Frequently Asked Questions
Below you will find answers to the questions we get asked most often about home mortgages, the home loan process, mortgage refinance, and more.
A home is one of the most significant purchases you will make in your lifetime, so knowing how much you can qualify for when applying for a home loan is important. You don’t want to end up with a mortgage that you can’t pay, so it is essential to be realistic about your monthly income and expenses. The general rule to follow is that your monthly mortgage payment should not exceed 28% of your monthly gross income1.
The easiest way to learn what you may qualify for is to contact one of our licensed Mortgage Loan Originators. They can quickly calculate how much you may qualify for based on a few key numbers, including your income and any other earnings, estimated housing costs, down payment, current interest rates and more. You will also need a general idea of your monthly expenses. Keep track of all your expenses in a one-month period to come up with an average total for each month.
To get started and find out how much you qualify for, contact a Homebridge Mortgage Loan Originator today!
Your debt-to-income (DTI) ratio compares your monthly debt expenses to your monthly gross income. In other words, it is simply your debt payments compared with your income. Your DTI helps lenders determine whether you can manage additional monthly payments like a mortgage and how likely you are to repay your loan on time.
To calculate your DTI, add up all your monthly debt payments, such as a mortgage, student and auto loans, credit card payments, and any other personal loans. Next, determine your gross monthly income, which is the amount you earn each month before taxes, insurance, and social security are taken out. Divide your total monthly debt payments by your gross monthly income. Finally, multiply your answer by 100 to get your DTI ratio as a percentage. Here is an example: If your monthly take-home pay is $2,000 and you pay $400 per month in debt for loans and credit cards, your DTI is 20% ($400 divided by $2,000).
The CFPB (Consumer Financial Protection Bureau) recommends keeping your DTI ratio, including your monthly mortgage payment, at 36% or less. Here are a few ways you can improve your DTI:
- Avoid taking on new debt: Try to only apply for the credit you need.
- Pay down existing debt: Try to pay off the highest interest debt first, or whichever debt has the highest monthly payment. You can also try to lower a payment by extending your repayment timeline.
- Lower the interest on some of your debts: You can do this through a credit card balance transfer, refinancing a personal or auto loan, or negotiating directly with your creditor for a lower interest rate.
- Pay more than the minimum payment whenever possible: This may help reduce debt faster and minimize interest charges.
- Use a budget: Create a realistic budget and stick to it to get your debt under control.
Contact a Homebridge Mortgage Loan Originator today for assistance with calculating your DTI and any other mortgage questions.
Mortgage insurance allows lenders to offer loans to homebuyers who have a smaller down payment. It protects the lender in the case that a homeowner defaults on their loan. With a conventional loan, you will be required to pay for private mortgage insurance (PMI) if you put less than 20% down. For loans with smaller down payments, such as an FHA loan, you’ll pay for mortgage insurance regardless of the down payment amount.
Mortgage insurance pays the lender a portion of the principal if a homeowner stops making mortgage payments. Mortgage insurance varies a bit from loan type to loan type so let’s break it down a bit further:
- Private mortgage insurance (PMI) for conventional loans: Most lenders offer conventional mortgages with low down payment requirements, some as low as 3%. In this case, the lender will likely require you to pay for private mortgage insurance (PMI). Typically, the monthly PMI premium is included in your mortgage payment. You can ask to cancel PMI after you have over 20% equity in your home.
- FHA mortgage insurance premium (MIP): FHA loans offer minimum down payments as low as 3.5%. Most FHA home loans require an upfront mortgage insurance premium, regardless of the down payment amount. The upfront premium is 1.75% of the loan amount, and the annual premium ranges from 0.45% to 1.05% of the average outstanding balance of the loan for that year.
- VA funding fee: VA mortgages don’t require any mortgage insurance, but most homebuyers will pay a funding fee which can range from 1.4% to 3.6% of the loan amount for purchase loans. The fee amount varies based on your down payment amount and whether it is your first VA loan.
- USDA guarantee fee: Some USDA loans charge two fees: an upfront guarantee fee you pay once and an annual fee you pay every year for the life of the loan. The federal government evaluates the fees each fiscal year and can change them. However, your fee amount will not change; it is fixed when the loan closes.
Mortgage points or discount points are a form of pre-paid interest available when securing a mortgage. One point is equal to 1% of the loan amount. These fees are paid directly to the lender at closing in exchange for a reduced interest rate. It is also known as “buying down the rate.” The key benefits of mortgage points are that they can save on the overall cost of the loan and lower your monthly mortgage payments. These differ from origination points, which cover the expenses your lender made for getting your loan processed and are part of your overall closing costs.
Here are a few guidelines on when you should consider buying mortgage points:
- You plan to stay in your home for a long time. You pay more upfront, but you’ll see savings from the reduced interest rate if you stay in the home long enough.
- Determine the breakeven point: Consider the upfront cost of the points and when that will be eclipsed by the lower mortgage payments. For example, let’s say you buy a home for $200,000, and your monthly payments equal $1,136. If you buy two mortgage points for 1% of the loan amount each, that equals $4,000. Your interest rate drops, and your monthly payments go down to $1,074, which is a savings of $62/month. Then divide the amount you paid for points by the amount of monthly savings ($4,000/$62), and you get 64.5months. This means that if you stay in your home longer than 64.5 months, you will save money in the long term.
A licensed Mortgage Loan Originator can help you determine if mortgage points make sense for your loan and financial goals.
a. An annual percentage rate (APR) represents the average annual finance charge you’ll be paying on the loan when including all fees and costs associated with obtaining the loan. While the interest rate on a loan reflects the current cost of borrowing expressed as a percentage rate, the APR provides a more complete picture by taking the interest rate as a starting point and accounting for lender fees and other charges required to finance the loan.
b. Comparing APRs can help you understand how much you’ll be paying over the life of a loan. Factors that may affect the APR include:
- Points: These are discount points you can pay upfront to lower your monthly payments.
- Rates: The interest rate is a reflection of the cost you’ll pay to borrow the money. This could be a fixed-rate or an adjustable-rate.
- Fees: These can include processing and underwriting fees, settlement fees, appraisal fees, and more.
- Down payment: This is the amount you will pay upfront when you close your home loan.
- Private mortgage insurance (PMI): Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments.
Some affordable lending programs allow homebuyers to obtain financing despite having previous credit issues, bankruptcies, and other financial concerns. You can work on strengthening your credit while getting guidance on buying your first or next home. Different loan products may have more flexibility for homebuyers who have lower credit scores. An experienced Mortgage Loan Originator can help determine the loan to best fit your needs if your credit score is less-than-perfect.
Obtaining a home loan after a bankruptcy is possible, although it may require a little patience. There is generally a waiting period before you can buy a new home, depending on the type of bankruptcy and the loan type you are seeking. Check out the chart below for more details and contact a Homebridge Mortgage Loan Originator to discuss your specific situation today.
What is a Rate Lock?
Locking in a rate simply means setting the final interest rate for your mortgage loan.
How Long Does a Lock Last?
Rate locks vary but are usually made in increments of 5 or 10 days, ranging from 10 to 60 or more days. Longer locks are less likely to expire if your closing is delayed, but shorter locks may be less expensive.
How Much Does a Rate Lock Cost?
Standard lock terms (30, 45, 60, 75, and 90 days) do not have a rate lock fee. There is an upfront fee for an extended rate lock greater than 90 days.
Why Do Longer Locks Cost More?
When you lock your rate, we purchase insurance against swings in the interest rate market (a hedge) and register the lock with the end investor (usually Fannie Mae or Freddie Mac). Longer locks pose a greater risk for market changes, so the insurance is more expensive.
Locking In Is a Two-Way Street.
The lock protects you from rising rates, though you take some risk that prevailing rates might fall before your loan closes. On the other hand, if you don’t lock the rate, you risk getting a higher interest rate and monthly payment when you do finally lock the rate.
The Best Approach to Securing the Lowest Rate.
The lock you choose will depend on your scenario, including variables like the type of loan, complexity of qualification, credit requirements, and property type. When rates are rising, locking in will protect you. If rates are falling, then floating—or waiting to lock—may be better.
The Bottom Line.
Contact a Homebridge Mortgage Loan Originator who can discuss and help you decide what’s best for you. We’ll devise the best approach based on all those variables and your own preferences.
Closing costs for a mortgage include the fees that the lender, real estate attorney, and other professionals charge to manage and close your home loan. They are the fees and charges in excess of the purchase price of the property that are due at the closing of the real estate transaction. Closing costs can range from 2% to 5% of the loan cost, including property taxes, mortgage insurance and more. Most of the costs are paid by the buyer, but the seller typically must pay a few as well, such as the Real Estate Agent’s commission.
The most cost-effective way to pay closing costs is to pay them out as a one-time expense. You may be able to finance them by folding them into the loan if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage.
You may be able to negotiate some of the fees to lower your closing costs. Some states, counties, and cities offer low-interest loan programs or grants to help first-time homebuyers with closing costs. Check with your local government to see what’s available.
A fixed-rate mortgage is a home loan with a set interest rate for the term of the loan. A fixed-rate loan offers a fixed term (for example, 10, 15 or 30 years) as well as a fixed interest rate, so the monthly amount for the payment of principal and interest will not change during the term of the mortgage. However, your monthly mortgage payment may also include interest, taxes, and insurance. In that case, while your principal and interest amounts will not change, the amount needed for taxes and insurance may. This is when you may see a fluctuation in your monthly mortgage payment.
Escrow is money and/or documents held by a trusted third party on behalf of two other parties that are in the process of completing a transaction. The third-party holding the escrow may be a law firm, title company, or escrow company. Typically, you may see an escrow firm or escrow account on your loan for two reasons.
- First, during the purchase or sale of your home, an escrow firm will create an escrow account to hold fees or expenses managed by agents during the transactions. During the closing process, the escrow agent will receive appropriate payment instructions to the various parties when all predetermined contractual obligations have been fulfilled. The escrow firm safeguards your funds and protects all parties by ensuring the terms of the purchase contract and the mortgage agreement are carried out.
- Second, your loan may have an ongoing escrow account to provide for the timely payment of taxes and insurance on your home. This prevents tax liens, loss of property, and any lapse of insurance coverage. In addition to the earnest money, the escrow account typically holds funds for the down payment and closing costs, credits back from the seller, and any other funds that are part of the transaction.
As part of your regular mortgage payment, 1/12th of the annual cost is collected. These funds are held and paid out as bills come due. If taxes are $5,000 and insurance is $1,000 for a total of $6,000, you’ll pay $500 into escrow each month. The balance will build until an outgoing payment is made. After closing is complete, the escrow holder will distribute funds as detailed in the real estate contract and mortgage agreement.
The minimum required balance is usually a two-month cushion to assure that sufficient funds are in the account even if payments are interrupted.
The minimum is different from the starting amount to make sure sufficient funds are available to make the first tax or insurance payment when due.
So how does an escrow account help you?
- You have a consistent monthly expense instead of large bills a few times per year.
- The money in the account is always yours. You receive any remaining balance at the sale or refinance.
- You might enjoy more competitive interest rates. Loans without an escrow account will often incur a price adjustment.
The mortgage escrow account allows for a stress-free process. Paying a predictable amount each month makes it easier to budget and manage all the funds that are part of a mortgage transaction.
Still have questions?
Speak with a licensed Homebridge Mortgage Loan Originator today!