Top 6 questions about mortgages

If you have questions about mortgages, you’re not alone. Buying a home can be a complicated process, so it’s important to understand your choices. Learning about different lending options and terms will help you become an informed savvy buyer.

Here’s a list of six frequently asked mortgage questions and helpful links for more information.

The amount you can borrow is determined by the mortgage program’s specific requirements. Generally speaking, the factors below play a major role in determining whether you qualify for a loan, how much you can borrow, and at what interest rate. So before you apply for a mortgage, make sure you check these items off your list.

• Debt-to-income (DTI) ratio: DTI equals your cumulative monthly debt payments — such as student loans, auto loans, credit cards, and an estimate of your new mortgage payment — divided by your total monthly household income before taxes. Lenders may accept as much as 45% DTI, but below 36% is ideal.
• Credit history and credit score: A higher credit score represents less risk to the lender, making it easier for you to qualify for a mortgage. Credit scores under 670 are not as ideal, while scores 740 and above are better.
• Employment history: Lenders want stability and prefer to see steady employment for at least the most recent two years — and an explanation for any gaps in your work history.
• Savings: You should have enough savings to cover the upfront costs of purchasing a home, plus a buffer equal to at least three months of mortgage payments (more may be required depending on the loan program).
• Down payment: A 20% down payment isn’t always required, but it may make it easier to get qualified. Plus, it means you could borrow less and potentially avoid paying private mortgage insurance (PMI).

You can ask a lender for a prequalification before you shop or apply for a mortgage to determine how much you may be able to borrow.

There are two key components of your mortgage payment:

• Principal: The portion of your payment that will go toward repaying the amount of money you borrowed for a loan.
• Interest: The cost of borrowing money from a lender.

Most homeowners with a mortgage will also pay escrow as part of their total mortgage payment. Escrow may include amounts for:

• Property taxes: The yearly real estate taxes charged by the city or town you live in.
• Homeowners insurance: Required financial protection in case your property is damaged by fire, wind, theft, or other hazards.
• Flood insurance: Depending on where your property is located, you may also be required to get flood insurance coverage.
• Mortgage insurance: When you put down less than 20% for your initial down payment, the lender takes on more risk. To offset that risk, lenders may require mortgage insurance, which protects them from loss in case you can’t keep up with your payments.

Annual mortgage insurance premiums can range from about 0.2% to more than 1% of the total loan amount. The cost is based on:

• Type of loan
• Loan-to-value (LTV) ratio
• Credit score

You’ll typically pay the annual premium in equal installments, which are usually rolled into your monthly mortgage payment.

There are options available for paying your mortgage off faster, such as refinancing your mortgage to lower your interest rate or shorten your repayment term. Another method is to make additional principal payments on your mortgage when you’re able to fit it into your budget. By including extra money toward your mortgage principal payments (also known as making a principal curtailment), you’ll avoid the process of signing up for a new product or paying closing costs on a refinance.

Pro tip: Before paying off your mortgage, check with your lender to make sure there are no penalties for an early payoff.

It's a common mortgage myth that you need a 20% down payment. The reality is, it’s not at all common for borrowers to put down 20%. The average homebuyer puts down somewhere between 5% to 15%. Some mortgage programs even allow as little as 3% down, and if you’re a veteran, you may be able to qualify for up to 100% financing.

A home construction loan covers the cost of building a new home — or, sometimes, major renovations to an existing house — and the land the home sits on. When a borrower gets a construction loan, it’s most commonly a construction-to-permanent loan (C2P). C2P loans combine the financing for construction and the final mortgage into one loan. While the home is under construction, the builder receives disbursements of money from the lender as different milestones are completed. Borrowers generally make interest-only payments to the lender based on the amount of money disbursed to the builder. When the home is completed, the borrower begins to make regular mortgage payments.

If you’re preparing to buy a home, it’s important to educate yourself to avoid feeling intimidated by the process. Everyone has questions about mortgages — even those who’ve had a mortgage for years. Ask an experienced mortgage loan officer about anything you don’t understand; they’re here to help get you ready for your next big move!