Lending Update & Overview

A residential mortgage is a long-term loan (usually 15 or 30 years in length) provided by a bank, credit union or other financial institution secured by the property the buyer is purchasing. If the buyer defaults (fails to make payments in a timely fashion), the lender may start foreclosure proceedings to force payment of the debt through the sale of the property. 

2. How much can I afford to borrow? 

Agents should avoid giving a specific answer to this question since the buyer’s ability to purchase depends upon their income, credit score, debt-to-income ratio, and down payment amount. You can, however, explain the basic guidelines that lenders use. Specifically, the monthly mortgage payment should not exceed 28 percent of the buyer’s gross income. Second, the buyer’s total debt payments should not exceed 36 percent of the buyer’s gross income. A different approach is to use a mortgage calculator. The Street has identified their top six mortgage calculators you can share with your buyers. Please note that if your buyer is self-employed or has 1099-income rather than W-2 income, qualifying for a loan will be much more difficult. 

3. What are the most common types of mortgages? 

Government-backed loans: These include Federal Housing Administration (FHA), Veteran’s Affairs loans (VA), and US Department of Agriculture (USDA) loans. Government backed loans offer various types of down payments, interest rates, repayment terms and eligibility standards. 

Fixed-rate mortgages: Fixed-rate purchase mortgages are typically 15 or 30 years in length and the interest rate is locked for the entire term of the loan. 

Adjustable-rate mortgages (ARMs): The rate on ARMs can adjust after 3, 5, 7, or 10 years, based upon the term the buyer selects. The advantage is a lower interest rate, and in return the buyer gives up the stability of a fixed rate mortgage that never adjusts. 

Home equity loans (HELOCs): A HELOC is a line of credit borrowed against the homeowner’s equity in their home. Their home equity is the difference between the appraised value of their home and their current mortgage balance. 

Interest-only loans: In an interest-only loan, none of the principal is paid down. Consequently, most interest-only loans either require a balloon payment where the entire principal must be repaid at the end of the loan, or the loan shifts to being fully amortized after a period of being interest only. 

Jumbo loans: A loan is considered jumbo if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac — currently $766,550 for a single-family home in most states (except Hawaii and Alaska and a few federally designated high-cost markets, where the limit is $1,149,825). Jumbo mortgages are available for primary residences, second or vacation homes and investment properties, and are also available in a variety of terms, including fixed-rate and adjustable-rate loans. A jumbo loan will typically have a higher interest rate, stricter underwriting rules, and require a larger down payment than a standard mortgage. 

4. What are the rates for home mortgages? 

Interest rates vary due to a wide variety of factors including the type of mortgage, the length (term) of the loan, the borrower’s credit score, as well as market conditions including the indices to which the various types of loans are based. 

5. How much are the closing costs and fees associated with getting a mortgage? 

Closing costs are the fees and expenses associated with finalizing a mortgage, including loan origination fees, appraisals, fees, title insurance, and escrow fees. They vary based upon the type of loan and the lender. As a rule of thumb, three percent of the purchase price is often a good estimate of the amount of closing costs. 

6. What is the difference between a pre-qualification and a pre-approval for a mortgage? 

A pre-qualification is a document from a lender stating that the lender is tentatively willing to lend the borrower up to a certain amount. This document is based upon certain assumptions and is not a guaranteed loan offer. There are no financials collected/reviewed. A pre-approval is as close as you can get to confirming your creditworthiness and includes a review of income, assets, and credit history. A pre-approval letter is an offer to lend you a specific amount of money and is usually good for 90 days.

7. What documents do I need to get a mortgage? 

Most lenders require W2 statements, tax returns, recent pay stubs, recent bank statements, proof of ID and other additional documents might be required depending upon the buyer’s financial situation and the type of mortgage. 

8. How does the mortgage application process work? 

The mortgage application process consists of several steps: pre-qualification, pre-approval, loan application submission, underwriting, appraisal, title search and closing. Each step involves the collection and verification of various documents and information, culminating in the final loan approval and property purchase. The process can take as little as 30 days (and sometimes less) although 45 is the most common. If there is a problem with the appraisal, a lien on the property, a title problem or a different issue, loan approval can take longer. 

9. What happens after I get approved for a mortgage? 

After being approved for a mortgage, you’ll receive a loan commitment letter outlining the terms and conditions of the loan. You’ll then proceed to the closing process, which involves signing the loan documents, transferring funds, and ultimately acquiring the property title. Many states require the buyer and their agent to attend a closing at the title company to sign closing documents in person. 

In attorney states, the process varies a great deal. For example, New York buyers are required to have an attorney prepare the first draft of the sales contract, process all other contracts and represent the buyer at closing. In New Jersey, the real estate closing process breaks down into four major parts: the attorney review, inspections, the mortgage process, and the final closing. 

Since the closing process varies so dramatically across the country, agents should make sure their buyers are aware of the exact steps in the closing process in the area where they are purchasing. 

10. What are some common mistakes to avoid when getting a mortgage?

• Not getting pre-approved in advance 

• Failure to reach out to a mortgage professional to determine exactly how much they can qualify for and whether they are eligible for down payment assistance. 

• Not knowing that closing costs are on top of the down payment amount. 

• If interest rates are rising, failure to lock in their interest rate for 60 to 90 days when they first apply for a loan. 

• Choosing the wrong type of mortgage for their situation. 

• Settling for prequalification rather than doing the extra work to obtain preapproval. Lack of understanding about how credit scores impact the buyer’s interest rate and their ability to qualify for a loan.