Mortgages and Home Loans
Your Guide to Buying a Home
Frequently Asked Questions
Is it better to get a home loan from a bank or lender?
That depends. Every financial institution offers slightly different mortgage options and fees. Some banks may offer discounts and incentives for those who currently bank with them, while other lenders—particularly online ones—may be able to offer lower fees due to reduced overhead costs. Because of these differences, you should compare quotes from both before moving forward.
What do you need to qualify for a home?
Lenders may have a suggested minimum credit score, debt-to-income ratio, and a required down payment, depending on the loan program. You may also need various documents when applying, such as recent pay stubs, tax returns, W-2s, bank statements, and verification of employment. You can typically increase your chances of qualifying by offering a larger down payment or improving your credit score.
How do I get preapproved for a home loan?
You’ll have to fill out the lender’s preapproval form, usually found on its website. You typically need to provide a little information—your name, income, details on the house you’d like to buy —and submit to a hard credit check. The lender will then review your information, and you’ll get a preapproval letter offering a specific loan amount. The preapproval letter is typically good for 90 days.
Which loan is best for first-time homebuyers?
The best loan depends on your credit score and how much you have saved for a down payment. Many first-time homebuyers use Federal Housing Association (FHA) loans because they require a 500 credit score (with a 10% down payment) or a 580 credit score (with 3.5% down). Conventional mortgages only require a minimum of 3% down, but come with much higher credit score requirements.
What is a good down payment on a house?
It depends on what type of mortgage loan you’re using. If you’re getting an FHA loan, a down payment of at least 10% is ideal, as it ensures you can cancel mortgage insurance after 11 years. If you’re getting a conventional loan, shoot for 20%. This will let you avoid private mortgage insurance altogether.
What are the types of mortgages?
FHA and conventional loans are most common. Federal Housing Administration (FHA) loans are insured, reducing the risk for lenders that loan funds to less creditworthy borrowers. Conventional loans are issued by private lenders and don’t have this insurance. There are also jumbo loans (for higher-priced properties), VA loans (for veterans and military members), and USDA loans (for rural buyers).
What are typical mortgage terms?
The most common mortgage terms are 30 or 15 years. This means the loan balance is repaid over either 15 or 30 years. Adjustable-rate mortgages (ARM) come in 3/1, 5/1, 7/1, and 10/1 terms. This means your interest rate is fixed for three, five, seven, or 10 years, and after that, the rate resets annually based on current mortgage interest rates.
Do mortgage payments go down over time?
Your mortgage payment may go down over time, but it depends on several factors. With an adjustable-rate loan, your interest rate can change and, thus, your mortgage payment, too. Refinancing your loan may also reduce your mortgage payment. If neither of these scenarios applies, your payment will remain roughly the same (excluding changes to property taxes, PMI, home insurance, or servicer fees).
A mortgage is a specific type of loan that’s used to purchase a home or a piece of real property. Mortgages are offered by banks, credit unions, and other financial institutions across the country.
Refinancing a mortgage involves replacing an existing loan with a new one. Refinancing swaps out your current mortgage for one that ideally offers better terms. Homeowners typically refinance a mortgage to secure more favorable interest rates or other loan features that can save them money.
FHA loans are loans issued by private lenders but backed by the Federal Housing Administration (FHA). Because they're insured by the FHA, these loans bring home ownership into reach for low- or moderate-income buyers who might otherwise have a hard time getting approved by conventional lenders.
Predatory loans manipulate borrowers into accepting payment terms that are exploitative. They're used by unscrupulous lenders to extract more money than the borrower has the ability to repay, often through high interest rates or fees they never expected.
HUD loans—also called Federal Housing Administration (FHA) loans—are mortgage loans that are offered by private lenders and insured by the FHA. The FHA is an agency within the U.S. Department of Housing and Urban Development (HUD).
A reverse mortgage is a type of loan that provides you with cash by tapping into your home's equity. It's technically a mortgage because your home acts as collateral for the loan, but it's "reverse" because the lender pays you rather than the other way around.
Amortization is the process of spreading out a loan into a series of fixed payments. The loan is paid off at the end of the payment schedule.
A down payment is an upfront payment you make to purchase a home, vehicle, or another asset. The down payment is the portion of the purchase price that you pay out-of-pocket (as opposed to borrowing). That money typically comes from your personal savings, and in most cases, you pay with a check, a credit card, or an electronic payment.
The loan principal is the amount of money you borrowed from a lender. The loan principal can be found in a mortgage, car loan, student loan, credit card balance, and many other loans.
An escrow is a financial agreement in which a third party controls payments between two transacting parties and only releases the funds involved when all of the terms of a given contract are met.
An interest rate is the percentage of principal charged by the lender for the use of its money. The principal is the amount of money loaned.
Home Equity Loan
A home equity loan is a type of second mortgage. Your first mortgage is the one you used to purchase the property, but you can place additional loans against the home as well if you've built up enough equity. Home equity loans allow you to borrow against your home’s value minus the amount of any outstanding mortgages on the property.