Frequently Asked Questions

A: No, you don’t need perfect credit. There are loan programs available for borrowers with credit scores as low as 500. Obviously, the higher your credit score is, the better the terms you’ll get and the more you can borrow, but even borrowers with less-than-perfect credit can get a mortgage.

A: Yes, there are loan programs available that use ‘alternate’ credit. You’ll need proof of consistent payment of things like rent, insurance, tuition, or utilities. Most lenders require at least three alternative credit lines to take place of a traditional credit score.

A: Conventional loans typically require a 620 credit score (or higher); FHA loans require at least a 580 credit score, USDA loans require at least a 640 credit score; and VA loans require a 620 credit score, in most cases. If you opt for a private lender loan or alternative loan, the credit score requirements are up to each individual lender. 

A: A prequalification is a verbal estimation of how much mortgage you can afford. There’s nothing binding about it. A pre-approval, on the other hand, requires proof of your credit score, income, assets, and liabilities. If approved, you’ll receive a pre-approval letter that states how much mortgage you can afford, at what rate, and the specific terms.

A: While a 20% down payment is ideal, it’s not required. You can get a mortgage with down payments as low as 3% in some cases. A 20% down payment eliminates the need to pay Private Mortgage Insurance, but it’s not a reason to put off buying a home if you don’t have it.

A: The interest rate on your loan doesn’t change. It remains fixed for the life of the loan. The only way it would change is if you refinance the loan. A fixed rate loan makes it easy to budget because you always know your payment amount.

A: The interest rate on your loan is fixed for an introductory period (3, 5, 7, or 10 years). It then adjusts annually according to the index it’s tied to and the margin assigned to your loan. For example, many ARM loans are tied to the LIBOR index, so your rate would be the current LIBOR plus the margin (ex: 1%).

A: Discount points help you ‘buy’ your interest rate down. One discount point is equal to 1% of the loan amount. For example, if you borrow $250,000 and pay 1 point, it would cost $2,500 and 2 points would cost $5,000. Discount points are paid at the closing.

A: Every borrower pays closing costs. These are the fees charged to process and close your loan. You’ll pay closing costs to the lender for processing the loan as well as to third-parties, such as the title company and appraiser. Closing costs typically cost between 2% and 5% of the loan amount, but vary by lender and loan.

A: Your mortgage payment is made up of a few parts – principal, interest, real estate taxes, homeowner’s insurance, and mortgage insurance. All mortgage payments have principal and interest. The principal is the portion of your loan that you’re paying back and the interest is the amount charged for boring the money. Only some borrowers (those with less than a 20% down payment pay mortgage insurance and only borrowers with an escrow account pay real estate taxes and homeowner’s insurance). 

A: An escrow account is a collection of payments throughout the year to cover your real estate taxes and homeowner’s insurance. Most lenders require an escrow account to make sure your taxes and insurance get paid. You typically pay toward the account at the closing and then monthly with your regular mortgage payments. The amount you pay is based on the amount of taxes and insurance for the property.

A: Typically, you pay 1/12th of your annual tax amount each month. This amount may change slightly over the years if your escrow account comes up short one year. You’ll have to make up for the difference by paying a little toward the deficiency over the next year. For the most part though, 1/12th of your tax bill is your escrow payment for taxes.

A: Each loan program requires different documentation. For example, a fully documented mortgage requires proof of your income, liabilities, and assets. You’ll provide your pay stubs for the last 30 days, W-2s for the last two years, and asset statements for the last two months. If you’re self-employed or work on commission, you may also need to provide your last two years of tax returns.

Alternative loan programs that aren’t fully documented may require less documentation. For example, a bank statement loan doesn’t require pay stubs, W-2s, or tax returns. Instead, you must provide 12 months of bank statements to prove your income.

A: If you put less than 20% down on a conventional loan or you take out a government-backed loan (e.g.: FHA loan), you may pay mortgage insurance. You pay the premiums for this insurance that protects the lender if you default on your loan. The lender receives a portion of the amount you defaulted on from the insurance company.

If you want to avoid mortgage insurance, you need either a 20% down payment or an alternative loan by a private investor that doesn’t require mortgage insurance.

A: Yes, there are loan programs that allow you to get a mortgage as soon as two years after discharge of your bankruptcy. Even conventional and government-backed loans are an option if you wait long enough after the BK. The key factor is that you have built your credit back up and can show that you are financially responsible.

A: Every lender has a different timeline and it depends on how busy the lender is at any given time, but in general loans take 30 – 45 days. As long as you answer the lender’s questions and provide information to satisfy the conditions, you should be able to close the loan within a month to a month and a half.

A: An appraisal is a report that determines the fair market value of your home based on the comparable sales in the area and a full evaluation of your home. Appraisers try to use homes that have sold within the last 12 months and that are located within 1 mile for the fairest comparison.

A: Within three business days of applying for a mortgage, the lender must send you a Loan Estimate. This document details the settlement charges, interest rate, and the term of the loan. You can use this document to understand your payments, APR, and the total cost of the loan.

A: We all hope that the appraisal comes in at the same price or higher as you bid on a home, but that’s not always the case. If the appraisal comes in low, you typically have a few options. You can re-negotiate the price with the seller to better match the appraised value, back out of the sale, or pay the difference between the appraised value and loan amount allowed.

A: As you pay down your loan balance, you gain equity in the home. In other words, you own the portion of the home’s value that you pay off. However, the money remains tied up in the home until you sell the home and pay the loan off in full. If you don’t want to sell the home, though, you can tap into the equity sooner by taking out a cash-out refinance or a loan amount that is larger than what you owe on your current mortgage. 

A: If interest rates drop or you want to shorten your loan term, a rate/term refinance may help. With this refinance, you refinance only the outstanding mortgage balance of your loan at the time. Most people use it to take advantage of lower interest rates or to get a better loan than they could qualify for originally. This is common for borrowers that had a low credit score to start, but has since improved his/her financial situation and qualifies for a better loan.