Mortgage FAQ

Everyone’s homebuying experience is unique depending on their needs and circumstances, but most buyers start in the same place: with questions. From qualifying for a loan to interest rates and payments, discover the answers to your most pressing mortgage questions.

How do I know if I qualify for a mortgage?

The best way to start a homebuying journey is to meet with a lender and get pre-qualified for a mortgage. Pre-qualification is not an official stamp of approval, but it will set the parameters of how much home you can likely afford. Once you find a property, you will provide additional paperwork to become pre-approved.

Here is the typical mortgage application process:

• Pre-qualification

• Pre-approval

• Approval

Keep in mind, nothing is guaranteed until your loan application is approved. Set yourself up for success by avoiding common mistakes when applying for a mortgage.

Is there a difference between pre-qualification and pre-approval?

Though the terms sound similar, there are distinct differences between being pre-qualified and pre-approved for a mortgage loan.

Pre-qualification gets you started

Your first step in buying a home is getting pre-qualified. This is a way to establish a relationship with your potential lender and find out how much you may be approved for. The process varies, but usually involves you sharing some preliminary income details. The lender then completes a soft credit check, which does not affect your credit score, to make that initial estimate. Learn more about pre-qualification.

Pre-approval moves you closer to mortgage approval

To get pre-approved, your lender will need additional financial information such as bank statements, pay stubs, and a full credit report. This is also not a guarantee you will get a loan, but a pre-approval shows real estate agents and the seller that you are serious about buying a home. It also shows an estimated approval amount to guide your home search. Learn more about pre-approval.

What credit score do I need?

Your credit score affects your mortgage approval and interest rate. A higher score indicates to a lender you will be able to make payments on the loan. A lower score indicates a higher risk, but it does not mean you will not be approved.

What credit score is needed to buy a house for the first time?

Although the guidelines can differ depending on your lender, 620 is a common minimum baseline for most mortgage types. This includes VA loans and FHA loans. If you have a low score, you may want to take steps to increase your credit score before meeting with a lender. A higher score will increase your chances of getting approval and receiving a better interest rate.

Does applying for a mortgage hurt your credit?

Securing pre-approval for a mortgage will have an impact on your credit score as it will require a hard inquiry into your credit report. However, it is a vital step in the financing process and highly recommended by mortgage experts.

The good news is that the effect on your credit is temporary. You may see a small drop in your score, but you can quickly recover it by continuing to make on-time payments and keeping your credit card debt low.

Do I need a 20 percent down payment?

The short answer is: no. But larger down payments can help you secure a lower interest rate and avoid paying mortgage insurance.

Fortunately, options are available for aspiring homeowners with little, or even no, money down.  Talk to your lender to find out the options available to you.  

How much home can I afford?

You can use an affordability calculator to determine how much mortgage you may be able to obtain. The calculator is just an estimate and does not account for total homeownership costs like mortgage insurance, closing costs, water and electricity, maintenance, and HOA fees. You will have an even better idea of your budget once you get pre-qualified and pre-approved for your mortgage.

Which type of mortgage is right for me?

There are a variety of mortgages available to choose from, but not every lender will have the same options. The type that is right for you will depend on several factors including your credit score, income level, assets, down payment, and the purpose of the property you are looking to buy.

Here are the most common mortgage types:

• Conventional Loans: Available in several different terms with varying down payment requirements; most common type of mortgage today.

• Jumbo Loans: Non-conforming loan option for high-value properties requiring higher down payments.

• Government-Insured Loans: Special loans backed by government entities such as the Federal Housing Administration (FHA) and Veterans Affairs (VA); unique benefits and qualifications apply.

What does mortgage term mean?

Your mortgage term refers to the length of time in which you are contracted to pay back the home loan. The most common mortgage terms are 15-years and 30-years.

When do I lock in my rate?

Mortgage rates fluctuate along with changes in the economy and market. Your quoted rate is based on your lender’s current mortgage rates plus individual factors like your down payment, credit history, and loan term. It is recommended to lock in when you feel comfortable with your quoted interest rate and monthly payments to avoid the risk of rising rates before closing.

How do interest rates and fees affect my payments?

Shopping for a mortgage includes much more than a comparison of interest rates. You will also want to consider all mortgage costs. These include property purchase price, down payment (and possibility of mortgage insurance), interest rate, loan term, closing costs, and points.

What are points and why would I want to pay them?

Sometimes lenders offer borrowers the option to buy down their mortgage with points. Mortgage discount points, or buy-down points, are a one-time fee you can pay for a lower interest rate.

One point equals one percent of the loan amount (such as $2,500 on a $250,000 loan). Depending on your finances, the type of loan, and the market, one point can typically buy a rate down by an eighth to a quarter percent. That can lower your monthly payments and lead to significant savings over time–as long as you can afford the up-front cost and stay in the house long enough to make it worth it.

Buying down may be favorable if you want the lowest rate possible, can afford the up-front cost to buy it, and plan to stay in the home long enough to break even on your purchase. Be sure to run the numbers to make sure it makes sense for you.

What is included in my monthly mortgage payment?

Your mortgage payment comprises the price of your home, down payment, loan term, interest rate, and how your mortgage fees were structured. It may include the following:

• Principal: Pays down your outstanding loan amount.

• Interest: Based on your interest rate and current loan balance.

• Insurance: dependent on your situation; can include homeowners insurance,  private mortgage insurance (PMI), or mortgage insurance premium (MIP).

• Taxes: If you chose to have a portion collected and saved in an escrow account.

As you get further into the life of the loan, you may be able to drop mortgage insurance and see more of your payments go toward the loan principal. This is a sign your home equity is increasing.

Is it better to rent or have a mortgage?

When all of the costs of buying a home are added up, you may find yourself wondering if it is better to continue renting. Renting can be a good option if you are unable to afford buying a home at the moment. However, if you are looking to invest your money and lay down more permanent roots, then becoming a homeowner is your best bet. Not only will you be able to start building equity, but you will also have more control over your living space for renovations and home upgrades. Homeowners also get the benefit of tax breaks.

Is it smart to get a mortgage?

The average homebuyer will not have the funds at their disposal to pay all cash, up-front for a home purchase. However, having a mortgage is not a bad thing. Not only does a mortgage provide the funding needed to buy a home, but it also has other added benefits. Making on-time monthly payments will boost your credit score and you will likely get to enjoy tax benefits or mortgage interest deductions. 

It is normal to have questions when you begin the mortgage process, so it is important to take your time researching and consulting with the home loan specialists so you can better understand your options. Be sure to reach out to a trusted lender for a more personalized take on what your homebuying experience may entail.