BEFORE YOU BUY
Choosing a Mortgage Company
How do you choose a mortgage company that’s best for you?
There are two main types of mortgage companies:
Direct lenders are banks, credit unions, online entities and other organizations that provide mortgages directly to borrowers. They create and fund mortgages and either service them (which means that they manage the repayment) or outsource the servicing to a third party. They also establish loan rates and terms, which can differ significantly depending on the lender with which you work.
Mortgage brokers are independent, licensed professionals who serve as matchmakers between lenders and borrowers. Brokers usually charge a small percentage of the loan amount (generally 1 to 2 percent) for their services, which the lender pays for (but passes on to you as part of the cost of your mortgage). They don’t fund loans or set interest rates or fees or make lending decisions.
Why Town Square Mortgage is the best choice for you!
Town Square Mortgage is a direct lender, so you get the benefit of going direct. It is also an all-inclusive lender, which means that we handle the entire loan process internally. This ensures that we can get your loan done easily and fast! In fact, we guarantee a 21-day close on all our loans. Read our disclaimers.
Qualifying for a Home Loan
What is involved in qualifying for a home loan?
The four pillars that help you qualify for a home loan include income, credit, assets, and collateral.
This is your capacity to pay back the loan, which includes:
Source and type of income (salary, commission, self-employment)
Length and stability of income
How long that income is expected to continue in the future
This is your readily available money and savings, which includes:
Savings and Money Market funds
Assets or investments that can be converted to cash, such as IRAs, 401(k) accounts, stocks, bonds, CDs, etc.
Cash gifts from family members
Cash from down payment or closing cost assistance programs, grants or matching funds
This includes your credit score and report from one or more credit agencies, which includes:
Your credit score, which typically needs to be 580 or higher to qualify for a home loan
Your credit report, which assesses your record of paying bills and other debts on time
A review of your monthly debts, including car payments, student loans, credit card payments, personal loans, child support, alimony and any other debts
This is the value of the home you plan to buy, which includes:
The appraised value of your home
A pledge of your home as security against the loan
What is a credit score?
Your credit score is a number that reflects your financial history. Scores range from 300–850, with a high credit score indicating that you have consistently repaid debts and other loans on time. A higher credit score indicates a more favorable borrower.
What is a credit check and how is it used?
A credit check (also known as a credit inquiry or credit pull) occurs when a lender checks your financial history with credit reporting agencies to determine your creditworthiness. To provide you with a verified pre-approval, we do a credit check, which uses the median score from Transunion, Experian, and Equifax.
How does my credit score affect my mortgage?
Your credit score helps lenders evaluate your ability to pay back your loans, based on your borrowing history. The higher your credit score, the better rates you’ll be able to get. This can lead to significant savings over the life of your mortgage.
How can I get a copy of my credit report?
The Federal Trade Commission offers more information, including how you can get one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. For more info, visit: https://consumer.ftc.gov/articles/free-credit-reports
What if I think an item on my report or my score is incorrect?
If you think there’s a mistake in your credit score, contact the credit reporting companies directly:
What is a co-applicant on a mortgage?
A co-applicant is someone whose income and credit history are put on the loan application in addition to the primary borrower. Co-applicants are a common addition when the primary borrower may not qualify for the mortgage on their own.
What is a co-borrower on a mortgage?
A co-borrower is a spouse whose income and credit history are put on the loan application in addition to the primary borrower. Having a co-borrower is optional on a mortgage loan.
What happens if I’m applying with a co-borrower?
We must use the lower credit score of you and your co-borrower. If one of you has a low credit score, we often recommend that the person with the higher credit score apply to get the best terms possible. You’ll still be able to put both names on the title. However, both people may need to apply if more funds are needed for your down payment, or to improve your debt-to-income ratio.
Your Credit Score
Your Debt-to-Income (DTI) Ratio
What are qualifying ratios?
A qualifying ratio is a measurement that mortgage lenders use to help decide if you qualify for the loans they offer.
The qualifying ratio consists of the housing expense ratio, which is made up of monthly principal, interest, property taxes, and insurance payments (PITI); and the debt-to-income ratio (DTI).
What is a debt-to-income ratio?
Your debt-to-income ratio (DTI) is a measure of your monthly debt compared to your monthly income, calculated by your monthly debt divided by your monthly gross (pre-tax) income. DTI is one of the factors used to determine how much you can afford in a monthly mortgage payment. Simply put, it represents how much of your gross monthly income goes to creditors and how much of it is left over as disposable income.
How do I calculate my debt-to-income ratio?
Your DTI is most often written as a percentage. For example, if you pay half your monthly income in debt payments, you have a DTI of 50%. Simply divide all your monthly debt payments by your gross (pre-tax) income, and then multiply that number by 100. This will give you your DTI percentage.
What counts as debt in the debt-to-income ratio?
The following are considered debts in the debt-to-income ratio. This is not an all-inclusive list.
Future or estimated monthly housing expenses, including your mortgage payment, homeowners insurance and property taxes
Minimum required credit card payments
Alimony and child support
What counts as income in the debt-to-income ratio?
The following are considered income in the debt-to-income ratio. However, they can only be considered if they will continue for a minimum of three years.
Pre-tax monthly salary (determined by dividing your annual salary by 12)
Income from additional jobs
Revenue from rental property or other investments
Regular income from annuities, trust funds, and retirement accounts
Any child support or alimony payments you receive
What is an acceptable debt-to-income ratio?
Most lenders prefer to see a DTI of under 36%. In other words, the total of your monthly debts, including your estimated monthly mortgage payment, will be less than 36% of your monthly gross income. However, it may be possible to get a mortgage with a DTI of up to 50%, depending on the lender.
How can I lower my debt-to-income ratio?
Pay down or pay off your car loan before applying for your mortgage.
Start paying off your credit cards in full, one by one. (Just don't close the cards after you pay them off, as this can hurt your credit score.)
If possible, refinance or consolidate current loans to reduce your monthly payments. Note that when you refinance existing debts, your total finance charge may be higher over the life of the loan.
Consider adding a co-borrower with a low DTI to your loan.
Pick up a part-time job to help pay down your debt.
If you’re expecting a raise or promotion in the next few months, consider waiting to apply until it goes through.
Consider using some of your down payment savings to pay down debt. Make sure you’ll meet down payment requirements, which can be as little as 3-5%.
Interest Rates & APR
What is a mortgage interest rate?
The interest rate is the cost of borrowing money, expressed as a percentage of the loan. Most consumer mortgages use simple interest, which is defined as paying interest only on the principal. Borrowers are often quoted interest rates in addition to annual percentage rates (APRs), which are interest rates plus lender fees and charges.
What are points and credits?
Points represent a percentage of your loan amount (1 point = 1%). You might choose to pay points at closing to get a lower interest rate. In other words, by pre-paying some interest, you are “buying down” your rate. Alternatively, you may choose to receive a credit (or rebate) at closing to help cover costs and fees. This would correlate to a higher interest rate on the loan.
What does APR mean in mortgage terms?
The annual percentage rate (APR) is your interest rate plus ancillary charges and fees, such as closing costs and discount points, combined as a yearly rate. By law, a loan's APR is always expressed as a percentage next to the mortgage interest rate. The APR gives the best indication of the total cost of your home loan.
What is included in the monthly mortgage payment?
When you get a rate quote from us, the monthly payment shown includes the principal and interest of the loan. You will also need to pay taxes and insurance, which vary based on location and other factors.
What is a rate lock?
A rate lock is a guarantee from a lender that the offered interest rate with the associated points and credits for a mortgage is the rate that they will receive as long as their financial information matches what was provided during the rate lock process. Rate locks are typically good for a pre-set length of time, such as 30, 45, or 60 days.
What does "locking your loan" mean?
By locking your loan, we will hold your interest rate for you while we work together on the loan process. This gives you time to complete your application, knowing that your rate and monthly payment won’t change if interest rates rise.
What do I need to do to lock my rate?
After you get pre-approved and select your preferred rate, your application will show you a list of tasks that need to be completed. The first group of tasks is called "Lock your rate."
Can I choose a different rate or loan product after I lock?
Generally, yes. You’ll be locking in all the loan products available to you for today’s rate. This means you can change your rate, your rate type (fixed vs. adjustable*) or your loan term (15 or 30 years) up until the day you close. Changing your loan lock may delay the processing of your loan.
*A fixed-rate mortgage has an interest rate that remains the same for the life of the loan. An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically.
What can I do to help my loan close within the lock period?
The best thing you can do to ensure a speedy closing is to stay on track with your task list by utilizing the app, the online loan portal or by working with your loan originator. The task list has the documents you need to upload, third-party actions (such as inspection, appraisal, title, etc.) and any questions from our underwriter. Check daily to see what tasks are due so you can keep your loan on track. With your help, we can meet our guarantee of closing within 21 days.
Down Payments & Costs
What is a down payment?
A down payment is the amount of cash you pay upfront toward the purchase of a home. It's often expressed as a percentage of the selling price of a home—typically 3–20% depending on the type of loan. The difference between your down payment and the price of the home is what you finance with a mortgage. Generally, if you put less than 20% down on a home, private mortgage insurance (PMI) is required in addition to your monthly payment.
What are the upfront costs to buy a home?
Here are the upfront costs to expect when you purchase a home:
Down payment: This is the portion of the purchase price you agree to pay in cash
Third-party fees: These are fees paid to third parties, not us. These services are required to get a purchase loan no matter which lender you use, and we don’t mark up the prices. Some of those fees may be paid by the seller. Examples include the appraisal fee, title insurance, and transfer taxes (this list is not all-inclusive).
Escrow deposit: If you choose to pay for your homeowners insurance and taxes as part of your monthly loan payments, you will need to pay an initial deposit so the account can cover future payments. The number of months required will depend on when these items are due for payment relative to your closing date. Some loan programs require escrow accounts.
Pre-paid interest: This is a one-time upfront interest payment due at closing. It covers interest from the day of closing through the end of the month.
Loan points: We allow you to get a lower interest rate by paying “points.” In our quotes, you’ll see this labeled as “Today’s price for this rate.”
What third-party fees will I be charged?
Among the third-party fees associated with a home purchase loan are:
Appraisal fee: A home appraisal must be done by a licensed appraiser to determine the value of the property. You will get a copy of the report.
Credit report: We need to check your credit to determine your creditworthiness and monthly debt obligations.
Flood certification: We need to determine if your property is in a flood zone to ensure appropriate insurance coverage is in place.
Lender’s title insurance: This fee ensures we’re protected if someone later makes a claim against the title of the property.
Other title fees: You will see several miscellaneous title fees. These are charged by the title company for things such as document processing and paying the notary.
Real estate transfer taxes: Local and state governments charge a transfer tax when real estate is sold.
Recording fees: This fee is charged by your city or county to officially record the sale.
Settlement: This fee is paid to the settlement or escrow agent for coordinating the handling and disbursement of funds between the buyer and seller.
Owner’s title insurance: This is an optional fee. It ensures you are protected if someone later makes a claim against the title of the property.
When will I need to pay these costs?
After your offer is accepted and you sign a purchase agreement, you will pay an earnest money deposit. This shows the seller you are serious about the transaction and typically ranges from 1-2% of the purchase price. This deposit will be applied toward your down payment. At closing, you will be expected to pay for all remaining costs, including the down payment, third-party fees and pre-paid costs. The appraisal fee is generally paid upfront.
Your Loan Payment
What is included in the loan payment?
A mortgage payment is typically made up of four components: principal, interest, taxes and insurance.
The principal portion is the amount that pays down your outstanding loan amount. Interest is the cost of borrowing money. Taxes and insurance vary based on location and other factors.
What is “principal” on a home loan?
When referring to a home loan, the principal is the amount of money borrowed, excluding taxes, interest, or homeowners insurance. In other words, it's what you originally borrowed from your lender when you first took out your home loan. If you borrowed $500,000, then your principal is $500,000.
What does “amortization” mean?
Amortization is the process of paying off the principal and interest on your loan. You may see it expressed as an amortization schedule—essentially an outlook of every payment you need to make until you've paid off the balance of the loan in full. Some loans use compound interest, which is applied to the principal and to the accumulated interest of previous periods (this is also known as a negative amortization loan).
What is “PMI” or private mortgage insurance?
Private mortgage insurance (PMI) is insurance required by lenders when a borrower puts less than 20% down on a conventional loan. It's meant to protect the lender in case the borrower defaults on the loan. PMI can be cancelled once the borrower has at least 20% equity in the property. Like your interest rate, the PMI amount is determined by many different factors, including your credit score, loan-to-value ratio, debt-to-income ratio, property type and occupancy.