare closing costs between lenders, using the APR to find out how much you’d owe per year for a loan when you factor in every cost.
Product offerings. Your lender may offer different loan terms like 15-, 20- and 30-year mortgages with fixed or adjustable interest rates. There are many variations of adjustable-rate mortgages based on how often the rate can change and by how much, such as 3/1, 5/1 and 5/5. If you want an adjustable-rate mortgage, look for a lender with multiple options so you can find the right fit.
If you want a FHA, VA or USDA loan, find a lender that participates in that program.
Customer satisfaction. You should use customer satisfaction reviews to research lender performance. Lenders that don’t treat their customers well might not be worth signing up with, even if they offer great loan rates. You’ll be working with your lender for years, so you want one that will treat you well and that won’t make mistakes.
Check the 2017 J.D. Power Primary Mortgage Origination Satisfaction Study, which asked customers to rate their satisfaction with mortgage lenders across seven areas: overall satisfaction, loan offerings, application/approval process, interaction, loan closing, onboarding and problem resolutions. For each category, J.D. Power gives a rating of between five (indicating the lender is “among the best”) and two.
Readers should also contact the Better Business Bureau to find out if a lender has any reviews or complaints from past borrowers.
Refinancing an Existing Mortgage
After you close on a mortgage, you aren’t locked in permanently until it’s paid off. With refinancing, you can get a new loan for your mortgage balance with new terms, like a different length of the loan or a new interest rate.
When you refinance, the lender pays off your existing mortgage and replaces it with a new one. You can refinance to get a new loan with your existing lender or move to a new lender.
“Refinancing is an effective and popular strategy,” says Sickler. “You shouldn’t be afraid to look for new offers for your loan.”
If You Can’t Make Your Mortgage Payments
If you’re in a tough financial position and can’t make your mortgage payments, you need to move quickly to protect your home. Miss too many payments and the lender can foreclose on your property, forcing you to move out.
There are options to help you through this tough stretch and increase the chance that you can keep your home, even if you can’t keep up with your current mortgage payments.
* Reach out to your lender immediately. You should contact your lender as soon as you realize you’re going to miss a mortgage payment. Don’t wait until you’ve already missed several payments. If you miss a payment and the lender doesn’t know why, it could report your late payment to the credit bureaus, which hurts your credit score. Miss too many payments and the lender will eventually foreclose on your home.
* On the other hand, if you let the lender know you’re in financial trouble, it may be able to work something out.
* “Servicers understand things happen, and they’re willing to work with you,” says Sickler. “The more proactive borrowers are at the beginning of a problem, the better the results will be.”
* When you ask for help with your mortgage, your lender will ask you to fill out paperwork explaining why you can’t make the payments, whether it’s a temporary or permanent problem, your current income and any other assets you have besides the house. Based on this information, the lender could create a new payment plan or give you a temporary forbearance, which delays your mortgage payments for a set amount of time.
* Speak with a HUD counselor. After speaking with your lender, you should contact a HUD counselor. HUD counselors can offer free advice to help you avoid foreclosure. They can help you review your budget to see if there’s anything you can do to make your mortgage payments and will try to work out a payment plan with your lender if you haven’t already done so.
* HUD counselors can identify whether you qualify for any government mortgage assistance programs available to help struggling homeowners. These programs could lower your monthly payment, delay your payments or help you refinance to a more affordable plan.
* Beware of scams. People get desperate when they fall behind on their mortgage payments, and this makes them good scam targets. You should only work with your lender and HUD counselors to sort out your mortgage issues.
* If a company contacts you with a promise to solve your mortgage problems, don’t sign up. In the best-case scenario, the company will charge you for services you could get for free from the government. Worst case: It could steal your money and your identity.
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