Mortgage Basics

Loan programs fall into two main categories - Conforming & Non-Conforming.  Simply put, conforming loans, also known as QM (qualifying mortgage) loans,  are mortgage loans that "conform," or "qualify," to the Consumer Financial Protection Bureau (CFPB) and/or the standards set by the government agencies - FANNIE MAE® (Federal National Morgage Association), Freddie Mac (Federal Home Loan Mortgage Corporation), or Ginnie Mae (Government National Mortgage Association). 

Non-Conforming loans, also known as Non-QM Loans, are loans that cannot be sold to these goverment agencies and therefore are either portfolioed (held) by the lender.

This may all seem overwhelming to even think about. But rest assured, your Mortgage Hero team is here to help! Our Loan Officers are licensed and must complete continual annual training to maintain their license. We have over 20 lenders with a variety of programs to help you buy  your future home! Give us a call and get started today!

A down payment is the amount of required as a minimum investment of the buyer toward the home. See the Loan Programs section for more details on minimum requirements.

The Loan-to-Value (LTV) is the relation between the Purchase Price and the Loan Amount. For example, a 10% down payment would give the property a 90% LTV.

Debt-toIncome, or DTI, is a calculation of your debts against your income. This is a vital part in determining qualification. Only un-secured debt is typically used in this calculation - credit cards, car loans, student loans, child support, etc... Other expenses such as car insurance or phone bills are not counted.

Refer to the Loan Programs matrix for the base guidelines on DTI limits. Keep in mind, lenders can establish their own overlays on top of the base ones provided by the government agencies.

As their names indicate, a Fixed-Rate Mortgage is one where the interest rate is fixed for the life of the loan. Fixed Rate mortgages can be set for as little as 10 years all the way to 40 years. Most lenders do not offer the 40 year option, only up to 30 years.
An Adjustable Rate Mortgage (ARM) can change within the limitations of the terms. For example, some will not change for 5 years, some for 7, even has high as 10 years. Additionally, the rate can only increase based on the pre-established increments - .5% to 1% - and has a cap or limit to how high it can go.  An ARM is subject to market conditions so it is possible that the rate decreases as well.

An Amortization Schedule is a timetable that breaks down the payments over the term of the loan, showing how much goes to principle and how much to interest.

While these types of loans are not allowed in conforming loan products, they do exist in some non-conforming loan options. Balloon loans are loans where payments are relatively low for a set period after which a ballon payment is do; that is, the full amount owed is due all at once.

Also known as Settlement Costs, closing costs are the costs incurred when obtaining your loan. They are typically paid at closing and include, but are not limited to: attorney's fees, preparation and title search fees, origination fees, discount points, appraisal fees, title insurance, credit report charges, prepaids, escrows, and taxes. There is no set amount that can be represented as a percentage, however, there are rules protecting a buyer on how much they can increase once they are disclosed on the official Loan Estimate.

An escrow account is often required by the lender to ensure taxes, insurance, and other ownership costs are paid when they come due. A portion of your monthly payment is set aside to fund the escrow account.
Should you refinance or sell your home, this account is closed and any remaining funds are refunded to the owner of the account within 45 days of closing.

A Fee Estimate, historically known as a Good Faith Estimate, is a preliminary estimate of the costs for the loan. This is non-binding and can change by any amount at any time.

A Loan Estimate is the official and legally binding estimate used at the beginning of the loan underwriting process. Lenders are regulated as to which fees are allowed to change and by how much.

Interest rates can be secured when "locked" and not change throughout the loan process.  Lock periods range from 15-90 days. The longer the period, the more it may cost in points or interest.

Mortgage Insurance, also referred to as Private Mortgage Insurance, is an insurance the government made allowable in 1957. This allowed potential homebuyers to buy a home without having 20% down.  This insurance protects the lender in the case the home owner defautls on their mortgage.

For Conventional Loans, the homeowner may request the insurance be removed once the property has at least 20% of equity, the lender typically requires an appraisal. Otherwise, it is automically removed when it reached 22% equity.

For FHA Loans, PMI stays for the life of the loan if the down payment is less than 10%. For down payments over 10%, PMI only remains for 11 years.

For USDA Loans, PMI remaines for the life of the loan.

For VA Loans, there is not PMI. Altough, veterans may be required to pay an upfront "funding fee," depending on their disability status.

PITI-A stands for Principle, Interest, Taxes, Insurance and Association fees.
These are the components that make up an owner's monthly mortgage/housing payments. The PITI portion is made to the lender while the Association fees are paid separetly and directly to the association.

A prequalification is typically just a conversation. No application or credit has been reviewed, but a buyer has been screened and the chances for a pre-approval is likely.

A pre-approval is when a loan file has been reviewed and resulted in a conditional-approval. Loan Officers have a desktop underwriter tool they use to verify the likelyhood of an approval. 

It's important to note that a seller will usually not accept an offer on their home that requires financing without a Pre-Approval letter. Naturally, this should be the first step in the home-buying journey.

The occupancy of a home is categorized into three types: Primary Homes, Second Gomes, and Investment Homes.

Primary Homes are self explanatory - this is where the borrower primarily resides.

Second Homes are properties where the owner occupies the home only part of the year. It may be rented to friends and family for a portion of the year, but not entirely. 

Investment Properties are properties intended for short or longer term rentals; or a combination of both.