Frequently Asked Mortgage Loan Questions

Q. What is the maximum loan that I can afford?
A. The answer to this has to do a lot with your income and your debt load. As a general rule, your debt-to-income ratio for your housing expense should not exceed 28% and the total debt-to-income (which includes your long term debt such as cars, credit cards, student loans, alimony or child support) should not exceed 36%. These ratios can vary depending on the type of mortgage you are applying for.

Q. What is earnest money?
A. Earnest money is the deposit you make on a home when you submit an offer, to prove to the seller that you are serious about wanting to buy the house. Generally the amount is 1-5% of the purchase price. If your offer is accepted, the earnest money becomes part of your down payment or your closing costs. If your offer is rejected, your money is returned to you. If you back out of a deal, you may forfeit the entire amount.

Q. What makes up my closing costs?
A. Generally, your closing costs will consist of:

  • Property taxes (to cover tax period to date)
  • Interest (paid from the date of closing to 30 days before first monthly payment
  • Loan Origination fee (covers lenders administrative cost)
  • Recording fees
  • Title Insurance
  • Loan discount points
  • First premium of mortgage insurance (if applicable)
  • First payment to escrow account for future real estate taxes and insurance (normally equal to 2 months worth of amount due)
  • Paid receipt for homeowner's insurance policy (and flood insurance if applicable)

Closing costs-which you pay at settlement-average 3-4% of the price of your home.

Q. What are discount points?
A. Discount points allow you to lower your interest rate. For each "point" you pay, the interest rate for your loan is reduced. For example: If you paid a point equaling 1% of the total loan amount your interest rate may be reduced by ½ a percentage point.

Q. How large of a down payment do I need?
A. There are mortgage options now available that do not require a down payment. Ask your lender about these types of mortgages. The larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require mortgage insurance to secure the loan.

Q. What is mortgage insurance?
A. Mortgage insurance is a policy that protects lenders against some, or most losses that result from defaults on home mortgages. It is primarily required for borrowers with down payment of less than 20%. This is also referred to as PMI (Private Mortgage Insurance)

Q. What is the difference between pre-qualify, pre-approve, and final approval?
A. Pre-qualification is an informal way to see how much you may be able to borrow. By telling your lender your income, long-term debts, and how large a down payment you can afford, the lender can provide you with a ball-park figure on the amount you may have available to spend on a home.

Pre-approval happens when all credit and employment is verified and approval of the mortgage is subject to the appraisal of the property. This involves providing the lender with your financial information so they can give you a definite idea of what you can afford.

Final approval occurs when the property has been appraised, all documentation is in the hands of the lender and all contingencies have been met.

Q. What do I need to take with me when I apply for a mortgage?
A. If you bring everything with you when you visit your lender, you will save a good deal of time. You should have:

  • Completed and signed Uniform Residential Loan Application.
  • Pay stubs covering most recent 2 months, or if you are not a W-2 wage earner, income tax statements for the last 2 years
  • Employer name, address and phone number
  • Copies of your checking and savings accounts statements for the past 2 months
  • Evidence of other assets like bonds or stocks
  • List of all credit card accounts and the approximate amount owed monthly on each
  • List of account numbers and balances due on outstanding loans, such as cars and student loans.

If you already have a property chosen, you will also need:

  • Copy of the completed sales contract.

If you are applying jointly with your spouse, be sure to bring the same documents for them.