Whether you’re a first-time homebuyer or not, getting a mortgage can be a scary undertaking. To help get you through the process, we’ve answered some of the most common questions would-be homebuyers have about mortgages — from the application process to the closing table.
Frequently Asked Questions
01 How do I start the loan process with Network Mortgage?
- Give us a call at (530) 899-1870
- Use our Contact Form to arrange an appointment or return call
- Request a no obligation Rate Quote before making an appointment
- Visit our location in Chico, California
02 What are current mortgage interest rates?
This is a tough question to answer accurately because there are so many variables involved:
- Income history
- Current debt
- Credit worthiness
- Down payment
- Property value
Also, in constantly changing economic times (like now), mortgage rates can fluctuate on a daily — even hourly — basis. That said, we’d be happy to give you a no obligation estimated interest rate quote.
03 How much house can I afford?
Buying “too much house” can quickly turn your home into a liability instead of an asset. That’s why it’s important to know what you can afford before you start looking at homes with a real estate agent.
Many financial experts suggest keeping your monthly mortgage payment to 28–31% of your gross income. Conventional underwriting guidelines may allow even higher monthly payments with compensating factors like good credit or financial reserves. However, keeping your payment as low as possible will make default less likely.
Also, with a conservative monthly mortgage payment, you’ll have room in your budget to cover additional costs of home ownership — like improvements, repairs, and maintenance — while saving money for other financial goals, including retirement.
04 Do I need great credit to get a mortgage?
Not necessarily, but it certainly helps. Keep in mind that lenders don’t just look at your credit history, but also at your ability and willingness to pay in the future. However, be aware that the lower your score, the higher your interest rate will be. And if your score’s a little low, don’t give up. There are plenty of ways you can improve your credit score, though it may take some time.
05 Will self-employment affect my ability to get a mortgage?
Not always, but keep in mind the following:
- Being self-employed may require paying a higher interest rate, as lenders look to compensate for the lack of verifiable, steady income.
- Self-employed individuals often use business expenses to reduce taxable income. This can backfire when they need to prove a substantial income to qualify for a loan.
- Some lenders offer low-documentation (stated income/stated asset) loans, but the interest rate is usually much higher than “conventional” mortgages.
- If you’re self-employed, you can improve your chances of getting a mortgage by offering a larger down payment, paying down debt, or increasing your credit score.
06 How much of a down payment do I need?
Most conventional loans require a down payment of at least 5%. FHA loans typically require 3.5%. However, we recommend putting at least 10% down on a home, but 20% is even better because you won’t have to pay private mortgage insurance (PMI). PMI is an extra cost added to your monthly payment to protect the lender against default. The monthly PMI amount doesn’t go toward paying off your mortgage.
Saving a big down payment takes hard work and patience, but it’s worth it. Here’s why:
- You’ll have built-in equity when you move into your home.
- You can finance less, which means you’ll have a lower monthly payment.
- Since loan pricing is risk-based, your interest rate will likely be lower.
On the other hand, if you buy a home with little to no down payment and home values fall, you could be stuck until the market recovers.
07 What are closing costs, and how much are they?
Closing costs refer to all of the charges that you’ll need to pay before your loan is completed. This can include origination fees, title insurance, prepaid escrow fees, and more. These costs can vary widely, but expect to pay around 2% to 3% of the home’s price in closing costs.
08 What type of mortgage is best for me?
There are dozens of different home loan programs available, and they change on a daily basis. Here are a few of the more common mortgage types:
- Conventional loans
- Federal Housing Administration (FHA) loans
- Department of Veterans Affairs (VA) loans
- U.S. Department of Agriculture (USDA) loans
A conventional mortgage is often the best option, but can be tougher to qualify for. Government-insured mortgages, such as FHA loans, can be easier to qualify for but may be costlier. If you’re a veteran, a VA loan could be the best option for you. And if you plan to buy a home in a rural area, a USDA mortgage could give you a no-money-down option. The best source for advice is your loan advisor.
09 What is a VA mortgage?
The Veteran’s Administration (VA) loan program is guaranteed by the U.S. Government’s Department of Veteran’s Affairs. One benefit of a VA loan is that no down payment is required. VA loans may be available to the following individuals:
- Honorably discharged veteran
- Active duty service member
- Un-remarried surviving spouse of a military service member
- National Guardsperson
10 What is an FHA mortgage?
Federal Housing Administration (FHA) loans are insured by the U.S. Government through the U.S. Department of Housing and Urban Development, also called HUD. FHA loans offer an excellent start to first-time home buyers, with options such as a low down payment or low closing costs. Learn more
11 What is an HECM reverse mortgage?
The Home Equity Conversion Mortgage (HECM) is the Federal Housing Administration’s (FHA) reverse mortgage program which enables seniors age 62 and older to withdraw some of the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both.
You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing. Learn more
12 Should I choose a fixed-rate or an adjustable-rate mortgage?
When interest rates are historically low, like they are now, a fixed-rate mortgage (FRM) makes the most financial sense. Not surprisingly, the vast majority of mortgages originated today are fixed-rate.
That said, while a fixed-rate mortgage is the best choice for most home buyers, there are some circumstances where an adjustable-rate mortgage (ARM) may be better.
For example, if you expect to sell the house before the fixed-interest period ends and the rate starts to float, an ARM could end up saving you thousands of dollars. In other words, ARMs make sense for people who know they will be relocating in the near future, or know they will be paying off their loan in a few years.
13 Should I “lock” my interest rate?
A rate lock means that you’re guaranteed today’s mortgage interest rate for some predetermined period, typically 30 to 60 days. If interest rates have been trending upward, it’s usually a good idea to lock in your rate.
While the prevailing mortgage rate doesn’t usually make a big move in a month or two, it’s certainly possible. If any move upward in rates would jeopardize your qualification, you should talk to your loan advisor about locking your interest rate early in the process.
14 What are discount points, and should I pay them?
Discount points are fees that you pay up front on your mortgage in exchange for a lower interest rate. One “point” is equal to 1% of the loan amount. For example, on a $300,000 mortgage, one discount point would be $3,000. If the interest savings over the life of the loan is greater than the points paid, it can be worth it.
Your loan advisor can help you determine whether discount points are a good idea by comparing the effect of various interest rates on your mortgage. Points paid should be regained through monthly payment savings within a few years or less.
15 Are mortgage costs tax-deductible?
Three types of mortgage and homeowners costs may be tax-deductible:
- Discount points
- Interest paid on a home loan or home equity loan
- Property taxes
After the year that you buy your house, only your mortgage interest and annual property taxes are deductible. Be sure to consult your tax advisor for advice about your specific situation.
16 Should I get a 15-year or 30-year term loan?
This mostly depends on your budget. If you can afford the higher monthly payments, a 15-year mortgage usually comes with a lower interest rate than a 30-year version. Not only will you pay off the house quicker, but you can save a huge amount of interest.
On the other hand, a 30-year mortgage will cost less per month, allowing you to afford a nicer house — or one in a better location. Whether you get a 15 or 30-year loan can also depend on your financial goals and how long you expect to live in your home.
17 Are mortgage interest rates negotiable?
Possibly. But comparing rates between lenders can be a confusing process. Interest rates always involve a cost or a credit, plus fees can vary and may be disclosed differently.
To know how expensive a particular interest rate is, check the difference between the interest rate and the APR. When there’s a big difference between those two numbers, it means there are a lot of costs associated with the quoted rate.
18 What documentation do I need to apply for a mortgage?
Your lender may ask for a lot of documents, and different lenders ask for different stuff. But in general, be prepared to provide all of the following:
- Income verification (tax returns for last 2 years, W-2s, 1099s, and your last few pay stubs)
- Drivers license and Social Security card (or alternative ID)
- Bank statements
- Proof of funds to close (and an explanation of their source)
If some or all of your down payment is coming from a “gift,” you will need a letter from the source to confirm that it is indeed a gift, and not a loan.
19 What is a pre-qualification?
A “pre-qualification” is a statement from a lender claiming that they have verified your income, assets and credit history — And that you qualify for the type and amount of mortgage you would need to purchase a property.
A pre-qualification letter from a lender should be presented with any offer to purchase a home and it is considered a requirement in many markets. Some sellers, particularly new home builders, require that you become prequalified with a lender they have selected. Keep in mind you can do so, but still work with the lender of your choice.
20 What is a pre-approval?
A “pre-approval” is the next step up from a pre-qualification. It typically means that a lender has done an actual underwrite of your loan either manually or through an automated underwriting system.
A pre-approval is considered stronger than a pre-qualification, however a good lender will understand the lending guidelines for the loan you need, and will do whatever’s necessary to get you approved. Depending on where you live, the distinction between a pre-qualification and pre-approval can be hazy at best.
21 What is an escrow account?
When you obtain a mortgage, you’ll probably be asked to put money into an escrow account to guarantee the lender that the ongoing expenses of owning the property will be paid in a timely fashion — specifically taxes and insurance. You’ll pay a lump sum into the escrow account at closing (sometimes called “prepaids”), and add to it further with each of your monthly mortgage payments.
Escrow accounts (also called impound accounts) are required on government loans (FHA, VA and USDA). If you’re not getting a government loan, you can generally choose whether or not you want taxes and insurance impounded.
22 What is private mortgage insurance?
Private mortgage insurance (PMI) is insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders require mortgage insurance for loans that have a loan-to-value ratio above 80% (less than 20% equity). Learn more
23 Why does it take so long to close a mortgage?
Mortgages tend to take at least 30 days to originate, and many first-time buyers don’t expect to wait so long. In short, a lot of things need to happen between the mortgage application and taking ownership. Just to name a few:
- Gather documentation for your lender (and they’ll always come back and ask for more)
- Schedule and complete a home inspection
- Seller may need time to complete repairs
- Loan needs to make its way through underwriting
- Appraisals can take time in a busy market
Be patient. It’s a lengthy process, and a lot to get done within a 30-day window.
24 What happens at closing?
When you close, that new house and mortgage are officially yours. At the closing, you’ll sit down with the professionals involved in the transaction and sign all the legal documents needed to give you ownership of your new home.
You’ll also be responsible for paying closing costs as part of the process. Closing costs are typically 2% to 3% of your home’s purchase price. You’ll receive a “closing disclosure” three days before closing so you know exactly what you can expect. If you have questions about the closing process, talk to your real estate agent or lender.
25 How is my mortgage payment determined?
Depending on your situation, there are typically four parts of your mortgage payment:
- Principal: Repayment of your outstanding balance.
- Interest: Payment of the interest charged on the outstanding balance.
- Taxes: One-twelfth of your expected annual property taxes may be included in your mortgage payment, and deposited into your escrow account.
- Insurance: This includes homeowner’s insurance, as well as any other hazard insurance you’re required to have, such as flood, fire, or windstorm. If you put less than 20% down on your loan, this can also include private mortgage insurance.
Based on these four items, your mortgage payments are sometimes referred to as PITI.
26 Will my monthly payments change during the loan term?
Probably. Even with a fixed-rate loan, your payment is likely to change over time. Why? Your property taxes and insurance expenses — upon which the escrow portion of your payment is based — tend to fluctuate. If they rise, it may be necessary for your lender to ask for a higher escrow payment. (Those expenses would change whether they are included on your monthly mortgage statement or not.)
27 Can I prepay my mortgage if I have extra money?
Check with your lender. Very few loans have prepayment penalties these days. Making an extra payment every year to be specifically applied toward your principal balance can take years off your loan’s payment term and save lots of money.
To know for sure, read the fine print on the closing disclosure form. Ideally, you should do this before you sign — so if you don’t like the terms, you can ask to have the penalty removed. Just keep in mind that any changes to the agreement may affect your loan costs.
28 What should I do if I fall behind on my mortgage payments?
As soon as possible, speak with your mortgage lender and explain your situation. If you’re experiencing a job loss, health crisis, bereavement, or other hardship, you might be able to negotiate a “temporary mortgage forbearance.” This will allow you to temporarily lower — or even suspend — your monthly loan payments.
29 What are the benefits of refinancing?
You should consider refinancing if you want to pay off high-interest-rate debt, shorten the length of your repayment term, or lower your monthly mortgage payment.
30 When does it make sense to refinance?
In general, one or more of the following conditions should be present before you should consider refinancing:
- Mortgage interest rates are falling
- Your home has significantly appreciated in market value
- You’ve been making payments on your original 30-year mortgage for less than ten years
31 Can I refinance to take cash out of my house?
Yes. There are a variety of options that allow you to tap into your home’s equity and take cash out. Consult your loan advisor for the best cash-out refinancing plan for you.
32 Can I consolidate debt when refinancing my mortgage?
Yes. Cash-out refinancing can help homeowners consolidate high-interest, non tax-deductible debt. Because your mortgage interest rate is likely to be lower than your credit card rates or personal bank loans, consolidating debt may reduce your overall monthly debt payments. In addition, your mortgage interest may be tax-deductible, while your credit card interest is not.