Mortgage FAQ

A mortgage is a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan.

The main types include: Fixed-rate mortgages (interest rate stays the same), Adjustable-rate mortgages (ARM - rate can change), FHA loans (government-backed), VA loans (for veterans), USDA loans (rural properties), Conventional loans (not government-backed), and Jumbo loans (for expensive properties exceeding conforming loan limits).

Fixed-rate mortgages have an interest rate that remains constant throughout the loan term, providing predictable monthly payments. Adjustable-rate mortgages (ARMs) have rates that can change periodically based on market conditions, typically starting with lower rates that may increase or decrease over time.

Principal is the original amount of money borrowed for the mortgage. Interest is the cost of borrowing that money, calculated as a percentage of the remaining principal balance. Each monthly payment typically includes both principal (which reduces the loan balance) and interest (which compensates the lender).

PMI is insurance that protects the lender if you default on your loan. It's typically required when you make a down payment of less than 20% on a conventional loan. PMI can usually be removed once you've built up 20% equity in your home through payments and/or appreciation.

An escrow account is a separate account held by your mortgage servicer to pay property taxes, homeowner's insurance, and sometimes HOA fees. You pay into this account monthly as part of your mortgage payment, and the servicer pays these bills on your behalf when they're due.

Credit score requirements vary by loan type: FHA loans typically require 580+ (3.5% down) or 500-579 (10% down), VA loans usually need 620+, USDA loans typically require 640+, and conventional loans generally need 620+ for best rates, though some programs accept lower scores with compensating factors.

Most lenders use debt-to-income ratios to determine affordability. Generally, your total monthly debt payments (including the new mortgage) shouldn't exceed 43-45% of your gross monthly income, though some programs allow higher ratios with strong compensating factors like high credit scores or large down payments.

DTI is the percentage of your gross monthly income that goes toward paying debts. There are two types: Front-end DTI (housing costs only) and back-end DTI (all monthly debt payments). Lenders typically want to see a back-end DTI of 43% or lower, though this varies by loan program.

Down payment requirements vary: FHA loans require as little as 3.5%, VA loans often require 0% for qualified veterans, USDA loans may require 0% for eligible rural properties, and conventional loans can require as little as 3-5% for first-time buyers, though 20% helps avoid PMI.

Refinancing is replacing your current mortgage with a new loan, typically to get a lower interest rate, reduce monthly payments, change loan terms, or access home equity. The new loan pays off the existing mortgage, and you begin making payments on the new loan.

Consider refinancing when: interest rates drop significantly below your current rate, your credit score has improved, you want to change loan terms, you need cash for home improvements or debt consolidation, or you want to remove PMI. Generally, a rate reduction of 0.5-1% or more makes refinancing worthwhile.

A cash-out refinance is when you refinance for more than you owe on your current mortgage and receive the difference in cash. This allows you to tap into your home's equity for purposes like home improvements, debt consolidation, or other major expenses. The new loan amount will be higher than your current mortgage balance.

A streamline refinance is a simplified refinancing process available for FHA, VA, and USDA loans. It requires minimal documentation, no appraisal, and focuses on reducing your monthly payment or interest rate. The process is faster and less expensive than traditional refinancing.

Refinancing costs typically range from 2-6% of the loan amount and include: application fees, appraisal, title insurance, attorney fees, and other closing costs. Some lenders offer no-closing-cost refinancing where they pay the fees in exchange for a slightly higher interest rate.

A title search examines public records to verify legal ownership and identify any liens or claims against the property. Title insurance protects the lender and buyer from financial loss due to title defects, liens, or ownership disputes that weren't discovered during the search.

Mortgage insurance protects the lender if you default on your loan. PMI is for conventional loans with less than 20% down. FHA loans require MIP (Mortgage Insurance Premium). VA loans have a funding fee instead of mortgage insurance. USDA loans require an upfront and annual guarantee fee.

Yes, though options may be limited and rates higher. FHA loans accept credit scores as low as 500-580, some VA lenders work with lower scores, and specialized lenders offer programs for borrowers with credit challenges. Consider improving your credit first or exploring co-signer options.

Self-employed borrowers can qualify but need additional documentation like 2 years of tax returns, profit/loss statements, and possibly CPA-prepared financials. Lenders may average your income over 2 years. Bank statement programs and non-QM loans offer alternatives for those with complex income situations.

Yes, most loan programs allow gift funds for down payments from family members. You'll need a gift letter stating the funds are a gift (not a loan), documentation of the donor's ability to give the gift, and a paper trail showing the transfer of funds.

An ARM has an interest rate that changes periodically based on market conditions. Common types include 5/1, 7/1, and 10/1 ARMs, where the first number indicates years of fixed rate, and the second shows how often it adjusts afterward. ARMs typically start with lower rates than fixed-rate mortgages.

LTV is the percentage of the home's value that you're borrowing. It's calculated by dividing the loan amount by the property value. For example, borrowing $200,000 on a $250,000 home equals 80% LTV. Lower LTV ratios typically qualify for better rates and terms.

Amortization is the process of paying off a loan through scheduled payments over time. Early payments consist mostly of interest, while later payments include more principal. An amortization schedule shows how each payment is split between principal and interest throughout the loan term.

Equity is the difference between your home's current value and what you owe on your mortgage. You build equity by making mortgage payments (which reduce the principal balance) and through property appreciation. Making extra principal payments or home improvements can accelerate equity building.

A home inspection is a thorough examination of the property's condition by a licensed inspector. While not required by lenders, it's highly recommended to identify potential issues before purchase. The inspection can reveal problems that might affect the home's value or your decision to buy.

Pre-qualification provides an estimate based on self-reported information without document verification. Pre-approval involves submitting financial documents for verification and receiving a conditional commitment. Pre-approval is more reliable and gives you stronger negotiating power with sellers.

APR (Annual Percentage Rate) includes the interest rate plus other loan costs like origination fees, points, and some closing costs, expressed as a yearly rate. The interest rate is just the cost of borrowing the principal. APR gives you a more complete picture of the loan's total cost.

Yes, but it requires additional documentation and may limit your loan options. Lenders typically average irregular income over 2 years and may require larger cash reserves. Commission-based workers, freelancers, and seasonal employees may need specialized loan programs or non-traditional documentation.

Assets include cash, savings, checking accounts, retirement funds, investments, and other valuable property. Lenders verify assets to ensure you have funds for down payment and closing costs, plus reserves for future payments. Assets demonstrate financial stability and reduce lending risk.

A co-signer is someone who agrees to be responsible for the loan if you default. They can help if you have insufficient credit, income, or employment history. The co-signer's credit and income are considered in qualification, but they typically don't have ownership rights to the property.

Yes, but condo financing has additional requirements. The condo project must be approved by your loan program (FHA, VA, etc.), and lenders review the homeowners association's financial health, insurance coverage, and owner-occupancy ratios. Some lenders have stricter requirements for condos than single-family homes.

Yes, you can finance 2-4 unit properties with residential mortgages if you live in one unit. These require higher down payments (typically 20-25%), stronger credit scores, and more cash reserves. Rental income from other units can count toward qualifying income with proper documentation.

Manufactured homes can qualify for FHA, VA, and conventional financing if they meet specific requirements: permanently affixed to owned land, built after June 1976, meet HUD standards, and have a permanent foundation. Financing options and terms may differ from traditional site-built homes.

Yes, but second homes typically require larger down payments (10-30%), higher credit scores, lower debt-to-income ratios, and more cash reserves. Interest rates may be slightly higher than primary residences. You cannot use gift funds for the down payment on second homes.

Investment property mortgages require at least 20-25% down, higher credit scores (typically 640+), lower debt-to-income ratios, and significant cash reserves. Interest rates are higher than owner-occupied properties. Rental income can help with qualification but requires lease agreements and rental history documentation.

Yes, non-citizens can get mortgages including permanent residents, work visa holders, and some non-resident aliens. Requirements vary by lender and may include larger down payments, credit history in the U.S., employment authorization, and additional documentation. Some programs are specifically designed for foreign nationals.

Lenders can use alternative credit sources like rent, utility, and phone payment history to establish creditworthiness. FHA loans allow manual underwriting for borrowers with limited credit. Consider building credit history through secured credit cards or becoming an authorized user before applying for a mortgage.

Job changes can affect qualification but aren't necessarily disqualifying. Lenders prefer 2 years of employment history but may accept recent job changes if they're in the same field, represent career advancement, or come with employment letters. Recent graduates starting careers may have more flexibility.

A buydown is when someone pays extra upfront to reduce the interest rate temporarily or permanently. Temporary buydowns (like 2-1 buydowns) reduce payments for the first few years, while permanent buydowns lower the rate for the entire loan term. Sellers sometimes offer buydowns as purchase incentives.

Mortgage assumption allows a buyer to take over the seller's existing mortgage. FHA, VA, and USDA loans are generally assumable (with lender approval), while most conventional loans are not. The buyer must qualify for the assumption and typically pay the seller for their equity in cash.

Yes, co-borrowers are both responsible for the loan and have ownership rights in the property. This differs from co-signers who help with qualification but typically don't have ownership. Co-borrowers can be spouses, family members, or friends, and their combined income and assets are considered for qualification.

The VA funding fee helps offset the cost of the VA loan program to taxpayers. It varies based on loan type, down payment, and whether you've used VA benefits before. Veterans with service-connected disabilities are exempt from this fee. It can be financed into the loan amount.

Lenders typically count 75% of rental income toward qualification to account for vacancy and maintenance costs. You'll need lease agreements, rental history, and sometimes tax returns showing rental income. For multi-family properties you'll occupy, potential rental income can help with qualification.

Mortgage credit availability refers to how easy or difficult it is to obtain a mortgage, influenced by economic conditions, regulatory changes, and lender risk appetite. During tight credit conditions, lenders may require higher credit scores, larger down payments, and stricter documentation.

The secondary mortgage market is where lenders sell mortgages to investors, providing liquidity to make new loans. Government-sponsored enterprises like Fannie Mae and Freddie Mac purchase conforming loans, while private investors buy non-conforming loans. This system helps keep mortgage rates competitive.

Focus on paying bills on time, reducing credit card balances, avoiding new credit inquiries, and addressing any errors on your credit report. Consider secured credit cards or credit-builder loans. Work with the lender to understand specific reasons for denial and create an improvement plan.

MIP is required on FHA loans and includes both upfront (UFMIP) paid at closing and annual premiums paid monthly. Unlike PMI on conventional loans, MIP typically remains for the life of the loan on most FHA loans, though some can remove it after 11 years with sufficient equity.

Seasonal employees can qualify by showing consistent seasonal employment history (typically 2 years) and off-season income sources. Lenders may average your income over 12 months and require larger cash reserves. Documentation of rehire likelihood and supplemental income during off-season is important.

Mortgage bankers lend their own money and may sell loans after closing. Mortgage brokers act as intermediaries, connecting borrowers with lenders for a fee. Brokers may offer more loan options, while bankers may provide faster processing. Both must be licensed and can help you find suitable financing.

Look for licensed professionals with good reputations, competitive rates, clear communication, and knowledge of programs that fit your situation. Ask about experience with your loan type, average processing times, and fees. Get referrals from real estate agents, friends, or online reviews, and compare multiple lenders.