A mortgage is a big step toward homeownership. And the right loan can save you big in the long run. Take the time to learn how they work, the types of loans available, top interest rates and how to compare your options.
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When you want to buy a home or investment property, you take out a loan called a mortgage. You borrow money from a lender who charges a fee — known as interest — which is rolled into your monthly payments.
The lender considers your property collateral — or security for the loan. This means if you can’t make your payments, the lender can repossess your property and sell it to recoup the loss.
How does a mortgage work?
If you’ve never purchased a house and gone through the complicated mortgage lending process, the terms and process of applying can be daunting. Here’s a basic explanation of how a mortgage works.
Retail and wholesale lenders
Mortgages are offered by either retail or wholesale lenders
Retail lenders are banks such as Citi, JPMorgan Chase, Bank of America, Wells Fargo and U.S. Bank. You can apply directly with these banks for a mortgage.
Wholesale lenders allow their loans to be offered through third-party lenders such as mutual or building societies and credit unions.
Sometimes the lender funds loans with their own money. This type of loan is known as a portfolio loan. Lenders set their own requirements and loan terms.
Most of the time mortgages are funded by borrowed money. This means the loan is funded by borrowed money, and then sold to investors on the secondary mortgage market. This type of lender is known as a mortgage banker.
When you apply for a loan, lenders assess your risk by considering your credit score, down payment, assets, debt and income. Your risk will determine if you get the loan and what your interest rate will be.
The amount you actually owe is the principal. In exchange for lending you this money, your bank will charge interest.
Your interest rate is applied to your principal each month and your loan will amortize over time.
What is amortization?
When you take out a mortgage, you’re agreeing to pay the principal and interest over the life of the loan. Because your interest rate is applied to the balance, as you pay down your balance, the amount you pay in interest changes.
This means that at the beginning of your loan, a big percentage of your payment is applied to interest. With each subsequent payment, you pay more toward your balance.
Let’s say that you’re repaying a 30-year mortgage for $400,000 at 4.5% interest. According to your mortgage’s amortization schedule, your first payment is $2,027. But amortization means that payment allocates $1,500 to interest and only $527 to the principal. By the time you make your last payment, you’ll pay only $8 in interest and $2,019 to the balance.
What about interest-only loans?
In cases where you only wanted to pay the principal of a loan — usually if you’re keeping a property for a short amount of time — choose an interest-only loan. Once the principal is eliminated from your monthly payment, you’ll pay less monthly, but it won’t reduce your loan amount. Interest-only loans aren’t generally bought by Fannie Mae or Freddie Mac on the secondary market and usually require a good credit score.
When you’re choosing a mortgage there are two main kinds of rates out there. Fixed-rate mortgages give you a predictable payment each month, while adjustable-rate mortgages can change with the market.
Fixed-rate mortgages
Most people opt for fixed-rate mortgages. This allows you to lock in a rate for 10, 15, 20, 25 or 30 years. During this time, your rate and payments won’t change, giving you the security of mortgage payments that won’t fluctuate.
Who is best suited to this type of loan?
Those with a solid budget. Your payments won’t change for the life of the loan, meaning you can rest easy knowing exactly how much you’ll pay each month.
An ARM is a mortgage with an interest rate that changes with the market. So, over the course of your loan, your payments can rise or fall depending on what the market looks like. This is risky — though there is a chance that the rates will go down, they could rise to an amount you can’t afford.
Another option is the hybrid-ARM. You’re given an initial fixed period (usually five, seven or 10 years), when your rates won’t change. Once this fixed period ends, your rate is adjusted to match market conditions — raising or lowering your monthly payment.
You do get some security — usually lenders will cap the amount the rate can go up or down at each adjustment period, and over the life of the loan. But be aware that your rate could jump significantly during adjustment periods, so be 100% certain that you can afford the worst-case scenario.
Who is best suited to this type of loan?
If you’re planning to sell your home before the fixed period ends. This means you’ll be able to enjoy a lower rate for the initial fixed rate years and then sell after.
If you can afford the worst-case scenario. If you choose to keep the loan once the initial fixed rate period ends, there’s always the possibility that rates can drop lower during the adjustable period, depending on market conditions. But they can also increase higher than you can afford. Be sure you can afford your payments at the highest interest rate.
These are regular mortgage loans that are not part of any government loan programs like VA or FHA loans. These loans often come with lower interest rates and lower fees, but they need to meet standards set by the government-sponsored agencies Fannie Mae and Freddie Mac.
Banks or private lenders consider a borrower’s credit history, debt-to-income ratio, and down payment when evaluating a conventional loan application. Down payments can be as low as 5%, but often borrowers put down 20% or more to avoid having to get private mortgage insurance (PMI).
PMI rates often range between 0.3% and 1.2% of the loan amount per year, and PMI premiums can either be added to a borrower’s monthly mortgage payments or they can be paid with a lump sum payment. Borrowers are required to pay PMI until they have 20% equity in their home and therefore a loan-to-value (LTV) ratio of 80%.
LTV is the amount of money borrowed divided by the value of the home at purchase, and it is one indicator of the riskiness of the loan for the lender. PMI exists to lower the risk for the lender.
Your conventional loan can either be conforming or nonconforming.
What does that mean?
Simply speaking, conforming loans need to meet the standards set by Fannie Mae and Freddie Mac — agencies who buy your mortgage. These standards include loan maximums, credit qualifications, down payments and limited debt-to-income ratio.
Who is best suited to this type of loan?
Most popular mortgage. About 60% of people who apply for mortgages get a conventional loan.
If you’re buying a residential, second home or rental property.
Nonconformingloansare loans that are over the limit are considered jumbo loans. Because these tend to be a higher risk for the lender, they come with high interest rates, require a higher down payment and look closely at your credit before you can qualify.
Who is best suited to this type of loan?
You’re planning on buying a commercial property. Commercial property usually involves loans for more than the maximum limits.
If you have poor credit. Nonconforming loans can help if you have trouble qualifying for a conforming loan. Although they usually comes with higher rates.
This type of loan is insured by the Federal Housing Administration (FHA), and allows borrowers to purchase a property with a lower down payment and with less-than-stellar credit scores. FHA loans have a number of other eligibility requirements, particularly around your employment history and debt ratio, so be sure to do your research before applying for one.
Homebuyers with FHA loans are required to take out mortgage insurance, commonly referred to by the acronym MIP. Borrowers with FHA loans typically face an upfront mortgage insurance premium (MIP) and an annual premium that is paid in monthly installments until the borrower has 20% equity in their home.
Who is best suited to this type of loan?
If you can’t afford a 20% down payment. FHA will accept as low as 3.5% down on your new home.
Low to moderate income. If you’re credit or income wouldn’t qualify you for a conventional loan.
If you or a family member has served in the military, a Veterans Affairs (VA) mortgage can be a great way to buy a home. You’ll see benefits like no down payment or mortgage insurance required, low-interest rates and no prepayment fees.
Who is best suited to this type of loan?
Have served in the military. VA loans require that you or a spouse has served between 90 and 181 days in active service or over six years in the Reserves or National Guard.
This is a loan from the US Department of Agriculture for low to medium income borrowers who want to buy in rural areas. USDA loans don’t require a down payment, but still require private mortgage insurance (PMI).
Who is best suited to this type of loan?
Low income buyer. USDA focuses on families that fall at or below the poverty level for their area, are in need of clean and safe homes, and are unable to get loans anywhere else.
Acceptable debt-to-income ratio. Your complete mortgage —including interest, PMI and taxes — must be 29% or less of your income.
State and local programs
Many states and cities offer programs to help Americans buy a home. They often target those with low income, minority groups, among other things. So be sure you talk with a housing counselor in your local area to see what’s available.
Decide on a loan type. Is a fixed or adjustable rate mortgage best for your plans and budget? Get your credit in order and find out what loans are available to you.
Shop for different loans. Compare banks and lenders based on your loan type and how much you can afford for a down payment.
Use the APR. This includes some of the fees of your loan and can be a more accurate way to compare loans.
Find out about rate locks. Once you find a good rate, you want to lock it in until you settle on your home. You don’t want it to go up during the application process.
Be mindful of prepayment penalties. If you intend on moving out of your home before your loan limit is up, make sure that your loan doesn’t include prepayment penalties.
Ask for a loan estimate. By law, lenders must give you a loan estimate. This three-page document shows you the interest rates, payments, closing costs and even a section on the last page that gives you the key figures to use when comparing.
Repeat until you find a loan you want. It’s normal to ask for loan estimates from more than one lender until you find a loan you’re happy with.Back to top
How can I get the best rate on my mortgage?
Compare multiple lenders. Always get more than one quote when looking for a mortgage. You’ll get options from different types of lenders.
Get your credit score in order. A credit score above 740 can open the door to more competitive interest rates, lower down payments and other loans — even special government program loans such as FHA and VA loans.
Consider paying for points. Discount points are upfront charges you can pay to reduce the interest rate on your loan. See if paying for points will be beneficial to your total cost in the long run, especially if you don’t plan on keeping your home for a long time.
Qualify for special programs. There are a variety of government, state and local programs that may offer competitive rates and terms.
Save a larger down payment. The bigger your down payment, the lower your interest rate.
Lower your debt-to-income ratio (DTI). Your total debt load will affect which loans you qualify for. It’s a good idea to pay down any credit cards or loans when you’re shopping for the best rate.
Your lender will want to know your financial history to get an idea of your risk.
Appraisal fee:
$300–$500
This proves that your property is worth the sale price. It protects the lender if it needs to sell your property and recoup the costs.
Origination fee:
0.5%–1% of loan amount
This fee is for processing your loan application.
Title insurance fee:
$1,000–$5,000
At the time of closing, you’ll pay for title insurance, which comes in two forms — the lender’s and owner’s. The lender’s title protects the lender, while the owner’s title protects you.
Title search fee:
$75–$100
This determines whether a seller has the right to sell a property to a buyer.
Survey fee:
around $350
In some states, a survey of the property is required to ensure property lines and boundaries are correct.
Closing fee:
2%–5%
You’ll pay this fee to the attorney or company handling your closing.
Private mortgage insurance (PMI):
0.5%–1% of loan
If you have a down payment of less than 20% of the purchase price, you’re required to pay PMI each month.
Inspection fees:
$200–$400
Home and pest inspections will uncover any nasty hidden surprises within your new home.
Homeowners insurance, depends on your state:
$300–$3,000, yearly
Your lender will usually require that you take out homeowners and possibly flood insurance, to be paid monthly.
Points:
1% of the loan
Paying for discount points can reduce your interest rate, saving you money on your monthly payments. This is an optional cost and one you should consider the merits of before paying.
In addition, you may also pay attorney and postal fees.
Find a lender. Decide on a lender and loan you’re comfortable with.
Start the application process. Fill out Fannie Mae Form 1003, which includes all the information that a lender needs to asses your risk. Your loan is then reviewed by a loan officer before you sign it.
Review. Your house is appraised and inspected to make sure it meets all standards set by the lender. At this point your application is reviewed by an underwriter and your credit report is examined.
Loan estimate. You’ll receive your loan estimate for review and signature.
Closing. Before your closing meeting you’ll receive your closing disclosure, which will show you all the fees and costs you’ll pay. And finally, you’ll sign all remaining documents and get the keys to your new home.
Who’s involved in the purchase of your home?
When applying for a loan:
Loan officer. This person helps you find a loan and assists with the application process. They’ll keep you updated on the progress and be there to answer any questions.
Loan processor. Once you’re ready to apply, the loan processor will collect the required documents from you to support your application and will check the necessary calculations for your loan.
Mortgage underwriter. They give the final say on if your application is approved or rejected after fully evaluating it.
Closing representative. This person oversees and holds the closing meeting and the transferring of funds between parties.
When buying a property:
Real estate agent. A good real estate agent will be your point of contact to find a home and help you negotiate with the seller to get the best price.
Real estate appraiser. You’ll need to get the property appraised for your lender, and for yourself, to find the true value of the home.
Home inspector. You’re not required to get a home inspection, but it’s recommended. If there is anything wrong with the home, you can ask them to fix it, or lower your costs. Inspectors are trained to assess property to find any structural or safety issues.
Pest inspector. They look at your property for pests like termites that can destroy your home over time.
Loan estimates and closing disclosures
Lenders and brokers are required by law to give you a loan estimate. This gives you an estimate of the cost you’ll pay at closing. It will show information like:
The interest rate.
A breakdown of the closing costs.
An estimation of the tax and insurance costs.
An estimate of your monthly payments.
You should get a loan estimate within three days of getting your loan application. One you get a loan estimate, you are not required to use that lender. Use this tool to compare lenders and find one that gives you the best rates.
Source: consumerfinance.gov
You’ll receive a closing disclosure at least three business days before closing. It lists all the important information about your mortgage, including:
Your loan terms, such as how long you’ve fixed your loan for.
What your monthly payments will be.
The closing costs of your mortgage.
If you’re applying for a reverse mortgage, you’ll receive a HUD-1 and a truth-in-lending disclosure instead of a closing disclosure.
Source: consumerfinance.gov
Bottom line
Buying a house is likely one of biggest investments you’ll ever make. Don’t go into the process blind — do your research and understand the bundles of papers and jargon before you sign.
Adrienne Fuller is the publisher for money transfers and also the head of publishing at Finder. With a decade of experience creating guides in finance and education, she aims to deliver the accurate and transparent information she wishes she had when she made some of life's important financial decisions. She has a BA from Colorado College and when she's not helping folks save money, she's hiking with her two Catahoulas around her home in San Diego.
Amazing blog! Do you have any recommendation for aspiring writers?
Ι’m hoping to start my own blog soon but I’m а littⅼe lost οn eveгything.
Would you suggest starting ѡith a free platform like WordPress
οr go for a paid option? Tһere are sо mаny options out therе that Ι’m completely overwhelmed ..
Any recommendations? Appreciate іt!
It is nice and exciting to hear that you are aspiring to be a writer. Free platforms would not hurt to start with, reading reviews and also doing intensive research on the basics of being a writer. Also, you may want to check videos on youtube and free tutorials. Once that you have all what you need to start and might think that you need to learn more, it would not hurt to pay for additional training.
Hope this helps!
Please do not hesitate to contact us back is there is anything else
I bought a house with my now ex-fiance. She is keeping the house. I am wanting to get my name off of all legal documents, loan, mortgage, everything. How can I get that started without having to go through the court system?
Thanks for getting in touch with finder. I hope all is well with you. :)
You would need to first talk to your ex-fiance. From there you need to come up with your terms and conditions on how you should be able to shake off all the responsibilities related to the property. You would also need to get your mortgage provider involved in your discussion. In most cases, you would be able to accomplish this without going through the court system. However, if in case you need legal advice, you might as well speak to a lawyer or someone who is an expert in handling real estate documents.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
I just started a new job and I’m looking to buy a house that is going to hit the market. The lady has agreed to hold off on posting it to the market until I can find out if I can get approved or not.
It’s good to know that the owner has accommodated your request. Since time is of the essence with your deal with the owner, you may enlist the services of a mortgage broker who will assess your needs and help you find a suitable home loan. This may save you time and effort in finding the right lender as they have access to a range of home loans from a variety of banks and lenders.
My husband and I are looking to buy a home and I work a full time job but my husband is self employed who gets 1099 and paystubs monthly. However when we file taxes each year, we have a lot of deductibles which leaves very little income to show. We make enough money, but banks won’t approve us. How can we do a low doc and how does that work
My husband and I are looking to buy a home and I work a full time job but my husband is self employed who gets 1099 and paystubs monthly. However when we file taxes each year, we have a lot of deductibles which leaves very little income to show. We make enough money, but banks won’t approve us. How can we do a low doc and how does that work
While we are a financial comparison website and general information service we are not mortgage experts and don’t offer any of the products or services on our website. You can compare a range of loans in the market, alternatively you can reach out to a mortgage broker who will take all your circumstances into account and offer you a range of lending options.
Low doc home loans are types of loans offered as a way of meeting the requirements of small business owners. They are designed for self-employed people who otherwise wouldn’t be able to get a home loan due to their inability to show how much they earn using traditional methods. Generally, the eligibility requirements from lender to lender will differ, but in most cases you’ll be required to have a proof of your business and to supply the self-certification of your income plus good credit history. You would still need to prepare some deposit just like a regular home loan does.
It is also of worth to check other options such as joint application, or FHA mortgages.
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These are regular mortgage loans that are not part of any government loan programs like VA or FHA loans. These loans often come with lower interest rates and lower fees, but they need to meet standards set by the government-sponsored agencies Fannie Mae and Freddie Mac.
Amazing blog! Do you have any recommendation for aspiring writers?
Ι’m hoping to start my own blog soon but I’m а littⅼe lost οn eveгything.
Would you suggest starting ѡith a free platform like WordPress
οr go for a paid option? Tһere are sо mаny options out therе that Ι’m completely overwhelmed ..
Any recommendations? Appreciate іt!
Hi Rhys,
Thank you for reaching out to finder!
It is nice and exciting to hear that you are aspiring to be a writer. Free platforms would not hurt to start with, reading reviews and also doing intensive research on the basics of being a writer. Also, you may want to check videos on youtube and free tutorials. Once that you have all what you need to start and might think that you need to learn more, it would not hurt to pay for additional training.
Hope this helps!
Please do not hesitate to contact us back is there is anything else
Regards,
Val
I bought a house with my now ex-fiance. She is keeping the house. I am wanting to get my name off of all legal documents, loan, mortgage, everything. How can I get that started without having to go through the court system?
Hi Christian,
Thanks for getting in touch with finder. I hope all is well with you. :)
You would need to first talk to your ex-fiance. From there you need to come up with your terms and conditions on how you should be able to shake off all the responsibilities related to the property. You would also need to get your mortgage provider involved in your discussion. In most cases, you would be able to accomplish this without going through the court system. However, if in case you need legal advice, you might as well speak to a lawyer or someone who is an expert in handling real estate documents.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
I just started a new job and I’m looking to buy a house that is going to hit the market. The lady has agreed to hold off on posting it to the market until I can find out if I can get approved or not.
Hi Hhess8,
Thanks for reaching out.
It’s good to know that the owner has accommodated your request. Since time is of the essence with your deal with the owner, you may enlist the services of a mortgage broker who will assess your needs and help you find a suitable home loan. This may save you time and effort in finding the right lender as they have access to a range of home loans from a variety of banks and lenders.
Kind regards,
Liezl
My husband and I are looking to buy a home and I work a full time job but my husband is self employed who gets 1099 and paystubs monthly. However when we file taxes each year, we have a lot of deductibles which leaves very little income to show. We make enough money, but banks won’t approve us. How can we do a low doc and how does that work
My husband and I are looking to buy a home and I work a full time job but my husband is self employed who gets 1099 and paystubs monthly. However when we file taxes each year, we have a lot of deductibles which leaves very little income to show. We make enough money, but banks won’t approve us. How can we do a low doc and how does that work
Reply
Hi Mark,
Thank you for your inquiry.
While we are a financial comparison website and general information service we are not mortgage experts and don’t offer any of the products or services on our website. You can compare a range of loans in the market, alternatively you can reach out to a mortgage broker who will take all your circumstances into account and offer you a range of lending options.
I hope this information has helped.
Cheers,
Harold
Hello Brenda,
Thank you for your inquiry.
Low doc home loans are types of loans offered as a way of meeting the requirements of small business owners. They are designed for self-employed people who otherwise wouldn’t be able to get a home loan due to their inability to show how much they earn using traditional methods. Generally, the eligibility requirements from lender to lender will differ, but in most cases you’ll be required to have a proof of your business and to supply the self-certification of your income plus good credit history. You would still need to prepare some deposit just like a regular home loan does.
It is also of worth to check other options such as joint application, or FHA mortgages.
Hope this helps.
Cheers,
Jonathan