Mortgage Basics
How do I qualify for a mortgage?
Qualifying is the first step to purchasing a home. We can guide you through the simple application process over the phone, online, or in person. We’ll look at many different qualification factors and will need some documentation to complete the qualification process. Qualification criteria vary by different loan programs. One borrower may qualify for one mortgage loan option and not another. However, there are typically three things that you usually need…
- Income / Employment History – Most loan programs require an income and employment history. However, there are some programs that allow borrowers who recently started jobs or might have strong assets to qualify. Keep in mind, we can usually take into account multiple different types of income (job, rental income, child support, retirement, pension, alimony, disability, etc).
- Credit – Most loan programs need some kind of credit history. Although there are some unique programs that allow low or no credit scores to qualify.
- Down Payment or Equity – Different loan programs have different down payment requirements if you’re buying. If refinancing, there will be some requirement for equity as well. With this being said, there are down payment assistance options that will cover most or all of buyer’s down payments.
What’s included in my mortgage payment?
Many use the abbreviation of PITI to explain the different components of a mortgage payment. With many mortgages, there are options for homeowners to pay their taxes and/or insurance separate if they want. However, most homebuyers include it in their monthly payment to help keep 12 month of even housing obligations.
- Principal – portion of your mortgage payment that goes to paying down your loan
- Interest – monthly interest that you pay to your mortgage lender for your loan
- Taxes – property tax bill that you pay yourself or through your escrow account
- Insurance – your homeowner’s insurnace (also known as hazard insurance)
Two other monthly obligations that we consider when qualifying buyers and homeowners are mortgage insurance (sometimes required with lower down payment options) and HOA (community fees).
How much do I need for down payment?
Down payment requirements vary from loan program to loan program. Below are the minimum down payment requirements for each loan – keep in mind that not everyone can qualify at the minimum down payment. We help analyze all loan options and assist in determining the ideal down payment and loan. Also keep in mind that there may be down payment assistance available to cover some or all of your down payment.
How are rates determined?
For the most part, rates move with financial markets (specifically, the bond market) as well as the economy. Every client receives a custom rate specific to their specific scenario however.
Did you also know that mortgage rates change daily? Even hourly? Rates move often and are affected by many factors. Below is a simple list of everything that will affect your rate in addition to the market.
- Credit Score
- Loan Amount / Size
- Down Payment Amount / Equity
- Type of Property (ie. Home vs Condo)
- Loan Program
- Fixed or Adjustable Rate
- Type of Mortgage Insurance (if any)
- Residence Type (ie. Investment vs Primary)
- Amount of Discount Points or Lender Credit
- & MORE!
Different Loan Options
What are some of the different loan programs?
Below are just a few types of the different loan programs…
Conventional – Most common type of mortgage. Higher county limits than other programs. Typically for good to excellent credit.
FHA – Government loan that is more flexible on credit (for qualification and rate) compared to conventional. Loan limits are slightly lower than conventional loans.
Jumbo – These loans are for loan sizes above the conventional loan amount. Typically stricter guidelines/rules than conventional loans.
VA – VA mortgages are backed by the government to allow veterans to buy with no money down. VA loans also tend to be more lenient with credit and income.
USDA – USDA loans are offered in rural areas set by the government which offer no money down.
Renovation Loans – renovations loans allow you to buy a home or refinance your current home and finance home improvements into the new mortgage.
Down Payment Assistance – there are several different programs that we have to help buyers with their down payment – some are grants that don’t need to be repaid
Reverse Mortgages – these mortgages are for borrowers 62 and older designed with no monthly payment (or a payment back to the borrower every month)
Fixed & Adjustable Rate – we have options for both fixed rate (means rate never changes through loan term) and adjustable rates (fixed for certain period then can adjust)
Other Loans – there is a plethora of other types of private mortgages out there. Mortgages for NonWarrantable Condos. Mortgages for Stated Income Loans based on bank statement deposits. Mortgages for investors that only qualify based on rental income. The list goes on and on. However, above is a good overview of the primary options.
What decisions will you help us with?
We consider ourselves mortgage advisers – we don’t just qualify for someone for one loan program and give one rate option. We try to understand your short and long term goals to find the best mortgage for you. Below are a few decisions we’ll help you make in the process…
Choice of Loan Program
Some buyers might be deciding between a couple different loan programs. For example, you may be considering between FHA and a CONVENTIONAL loan. Or you might be deciding between a JUMBO loan and a CONVENTIONAL loan with a second mortgage. We’ll help you analyze the best option for your short and long term goals.
Rate Options
Many buyers expect thousands of dollars in closing costs. In reality, most buyers have the option to cover all of their lender fees with a slightly increased rate. For buyers who are looking to minimize move in costs or don’t think they’ll have their mortgage/home for long, opting for a higher rate where we can potentially cover your closing costs with a lender credit could make sense. If a buyer knows they’ll be in the home for a while, paying extra fees for a lower rate (known as discount points) might be worth it in the end.
Down Payment Amount
Buyers need to consider how much of a down payment to put on their home. Certain loan programs will have better rates and/or better mortgage insurance rates once you reach certain down payment thresholds. For example, putting 10% down payment can be greatly more beneficial than 9% on a conventional loan. Or we can also help you decide between using a first time homebuyer grant versus coming up with your own down payment for example.
If putting less than 20% down on a Conventional Loan, what type of mortgage insurance?
There are a few different types of mortgage insurance options that you‟ll need to consider. Even though most buyers decide to go with monthly mortgage insurance, there is also borrower upfront mortgage insurance and lender paid mortgage insurance.
Are there any pre-payment penalties?
On all the standard loans we offer and 99%+ of the loans we have closed, there are no prepayment penalties.
Some very, very unique loan programs for investment properties do have prepayment penalties but we always make sure it’s VERY transparent with what the terms are.
What's the difference between fixed rate and adjustable rate?
A fixed rate mortgage has the same interest rate through the entire term of the loan.
An adjustable rate mortgage typically has a fixed rate for a certain amount of time (5 or 10 years for example) and then it can adjust according to the terms of the loan.
Over 95% of the mortgages we have closed are fixed rate. In a low rate environment (like we’ve been in since 2008), the difference between a fixed rate and an adjustable rate is not that big. As rates increase over time, we expect adjustable rates to become more popular.
The Loan Process
How do I get started?
Typically, I recommend that you speak to us as soon as you’re interested in buying or refinancing a home so we can help guide you on options and prepare you so that way when you’re ready to make the move, you’re fully prepared.
Once you’re ready to apply, you can go to our online application or give us a call at 602.456.2273 to go through a quick phone application. We do not charge any application fees so it doesn’t cost you anything to review options.
What are the steps to the mortgage process?
1 – Application Stage
During the application stage, we’ll help you get prequalified. This consists of providing basic information along with documentation. Documentation will vary from person to person. During the application process, we will discuss payment estimates, what you’re qualified for, and review different loan options.
2 – Initial Loan Paperwork
Once you find a property and go under contract, we’ll gather any updated documentation if needed and we’ll send disclosures via email for esignatures. Here you’ll get a lot of legal disclosures and FYIs as well. This does not commit you to the loan.
3 – Processing & Appraisal (Behind the Scenes)
Once all the initial loan paperwork is signed, we’ll do a lot of the behind the scenes work. We’ll verify employment, identity, taxes, etc – our customers aren’t really involved during this. We’ll also get the appraisal ordered as well.
4 – Underwriting (Behind the Scenes)
We’ve already pre-qualified you and had the file pre-underwritten but now it becomes official to match the exact property, purchase price, loan amount, etc. The underwriter will work to approve your loan and let us know if for some reason they have any questions about verification and documentation. We do our best job upfront to request everything upfront that many clients aren’t bothered for any more paperwork.
5 – Closing Preparation (Behind the Scenes)
Once the underwriter gives full approval, we’ll work to prepare all the closing paperwork and then work with the title company (or lawyers in some states) to finalize closing figures.
6 – Signing / Funding / Closing
The title company (in most states – some states use attorneys) will work with you to set a time to sign (in their office or with a mobile notary) and also give you instructions regarding how to pay your down payment. Once the mortgage lender receives and reviews the copy of the complete package of the signed documents from the title company, the loan will be sent out. Once funded, the title company will record the deed at the County and you will officially be the new homeowner!!!
How long does it take to get prequalified?
Getting prequalified can take as little as a couple hours. The first step is the application, either online, over the phone, or in person. Then we help you gather the documentation that we’ll need. If you have your paperwork on file/organized (typically most can be accessed from online accounts anyways), then it’s very quick!
How long does the entire process take?
Most mortgage companies typically take a minimum of 30 days to process a loan. However, in many cases if properly planned we can close a loan in as little as 2 weeks.
Regular Closing – Two to Three Weeks
A loan closing where we already have the all of your documentation on
file, order the appraisal right away, there are no issues with verification,
& underwriting approves the file the 1st time around can close in 2-3 weeks. With this being said, the real estate transaction if buying still might take 30-40 days.
Longer Closing – 30 Days
A loan closing that might take 30 days could be because of a credit rescore, late appraisal order, low appraisal issues, or a verification (ie. tax verification, employer verification) taking longer than usual. This may also happen if we’re using a specific program like a particular down payment assistance grant or private loan with very specific underwriting approval process.
How can I make the process smooth?
- Keep your documentation organized
- Send all paperwork requested as soon as you can
- Order the appraisal (required to go through us) and pick your insurance company (we can give recommendations if needed)
- Follow the below DOs and DON’Ts…
DO
- Continue making mortgage & rent payments on time
- Stay current on all existing credit accounts
- Stay in your same position/industry
- Notify us of any changes that might happen with your employment, credit balances, assets, etc so we can help guide you through any obstacles
DON’T
- Increase credit balances or make a major purchase on credit (car, tv, appliances, etc)
- Apply for new credit or loans of any kind
- Pay off any collections/charge offs without notifying us first
- Change bank accounts unless necessary (creates more documentation for you)
- Close any credit accounts
- Borrower Money
- Deposit any cash or non-payroll deposits (might be hard to document or might not be acceptable)
- Leave town during escrow for an extended period of time without coordinating signing/closing with us
What Makes Us Different
How are you able to offer loans with no underwriting or processing fees?
We are a small and lean mortgage company by design. We keep our overhead to pass along the savings to your mortgage. Processing and underwriting fees charged by many lenders typically greatly exceed the actual payroll costs for processing and underwriting.
How can you offer rates much lower than the national average?
Shopping for a mortgage can be difficult – that’s where we come in. We are not loyal to any lenders and help you not only shop for the best rate but also make sure you’re getting into the best loan program for you. There are well over 100 wholesale mortgage lenders nationwide and we stay in touch with the broker community to make sure we’re getting the best deal for our clients. To learn about how brokers save clients money (vs going to a retail lender or bank), check out this article – How Does a Mortgage Broker Save a Consumer Money?
Why should I choose Modern Home Lending?
We hope that you give us a call so we can help you evaluate your options but below are just a few reasons…
- Great Service & Quick Closings – We’re very responsive to emails, phone calls, texts, etc. We keep you updated through the entire process and close our loans MUCH quicker than the average lender.
- Low Rates – We help our clients get some of the lowest rates offered in the industry by having over a dozen of lender options and not being tied to anyone specific.
- No Underwriting or Processing Fees – We don’t charge any ‘junk’ underwriting or processing fees. This alone could help save about $1500 in closing costs compared to other lenders.
- Lots of Options – we are always looking to get more loan programs for our clients to be the most competitive in the marketplace. Also, we always review options instead of just quoting one program with one rate.
Mortgage Insurance
When is mortgage insurance required?
Mortgage insurance is required on conventional & jumbo loans whenever you put less than 20% down payment. It is also required on some government loans such as FHA and USDA. With this being said, there are ways to avoid monthly mortgage insurance.
Why is mortgage insurance required?
Mortgage insurance is to help protect the lender with riskier, lower down payment loans. In the case that you foreclosure, the mortgage insurance will kick in and help cover some or all of the potential costs that the lender would have. On most loans, mortgage insurance either drops off down the line or reduces as the loan amount reduces.
Unfortunately it doesn’t benefit you as the borrower. However, I do help you make sure that we choose the best mortgage insurance for you and help you shop for the lowest cost as well.
What are the different mortgage insurance options?
For government loans (FHA/USDA), there is only the monthly mortgage insurance option. For conventional mortgage insurance, you have a few options:
- Monthly Mortgage Insurance (Most popular) – You pay a little extra each month for monthly mortgage insurance and can get rid of it eventually once you have more equity.
- Lender Paid Mortgage Insurance – The mortgage lender pays all of your mortgage insurance for you and in return, you get a slightly higher rate. This provides payments that are initially lower than the first option but don’t have potential of dropping your payments down the line like borrower paid monthly mortgage insurance.
- Borrower Paid Upfront Mortgage Insurance – As a buyer, you pay a large upfront sum in order to never pay monthly mortgage insurance. This makes sense if you know you’ll be in the home a while and think the market is pretty stagnant and it might take a while to gain equity.
Below is an example based off a $300,000 purchase, 5% down ($285,000 loan), and a 720 credit score.
| Monthly MI | Lender Paid MI | Upfront MI | |
|---|---|---|---|
| Interest Rate | 4.750% | 5.250% | 4.750% |
| Monthly P&I | $1486.69 | $1,573.78 | $1486.69 |
| Monthly MI | $133.00 | N/A | N/A |
| Initial Payment | $1619.69 | $1,573.78 | $1486.69 |
| Upfront MI Fees | N/A | N/A | $6156 |
This is not a live rate scenario – for example purposes only.
Can I get rid of a monthly mortgage insurance?
On conventional loans, you’re able to get rid of monthly mortgage insurance by either of the following:
-
- When you hit 78% LTV (22% equity) based on the original price, monthly MI falls off.
- After 2 years of good payments, once you have 25% equity based on the new value, you can submit a request to your mortgage lender to have it removed (usually with an appraisal showing you have 25% equity)
- After 5 years of good payments, once you have 20% equity based on the new value, you can submit a request to your mortgage lender to have it removed (usually with an appraisal showing you have 20% equity)
The above can vary slightly from loan to loan. As of 2013 for new loans, FHA mortgage insurance is permanent if you put less than 10% as a down payment which has made conventional a more popular option for some buyers with low down payments since then.
If it makes sense and you qualify, we can refinance you into a mortgage without monthly mortgage insurance as well.
Appraisals
How does an appraiser value a home?
Below is a little insight on how an appraiser will value a home.
Recent Comparable Home Sales are the Primary Basis of the Appraisal Report
When performing an appraisal, the appraiser will typically choose 5-9 properties that are most similar to the property being appraised. Properties that are more similar in features or were sold more recently will be weighted more in the appraisal. Most comparable properties will fall within the following criteria:
-
- Sold in the last 6 Months (more emphasis placed on sales within the last 3 months)
- Within a mile radius (the closer, the better)
- Similar Size
- Similar Features
Appraisers use Adjustments not “Price per Square Foot”
An appraiser will take a recent sale and adjust its sales price to determine the value of the home being
appraised. Let’s say an appraiser is hired to determine the value for property “A”. He or she may look at
Property B (a recent sale in the area) and adjust its value.
Sales Price of example Property B: $315,000 (used as a base price)
+ $4800 for larger square footage (Property A is given more value because its larger)
– $2650 for smaller lot
– $10,000 for backing up to a busy street
+ $12,500 for having a pool and spa
+ $1000 for having a fireplace
– $10,000 for not having as many kitchen upgrades
Adjusted Value for Property A (one that’s being evaluated): $310,650
In the example above, the appraiser would do this same comparison for every comparable property
chosen. Once all the adjustments have been made, the appraiser will determine a value.
How long does an appraisal take?
When should we order an appraisal?
On a refinance, we’ll order it right away. On a purchase, it should be ordered early on to avoid any delays. However, most buyers strategically wait to order the appraisal until all their inspection negotiations are completed.
Can I get rid of a monthly mortgage insurance?
On conventional loans, you’re able to get rid of monthly mortgage insurance by either of the following:
-
- When you hit 78% LTV (22% equity) based on the original price, monthly MI falls off.
- After 2 years of good payments, once you have 25% equity based on the new value, you can submit a request to your mortgage lender to have it removed (usually with an appraisal showing you have 25% equity)
- After 5 years of good payments, once you have 20% equity based on the new value, you can submit a request to your mortgage lender to have it removed (usually with an appraisal showing you have 20% equity)
The above can vary slightly from loan to loan. As of 2013 for new loans, FHA mortgage insurance is permanent if you put less than 10% as a down payment which has made conventional a more popular option for some buyers with low down payments since then.
If it makes sense and you qualify, we can refinance you into a mortgage without monthly mortgage insurance as well.
Closing Costs
What are the different types of typical closing costs?
- Title Insurance – Title insurance covers you in the case that there was some lien or encumbrance of some kind on the property – reassurance that the property is free and clear.
- Escrow Fees – The escrow company is the 3rd party that deals primarily with the title
insurance and is the middle man of the transaction handling all of the signings and funds. - Lender Discount Point (or credit) – While we don’t have processing or underwriting fees, there is typically a discount point (charged for lower rate) or a credit (money given to help pay closing costs). Discount points are typically vary based on your rate choice. The higher the rate, the higher potential for a lender credit. The lower the rate, the higher your total closing costs will be typically.
- Prepaid Home Insurance – Since insurance companies charge a year at a time, you’ll typically prepay
one full year worth of insurance upfront. - Prepaid Taxes– As taxes are collected in arrears (after), there will be some taxes collected at closing to put into your escrow account – this makes sure there is enough money to pay taxes when your taxes are due. Escrow accounts are not always required so this may be optional.
- Prepaid Interest – Mortgage interest is collected in arrears as well. For example, if you close on January 15th, your first payment will be on March 1st and you’ll have to prepay January’s interest from January 15th to January 31st.
- Other miscellaneous fees – There are multiple other costs that may apply depending on the transaction. These include home warranties (if you want one), HOA transfer fees, HOA disclosure fees, condo review fees, etc.
Who pays closings costs?
Typically, closing costs can be paid by any of the below (or combination)…
- Buyer – buyers can pay their closing costs and its an additional expense on top of their down payment
- Seller – sometimes it can be negotiated that the seller pays for closing costs on behalf of the buyer
- Lender – we keep closing costs low as-is by not charging processing or underwriting fees. However, with many programs, you can choose a slightly higher rate and get a lender credit to cover closing costs.
How can you cover our closing costs for us?
The below is for example purposes only and are live accurate rates.
Rate Option Examples
– 4.000% with $2259 discount points/fees
– 4.125% with $380 discount points/fees
– 4.250% with $1560 lender credit
– 4.375% with $3242 lender credit
As you can see above, the higher the rate, the easier it is to receive a lender credit. A lender credit is money that the mortgage company will credit (give) you at closing towards your other closing costs in exchange for choosing a higher rate. Typically, clients who don’t have that much money for out of pocket costs and/or know they won’t be in the home for the majority of their loan will pick a higher rate. Meanwhile, clients who have more money in the bank and know they’ll have the loan for the majority of the loan period will choose lower rates. I’d be happy to discuss which might be best for you.
A lender credit is typically available on non-down payment assistance regular loans with good credit.
What costs will I pay before closing out of pocket?
Typically, you’ll pay three things before all your cash to close is due.
- Earnest Deposit – this is typically due as soon as you and the seller reach an agreement and go ‘under contract’
- Home Inspection – most loans do not require this but it’s highly recommended that you get a home inspection (VA loans require a termite inspection)
- Home Appraisal – this is required by most (not all loans) to ensure the value of the property
Typically the home inspection and appraisal are about $1000 or so total. Earnest deposit is typically 1-2% of the sales price but is all negotiable (keep in mind your deposit typically gets credited towards your down payment).
How and why do closing costs vary?
| Common Items that Alter Closing Costs | |
|---|---|
| Time of the Month that Closing Takes Place | You’ll prepay interest for the remainder of the month that you close in. For example, if you close on 1/1, then you’ll pay all of January’s mortgage interest at closing but your first payment won’t be due until 3/1. If you close on 1/31, you’ll only pay one day of mortgage interest at closing, but your first payment will still be due on 3/1. |
| Time of the Year when Closing takes Place | The escrow account will collect anywhere from 2- 6 months of taxes depending on what time of the year you’re closing to make sure it has enough money for the next tax bill. However, the sellers will credit you for time that you weren’t in the home which will help offset this specific cost. |
| Cost of Homeowner’s Insurance | You’ll pay a year of insurance upfront plus a few months in reserves. Since you’ll be paying so much upfront, the cost of insurance can greatly impact your closing costs. Insurance costs will vary by borrower as well as by property/zip code. |
| Interest Rate Choice | As mentioned before, your fees are completely dependent on the market and the specific interest rate you choose. The lower the rate, the more fees. The higher the rate, the less fees involved. |
| Home Warranty Choice | You may decide to purchase a home warranty on one home but not another. This is another cost that can vary based on whether the home has a pool and other criteria. |
| HOA Fees | Some buyers look at homes in areas with no HOAs while others look at a variety of communities with HOAs. Each HOA has their own set of rules and transfer fee structure. |
| Cost of Title Company | Title fees can vary slightly from different title companies. |
What is an escrow account?
An escrow account is like a savings account that you can’t touch. It’s built to pay your taxes and insurance. Each month, you’ll contribute 1/12 of your annual insurance bill and 1/12 of your property tax bill into this account. Once these bills are due, the mortgage company will pay these bills on your behalf.
Escrow accounts are regulated by the government. Lenders can only keep a certain ‘cushion’ in these accounts and they can only be adjusted every so often.