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Mortgage Cheat Sheet

The FREEandCLEAR Mortgage Cheat Sheet focuses on the key questions that borrowers have when getting a mortgage for the first time. The cheat sheet offers insightful explanations, helpful mortgage process recommendations and links to relevant resources on FREEandCLEAR, including our informative mortgage topic videos. The cheat sheet complements the FREEandCLEAR Mortgage Process Guide which offers a more comprehensive review of the mortgage process. We also offer a downloadable version of our Mortgage Cheat Sheet.

Can I Qualify for a Mortgage?
  • There are multiple factors that determine your ability to qualify for a mortgage, including the following:
    • Debt-to-Income Ratio: lender guidelines typically allow a borrower to spend a maximum of 43% to 47% of their monthly gross income on their mortgage payment, other housing expenses such as property tax and insurance plus other monthly debt including credit card, auto and student loan payments
    • Credit Score: the lower your credit score the more difficult it is to qualify for a mortgage
    • Employment: lenders typically want to see that you have a two year employment history and/or have been employed by your current employer for at least six months before you apply for a mortgage
    • Down Payment: some lenders require that borrowers make a down payment of 20% in order for the borrower to receive their lowest interest rate although it is certainly possible to obtain a mortgage and buy a house with a down payment of less than 20%
    • Lender Guidelines: underwriting and borrower qualification guidelines vary across mortgage lenders -- one lender may decline an applicant while another lender may approve an applicant

FREEandCLEAR
Recommendation

  • Understand your credit score and organize your personal financial documents at the beginning of the mortgage process
  • Speak to multiple lenders to determine your ability to qualify for a mortgage

FREEandCLEAR
Resources

What Size Mortgage Can I Afford?
  • Although there are no set rules, there are some guidelines you can follow to help determine what size mortgage you qualify for
  • Borrowers typically spend:
    • Up to 43% of their monthly net income on their monthly mortgage payment (principal and interest)
    • Up to 52% of their monthly net income on total monthly housing expense (mortgage payment plus homeowner's insurance, property taxes and other potential housing-related expense such as homeowner's association fees)
    • Up to 62% of their net income on their combined monthly housing expense and other monthly debt payments (auto loan payments, credit card payments)
    • So the less other monthly debt you have, the more you can spend on your mortgage payment
  • Once you have decided how much you can spend on your monthly mortgage payment, you can determine what size mortgage you can afford based on the interest rate and mortgage term

FREEandCLEAR
Recommendation

  • Borrowers need to make sure they are comfortable with their monthly mortgage payment and total monthly housing expense regardless of what size mortgage a lender says they can afford. Remember, with mortgage programs such as an adjustable rate mortgage and interest only mortgage, your mortgage payment can increase so what you can afford today may not be what you can afford in the future

FREEandCLEAR
Resources

What Size Down Payment Do I Need to Buy a House?
  • Most lenders will typically offer their lowest interest rate to borrowers that make a down payment of at least 20% of the purchase price of the home
  • Lenders will often allow borrowers to make a down payment of less than 20% of the purchase price of the home, but may charge a higher interest rate or require the borrower to purchase private mortgage insurance (PMI), or pay a ​mortgage insurance premium (MIP) for an ​FHA mortgage​​, which increases your mortgage costs
  • Multiple conventional and government-backed mortgage programs make it easier to purchase a home with a low or no down payment, including the FHA mortgage program that allows a borrower to buy a home with a down payment as low as 3.5% of the property purchase price and the VA home loan program that requires no down payment

FREEandCLEAR
Recommendation

  • If you decide to make a down payment of less than 20% of the property purchase price understand if your interest rate increases or if you are required to pay additional fees such as PMI or FHA MIP
  • Review our comprehensive What Size Down Payment Do I Need to Make? discussion
How Much are Closing Costs?
  • When you evaluate closing costs, it is important to understand that there are non-recurring closing costs and recurring closing costs
    • Non-recurring closing costs: These are one-time, up-front costs that the borrower pays to various third parties to process and close the mortgage. Examples include lender, appraisal, title company, escrow and attorney (if applicable) fees
    • Recurring closing costs: These are costs that the borrower will continue to pay after the mortgage closes. Typically the borrower is required to pay a portion of these ongoing costs which are calculated based on at what day of month and time of year the mortgage closes. Examples include interest (from the day of closing until the end of the month in which your mortgage closes), pro-rated property taxes as well as other potentially applicable charges such as homeowners association fees, private mortgage insurance (PMI) and mortgage insurance premium (MIP)
  • There is no set rule for determining what your closing costs should be when you obtain a mortgage and closing costs vary depending on the mortgage amount with larger loans having higher costs
  • Closing costs also vary by mortgage type, geography and service provider

FREEandCLEAR
Recommendation

  • High closing costs should raise a red flag for borrowers and borrowers should be sure to compare closing costs across multiple lenders

FREEandCLEAR
Resources

Should I Pay Discount Points to Lower My Interest Rate?
  • Lenders typically offer the borrower the option to pay discount points to obtain a lower interest rate
  • A discount point is an up-front fee equal to 1.0% of the loan amount
    • So the cost for a discount point on a $300,000 loan is $3,000 ($300,000 * 1.0% = $3,000)
  • Paying discount points is optional for the borrower as compared to paying an origination point, which is a mandatory fee charged by some lenders to process your mortgage
  • If you decide to pay discount points then your interest rate should be lower than if you do not pay points
  • As a general rule, a half of a point is equivalent to .125% (1/8th of 1%) in interest rate, so a full point is equivalent to .250% (1/4 of 1%) in interest rate
    • For example, a mortgage proposal with a 4.250% interest rate and zero discount points is equivalent to a proposed 4.000% interest rate plus one discount point
  • In short, the borrower incurs a one-time, up-front cost to benefit from a lower interest rate and lower monthly mortgage payment over the life of the mortgage

FREEandCLEAR
Recommendation

  • Because it takes approximately five-to-six years to recover the up-front cost of a discount point, if you are planning on owning the property for which you are obtaining the mortgage for more than five years and the interest rate when you pay a discount point is at least .250% less than if you do not pay a discount point, then you can save money by paying the discount point
  • Divide the cost of the discount point by the difference between the payment without the discount point and the payment with the discount point to determine the number of months it takes to recover the cost of the discount point

FREEandCLEAR
Resources

What Mortgage Program is Right for Me?
  • There are three primary types of mortgage programs. We describe each program and outline their pros and cons below
  • Most first-time homebuyers select a fixed rate mortgage because it involves the least amount of risk
Program 1Fixed Rate Mortgage 2Adjustable Rate Mortgage
(ARM)
3Interest Only Mortgage
(IO ARM)
Summary
  • Interest rate and payment do not change
  • Fixed interest rate and payment for first 3, 5, 5 or 10 years (fixed rate period)
  • Then rate and payment can change for the remainder of the loan (adjustable rate period)
  • Pay only interest at a fixed interest rate for first 3, 5, 7 or 10 years (interest only period)
  • Then pay both principal and interest for the remainder of the loan (adjustable rate period)
  • Rate and payment can change during the adjustable rate period
Pros
  • Fixed mortgage payment over the life of the loan
  • Lower rate and payment during fixed rate period
  • Lower payment if rates go down
  • Lower initial payment than ARM or fixed rate mortgage
  • Qualify for a larger mortgage
Cons
  • Higher payment than ARM or interest only mortgage
  • Locked into rate if you cannot refinance
  • Uncertainty
  • Potential increase in rate payment
  • Uncertainty
  • Payment increases when you start paying principal
  • Potential increase in rate
Risk Level Lowest Higher Highest

FREEandCLEAR
Recommendation

  • A fixed rate mortgage is the right mortgage programs for most borrowers although if you know you are going to sell your home or refinance your mortgage before the adjustable rate period for an ARM or an Interest Only Mortgage, they could be the right program for you
  • That way you benefit from the lower monthly mortgage payment during the initial period of the mortgage but you are not exposed to a potential increase in interest rates and mortgage payment during the adjustable rate period, because you refinanced or sold the property

FREEandCLEAR
Resources

Are There Programs to Help People Buy Their First Home?
  • There are several mortgage programs designed to help first-time home buyers including programs offered by Fannie Mae as well as the FHA, VA and USDA that allow you to buy a home with a down payment of less than 20%
    • The Fannie Mae HomeReady program enables you to buy a home with a down payment as low as 3.0% but the borrower is required to pay private mortgage insurance (PMI) which is an additional ongoing expense
    • The FHA mortgage program allows the borrower to buy a home with a down payment as low as 3.5% of the property purchase price but the borrower is required to pay an up-front and ongoing mortgage insurance premium (MIP), which are additional costs on top other closing costs and your monthly mortgage payment
    • The VA home loan program enables active and retired military personnel to buy a home with no down payment but the borrower is required to pay a one-time, up-front VA funding fee in addition to other mortgage closing costs
    • The USDA home loan program is designed to help individuals with low-to-moderate incomes obtain mortgages and buy homes located in rural areas or small communities with no down payment
  • There are additional programs to help first-time home buyers pay for their down payment or mortgage closing costs

FREEandCLEAR
Recommendation

  • There are multiple conventional and government-sponsored programs to help people obtain mortgages and buy their first home but you should always understand the eligibility requirements and any additional costs associated with these programs
What Length of Mortgage Should I Choose?
  • Lenders typically offer mortgages with 10, 15, 20, 25 and 30 year terms, with the 30 year term being the most popular
  • The shorter the mortgage term, the higher the monthly mortgage payment but the lower the interest rate and less interest you will pay over the life of the mortgage
  • The chart below compares a mortgage with a 15 year term to a mortgage with a 30 year term for a $300,000 mortgage
  15 Year
Mortgage
30 Year
Mortgage
Difference
Interest Rate 3.250% 4.125%  
Monthly Payment $2,108 $1,454
($654)
Total Interest Expense Over Mortgage $79,442 $223,422 $143,980
  • Although the mortgage with the 15 year term has a higher monthly mortgage payment, you save approximately $144,000 in interest expense over the life of the mortgage as compared to the mortgage with the 30 year term

FREEandCLEAR
Recommendation

  • Consider getting a mortgage with a 30 year term but make the same payment that you would with a mortgage with a shorter term, such as a 15 year mortgage, so you make a higher mortgage payment than what is required
  • That way you maintain the flexibility of having a lower required monthly mortgage payment that goes along with a longer mortgage term, but you pay off your mortgage in 15 years and save thousands of dollars in interest expense
  • If the borrower experiences financial challenges, this approach allows him or her to make the lower monthly mortgage payment without having to refinance the mortgage

FREEandCLEAR
Resources

How Long Does It Take To Process and Close a Mortgage?
  • There is no set timetable to process and close a mortgage
  • Many different factors such as real estate market conditions and the availability of third party providers such appraisers can influence how long it takes to close your mortgage
  • Some borrowers may be able to obtain a mortgage in a month or less although it typically takes six-to-ten weeks to process and close a mortgage

FREEandCLEAR
Recommendation

  • Being organized before you start the mortgage process can make the process go more smoothly but you should always be prepared for delays due to unexpected issues

FREEandCLEAR
Resources

What Types of Mortgage Lenders are There?
  • It is important to remember that you have options when you select a lender for your mortgage
  • The table below outlines the pros and cons of the four main types of mortgage lenders
  1Bank 2Mortgage Banker 3Credit Union 4Mortgage Broker
Overview
  • Takes deposits and makes loans
  • Does not take deposits
  • Offers mortgages to borrowers
  • Takes deposits and makes loans
  • Not-for-profit
  • Requires membership
  • Works with multiple lenders
  • Personal mortgage shopper
Pros
  • Direct Lender
  • Potentially lower interest rate
  • Direct Lender
  • 100% focused on mortgages
  • Potentially lower interest rate and fees
  • Compare multiple mortgage offers
  • Select the best one
Cons
  • Stricter qualification guidelines
  • Limited resources compared to some banks
  • May not offer better terms
  • Membership eligibility requirement
  • Not a direct lender
  • May not offer the best terms
Examples
  • Wells Fargo, Bank of America, Chase
  • Quicken Loans
  • Navy Federal Credit Union
  • Small, local companies

FREEandCLEAR
Recommendation

  • Speak with multiple lenders before you make your mortgage selection

FREEandCLEAR
Resources

  • Use our INTEREST RATES function to review a list of lenders in your area
How Do I Find the Best Interest Rate for My Mortgage?
  • Creating lender competition for your business is the best way to make sure that you are getting the lowest interest rate with the lowest fees
  • You should gather and compare proposals from multiple lenders before you select the mortgage that is right for you
  • Please note that lenders that offer lower interest rates often charge higher fees so you need to assess the trade-off between interest rate and fees
  • Interest rates also vary by mortgage program. For example, interest rates for an adjustable rate mortgage are typically lower than the interest rate for a fixed rate mortgage, so make sure you are comparing interest rates for the same type of mortgage program

FREEandCLEAR
Recommendation

  • When you shop for a mortgage FREEandCLEAR recommends that you compare proposals from three to four lenders, including at least one mortgage broker

FREEandCLEAR
Resources

How Much Money Should I Keep in Reserve After My Mortgage Closes?
  • Be sure to keep enough savings in reserve after your mortgage closes and you buy a house to absorb any unexpected changes in your financial situation

FREEandCLEAR
Recommendation

FREEandCLEAR
Resources

  • Check out our Down Payment Example that illustrates the total up-front money required to purchase a property, including the down payment, and the recommended savings you should keep in reserve
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Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
 
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Monthly Housing Payments
P & I More Info
Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
Mortgage Insurance More Info
Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
(Estimated)
Property Tax More Info
Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
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Homeowner Insurance More Info
Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
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Homeowner Association Fee More Info
Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
(If Any)
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Points More Info
Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
Origination Fee More Info
Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
Credit Report Fee More Info
Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
Tax Service Fee More Info
Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
Processing Fee More Info
Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
Underwriting Fee More Info
Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
Wire Transfer Fee More Info
Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
(If Any)
FHA Upfront Premium More Info
FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
(If any)
VA funding Fee (If any)
Flood Fee
Other Fees More Info

Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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