What’s a mortgage?
A mortgage is a loan that helps you buy a home. It’s actually a contract between you (the borrower) and a lender (like a bank, mortgage company, or credit union) to lend you money to buy a home. You repay the money based on the agreement you sign. But if you default (that is, if you don’t pay off the loan or,in some situations, if you don’t make your payments on time), the lender has the right to take the property. Not all mortgage loans are the same. This article from the CFPB explains the pros and cons of different types of mortgage loans.
What should I do first to get a mortgage?
- Determine the down payment you can afford. The amount of your down payment can determine the details of the loan you qualify for. The CFPB has tips about how to figure out a down payment that works for you.
- Get your free annual credit report. Go to AnnualCreditReport.com. Review your report and fix any errors on it. (This video tells you how.) If you find errors, dispute them with the credit bureau involved. Tell the lender about the dispute, if it’s not resolved before you apply.
- Get quotes from several lenders or brokers and compare their rates and fees. To find the best loan for you, research all costs of the loan. Knowing just the amount of the monthly payment or the interest rate isn’t enough. Even more important than knowing the interest rate is knowing the APR — the total cost you pay for credit, as a yearly interest rate. The interest rate is a very big factor in calculating the APR, but the APR also includes costs like points and other credit costs, like mortgage insurance. Knowing the APR makes it easier to compare “apples to apples” when considering mortgage offers. This Mortgage Shopping Worksheet can help you keep track and compare the costs for each loan quote.
How do mortgage brokers work?
A mortgage broker is someone who can help you find a deal with a lender and work out the details of the loan. It might not always be clear if you’re dealing with a lender or a broker, so if you’re not sure, ask. Consider contacting more than one broker before deciding who to work with — or whether to work with a broker at all. Check with the National Multistate Licensing System to see if there have been any disciplinary actions against a broker you’re thinking about working with.
A broker can have access to several lenders, so they may be able to give you a wider selection of loan products and terms. Brokers also can save you time by managing the loan approval process. But don’t assume they’re getting you the best deal. Compare the terms and conditions of loan offers yourself.
You often pay brokers in addition to the lender’s fees. Brokers are often paid in “points” that you’ll pay either at closing, as an add-on to your interest rate, or both. When researching brokers, ask each one how they’re paid so you can compare offers and negotiate with them.
Can I negotiate some of the terms of the mortgage?
Yes. There’s no harm in asking lenders or brokers if they can give you better terms than the original ones they quoted. You also can ask whether they can beat another lender’s offer. For example, you might:
- Ask the lender or broker to waive or lower one or more of its fees, or agree to a lower rate or fewer points.
- Make sure that the lender or broker isn’t agreeing to lower one fee while raising another — or to lower the rate while adding points.
Should I choose the lender advertising or offering the lowest rates?
Maybe not. When you’re shopping around, you may see ads or get offers claiming to have rates that are very low or fixed. But they may not tell you the true terms of the deal as the law requires. The ad may feature buzz words that are signs that you’ll want to dig a little deeper. For example:
- Low or fixed rate. A loan’s interest rate might be fixed or low only for a short introductory period — sometimes as short as 30 days. Then your rate and payment could increase dramatically. Look for the APR: under federal law if the interest rate is in the ad, the APR also should be there. Although it should be clearly stated, you may instead need to look for it buried in the fine print or deep within a website.
- Very low payment. This might seem like a good deal, but it could mean you would pay only the interest on the money you borrowed (called the principal). Eventually, though, you would have to pay the principal. That means you would have higher monthly payments or a “balloon” payment — a one-time payment that is usually much larger than your usual payment.
You also may find lenders that offer to let you make monthly payments where you pay only a portion of the interest you owe each month. So the unpaid interest is added to the principal that you owe. That means your loan balance will increase over time. Instead of paying off your loan, you end up borrowing more. This is known as negative amortization. It can be risky because you can end up owing more on your home than what you could get if you sold it.
Find out your total payment. While the interest rate determines how much interest you owe each month, you also want to know what you must pay for your total mortgage payment each month. The calculation of your total monthly mortgage payment takes into account these factors, sometimes called PITI:
- principal (money you borrowed)
- interest (what you pay the lender to borrow the money)
- taxes and
- homeowners’ insurance
PITI sometimes includes private mortgage insurance (PMI) but not always. If you have to pay PMI, ask if it is included in the PITI you’re offered).
I’ve had some credit problems. Will I have to pay more for my mortgage loan?
You might, but not necessarily. Prepare to compare and negotiate, whether or not you’ve had credit problems. Things like illness or temporary loss of income don’t necessarily limit your choices to only high-cost lenders. If your credit report has negative information that’s accurate, but there are good reasons for a lender to trust you’ll be able to repay a loan, explain your situation to the lender or broker.
But, if you can’t explain your credit problems or show that there are good reasons to trust your ability to pay your mortgage, you will probably have to pay more — including a higher APR — than borrowers with fewer problems in their credit histories.
What will help my chances of getting a mortgage?
Give the lender information that supports your application. For example, steady employment is important to many lenders. If you’ve recently changed jobs but have been steadily employed in the same field for several years, include that information on your application. Or if you’ve had problems paying bills in the past because of a job layoff or high medical expenses, write a letter to the lender explaining the causes of your past credit problems. If you ask lenders to consider this information, they must do so.
What if I think I was discriminated against?
Fair lending is required by law. A lender may not refuse you a loan, charge you more, or offer you less-favorable terms based on your:
- National origin (where your ancestors are from)
- Marital status
- Whether all or part of your income comes from a public assistance program, or
- Whether you have in good faith you acted on one of your rights under the federal credit laws. This could include, for instance, your right to dispute errors in your credit report, under the Fair Credit Reporting Act.
Why am I getting mailers and emails from other mortgage companies?
Your application for a mortgage may trigger competing offers (called “prescreened” or “preapproved” offers of credit). Here’s how to stop getting prescreened offers.
But you may want to use them to compare loan terms and shop around.
Can I trust the offers I get in the mail?
Review offers carefully to make sure you know who you’re dealing with — even if these mailers might look like they’re from your mortgage company or a government agency. Not all mailers are prescreened offers. Some dishonest businesses use pictures of the Statue of Liberty or other government symbols or names to make you think their offer is from a government agency or program. If you’re concerned about a mailer you’ve gotten, contact the government agency mentioned in the letter. Check USA.gov to find the legitimate contact information for federal government agencies and state government agencies.
Does a lender have to give me anything after I apply for a loan with them?
Under federal law, lenders and mortgage brokers must give you:
- this home loan toolkit booklet from the CFPB within three days of applying for a mortgage loan. The idea is to help protect you from unfair practices by lenders, brokers, and other service providers during the home-buying and loan process.
- a Loan Estimate three business days after the lender gets your loan application. This form has important information about the loan:
The CFPB’s Loan Estimate Explainer gives you an idea of what to expect.
- a Closing Disclosure at least three business days before your closing. This form has final details about the loan you chose: the terms, expected monthly payments, fees and other costs. Getting it a few days before the closing gives you time to check the Closing Disclosure against the Loan Estimate and ask your lender if there are discrepancies or if you question any costs or terms. The CFPB’s Closing Disclosure Explainer gives you an idea of what to expect.
What should I watch out for during closing?
- The “closing” (sometimes called “settlement”) is when you and the lender sign the paperwork to make the loan agreement final. Once you sign, you get the mortgage loan proceeds — and you’re now legally responsible to pay back the loan.
- If you want to know what to expect at closing, you may want to review the CFPB’s Mortgage Closing Checklist.
- You’ll also want to watch out for scammers. You could get an email that looks like it’s from your loan officer or another real estate professional, saying there’s been a last-minute change. They might ask you to wire the money to cover closing costs to a different account. Don’t do it — it’s a scam.
- If you get an email like this, contact your lender, broker, or your real estate professional at a number or email address that you know is real and tell them. Scammers often ask you to pay in ways that make it tough to get your money back. No matter how you paid a scammer, the sooner you act, the better. Learn more about how to get your money back.