Mortgage 101
what is a Mortgage
A mortgage is simply a loan that is used to buy your home.
Unless you can pay for your home upfront in an all cash offer, you’ll need to take a loan to pay the home off gradually. Just like any loan, you’ll need to apply for it. If you’re “approved” you will be able to borrow a certain amount of money from a lender. Each month you’ll pay a portion of the loan (plus interest) for a period of time. The requirements to secure a mortgage may seem overwhelming - but by understanding basic lending terminology and requirements, you’ll be able to avoid common roadblocks. Use this guide to learn how to prepare before applying for a mortgage, and what to watch for during the process to keep your mortgage application as simple as possible.
The Process
1. CHOOSE YOUR LENDER
Choosing a lender is about more than finding the lowest interest rate. A knowledgeable lender can help you identify the right financing strategy, avoid surprises, and navigate the homebuying process with confidence. Here are some important questions to ask:
• What programs am I eligible for and what are the pros and cons of each?
• What is your process for pre-approval and underwriting?
• What can I expect for communication throughout the process?
• What lender fees and closing costs should I expect?
2. COMPLETE YOUR LOAN APPLICATION & GET PRE-APPROVED
Before you begin shopping for a home, it’s important to understand how much home you can comfortably afford and what financing options are available to you. The pre-approval process is designed to do just that.
During this stage, you will complete a mortgage application and provide documentation related to your income, assets, employment, and credit history. Your lender will review this information to evaluate your borrowing power and determine which loan programs best fit your goals.
A thorough pre-approval allows your lender to:
• Verify your financial qualifications
• Identify any potential issues before you start house hunting
• Determine your maximum loan amount and estimated monthly payment
• Discuss down payment and closing cost options
• Recommend loan programs that align with your needs
• Prepare you to make a strong, competitive offer when you find the right home
Once the review is complete, your lender will issue a pre-approval letter outlining the loan amount for which you qualify. This letter demonstrates to sellers and real estate agents that you have taken the necessary steps to secure financing and are a serious, qualified buyer.
3. HOUSE HUNTING AND MAKING AN OFFER
With your pre-approval in hand, you’re ready to begin the exciting process of searching for your new home. Working with a trusted real estate agent can help you identify properties that fit your needs, budget, and long-term goals while providing valuable guidance throughout the negotiation process. If you don’t already have a great agent you are working with please reach out, we work with a lot of wonderful agents that we can recommend. Once you’ve found the right property, your real estate agent will help you prepare and submit an offer. When both parties agree to the terms and sign the contract, the home officially goes under contract. This marks the beginning of the next phase of the mortgage process, where your lender, title company, and other professionals work together to move your loan toward closing.
The Process
4. LOAN PROCESSING
Once your purchase contract is accepted, your file moves into the loan processing stage. During this phase, your Loan Processor acts as the coordinator between you, your Loan Officer, your employer, financial institutions, title company, insurance provider, and the underwriting team.
The processor’s role is to update and organize all documentation needed to verify the information provided in your application and pre-approval stage. This includes confirming income, employment, assets, debts, and other financial details. They will also order important third-party items such as the appraisal, title work, and any additional reports required for your loan program. It is common for the processor to request additional documentation throughout this stage. Don’t be alarmed, these requests are a normal part of the mortgage process! Providing requested items quickly can help keep your loan on schedule and avoid delays.
Once all required documentation is complete, the processor submits the loan package to underwriting for a formal approval decision. A thorough processing stage helps create a smoother underwriting experience and keeps your transaction moving toward a successful closing.
5. UNDERWRITING APPROVAL
Once your loan has been processed and all required documentation has been collected, your file is submitted to underwriting. An underwriter is responsible for independently reviewing your loan to ensure it meets lender and investor guidelines.
During this stage, the underwriter evaluates your income, assets, credit history, employment, property information, and overall ability to repay the loan. The underwriter may also review the appraisal, title work, and any other documents related to the transaction.
It is common for the underwriter to request additional information or clarification. These requests, often referred to as “conditions,” are a normal part of the process and do not necessarily indicate a problem with your loan.
Once all conditions have been satisfied, the underwriter issues a final approval, allowing your loan to move forward to closing.
6. CLOSING DAY
Closing is the final step in the homebuying process. During this stage, all loan documents are prepared, reviewed, and signed, and ownership of the property is officially transferred to you.
Prior to closing, you will receive a Closing Disclosure outlining your final loan terms, monthly payment, and closing costs. Your lender and title company will work together to ensure all figures are accurate and that any remaining funds needed for closing are collected.
At the closing appointment, you will sign the mortgage and property transfer documents. Once the documents have been signed, funds are disbursed, the transaction is recorded with the appropriate county, and you officially become a homeowner.
7. CONGRATULATIONS!
After recording is complete, you’ll receive the keys to your new home and officially begin your homeownership journey.
QUALIFY FOR A MORTGAGE IN
TODAY’S MARKET.
Find out your current credit history and score. Credit scores range between 200 and 860. A credit score above 620 is best for trying to obtain a mortgage. If your credit score needs improvement reach out to us, we can help you come up with an organized plan to increase your scores. If possible, wait 12 months after credit difficulties to apply for a mortgage. And once you’re ready to shop for a mortgage, don’t open any new credit card accounts.
Determine the approximate amount of mortgage you may qualify for by taking your gross monthly income and multiply by 25%. This is the maximum that many lenders would like to see for your monthly mortgage payment.
Stable income and income verification are both necessary. Make sure to stick with your employer while going through the home buying process, as a job switch will force lenders to reevaluate your finances.
types of Financing
CONVENTIONAL LOAN
This is the “standard” mortgage most home buyers use. You can obtain a conventional loan with as little as 3% down but at 20% you will be able to avoid having mortgage insurance (PMI) on your loan. Conventional mortgages are not guaranteed or issued by the federal government.
FHA LOAN
This is a government backed loan, sponsored by the Federal Housing Administration. FHA loans offer more flexibly in credit score requirement and down payment amounts.
VETERAN’S LOAN
This type of loan is available to all active service members, veterans as well as surviving spouses. The U.S. Department of Veterans Affairs backs this loan instead of a traditional bank. Most VA loans do not require a down payment and offer several other benefits.
Costs to Consider
EARNEST MONEY : Typically 1-2% of the purchase price, this is a deposit paid by the buyer. This is held by the escrow company as a good faith from the buyer to the seller. At closing, the earnest money will be transferred to the seller as a portion of the original purchase amount.
DOWN PAYMENT: This is the portion of the purchase price that you’ll be paying in cash. The rest of the payment to the seller comes from your mortgage. Down payments are generally between 5- 20% of the purchase price. A down payment of at least 20% allows you to avoid private mortgage insurance. There are many down payment assistance programs that can help qualifying buyers with a portion of the down payment. Ask us for more information on these!
CLOSING COSTS: Closing costs are associated with your mortgage, the transaction, or any payment required by the lender (such as taxes, insurance and title fees.) These costs are not part of the purchase amount, and are collected separately by the escrow company at closing. As a buyer, you can expect to pay 1-5% of the purchase price in closing costs.
what’s in a Mortgage Payment
PRINCIPAL OF THE LOAN
This is the amount you borrowed, and is also referred to as the “amount financed.”
INTEREST OF THE LOAN
The amount the lender charges you to borrow the money .
PROPERTY TAXES
A portion of your payment will be used for property taxes to your local city/ municipality.
HOMEOWNER’S INSURANCE
The amount you pay to insure your home from damages (fire, natural disasters, etc.)
Also consider for your payment
PRIVATE MORTGAGE INSURANCE
Usually required on loans if your down payment is less than 20%.
Terms to Know
FIXED RATE MORTGAGE
The interest rate remains the same, allowing you to lock in the rate for the life of the loan. This type of mortgage provides a stable and predictable monthly payment.
MORTGAGE POINTS
Also known as discount points, these are fees paid to the lender at closing in exchange for a reduced interest rate. One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000.) Paying points is often referred to as “buying down the rate.”
APR (ANNUAL PERCENTAGE RATE)
This is your interest rate stated as a yearly rate. Your Annual Percentage Rate is typically higher than your interest rate because it includes fees, such as lender and mortgage broker fees.
ADJUSTABLE-RATE MORTGAGE
The interest rate is flexible and subject to adjustments, usually offering a lower rate that will rise as the market rates increase. These types of mortgages may be a good choice when fixed interest rates are high. Rates adjust on pre-determined dates (i.e. annual, 3, 5 or 7 year terms.)
TRACK YOUR Monthly Budget
When you apply for a mortgage, your lender will tell you the highest monthly payment you can make. By making and following a budget, you can make sure you can afford your new mortgage and still pay for your other expenses.
Rent/Mortgage
steps to Take Now
Before you begin the mortgage process, it’s important to have your financial plan for purchasing in place. Use your tracked monthly budget to save for a down payment, reduce debt and increase your credit score.
It’s also crucial to take the extra time to search for the right lender and the right loan. Check references, shop around and ask plenty of questions- including an estimate of fixed costs for the mortgage.
Once you have found the right lender ask them what documentation you can work on gathering for your pre-approval.
And finally, make sure to respond quickly to the paperwork your lender requests to keep the mortgage process on schedule. Now that you have the basics down, you’re off to a great start for a seamless mortgage approval!
