*As of April 20, 2020, Quicken Loans® isn’t offering conventional adjustable rate mortgages (ARMs).
*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
Once you’re approved for your mortgage, you need to find a home, research comparables, get a home inspection, ask the seller to agree to seller concessions, figure out how much money you’ll need to have in escrow and how much of your monthly payment may go toward PMI, and then you’ll be ready for title work so you can get to closing.
Did any of that make sense?
If not, it will by the end of this article.
So, you want to buy a house, but you think the mortgage process is intimidating or maybe you’re not familiar with how a mortgage works. Either way, there’s plenty of jargon you’ll encounter along the way, so here’s a beginner’s guide to some terms that will help you before and during closing.
These may be familiar already but going over them ensures we’ll be starting at the same knowledge point.
A common sentence you might hear during your loan qualification process goes something like this: “You need two months PITIA for reserves.” What the heck does that mean? Let’s break this down.
PITIA refers to the components of your mortgage payment:
- Principal: Your principal is the unpaid balance on your loan at any given time.
- Interest: Interest refers to the money your lender or mortgage investor is charging you above and beyond the principal, in exchange for giving you the loan. This is expressed as a percentage.
- Taxes: In real estate, this means property taxes, which are set aside as part of your mortgage payment. More on that later when we talk about escrow.
- Insurance: The second I in PITIA refers to homeowners insurance. When you get a mortgage, you’re required to get homeowners insurance because the lender or mortgage investor wants to make sure your house can be rebuilt if there’s a natural disaster. Policies also often include personal property protection in case there’s a burglary or common theft.
- Association Dues: If you’ll be moving into a neighborhood or condo with a homeowners association, these dues are included in your payment for qualification purposes, even if they aren’t included in your actual monthly payment, but billed separately.
If someone says you need reserves, it means you need a certain number of months’ worth of mortgage payments in your savings in case you lose income or experience an emergency that strains your finances.
Annual Percentage Rate (APR)
The concept of interest itself is pretty straightforward. However, when shopping around and looking at mortgage rates, you may notice two different rates advertised next to each other. What’s the deal?
The first interest rate will be the lower one, and it’s the rate the lender is charging you strictly for borrowing the money.
The second rate is the APR. This rate takes into account both the basic interest charge and any fees the lender is charging in addition to your other closing costs. This is also a decent way to evaluate lenders. The bigger the difference between the interest rate and the APR, the more the lender is charging in financing fees.
The term is simply the amount of time it would take to pay your loan off if you made the minimum principal and interest payment every month. You can get a fixed-rate conventional loan with a term of anywhere between 8 – 30 years.
USDA loans offered by Quicken Loans are always a 30-year fixed mortgage. FHA and VA fixed loans come in terms between 10 and 30 years.
All of the adjustable rate mortgage (ARMs) through Quicken Loans are based on 30-year terms.
Fixed vs. ARM Mortgages
A fixed-rate mortgage is one in which the rate doesn’t change. You always have the same payment for principal and interest. The only thing about your payment that would fluctuate would be taxes, homeowners insurance and association dues. It’s good for consistency in your budgeting.
An adjustable-rate mortgage works a little differently. For the first several years of the loan, the rate is fixed at a lower rate than what you can get for a fixed-rate mortgage. At the end of the fixed period, the rate adjusts once per year, up or down based on an index added to a constant margin number. However, it can’t adjust upward forever. There are caps. To give you an idea of the way this works, let’s look at a loan that’s being advertised as a 7/1 ARM with 4/2/5 caps.
The 7 refers to the number of years your rate stays fixed at the initial rate. The 1 means it adjusts once per year at the end of the fixed period.
The 4 means that when you’re rate initially adjusts, it can’t go up more than 4%. The 2 means that with each subsequent adjustment after the initial one, the interest rate can’t rise more than 2%. Finally, the 5 means that the rate can never rise more than 5% above the initial interest rate for the lifetime of the loan.
The only thing that limits how much your rate can go down is the margin set by the lender or mortgage investor.
Another term you might hear when going through the mortgage process is “amortization schedule.” Your amortization schedule simply refers to the amount of principal and interest paid every month over the course of your loan.
Assuming you make the normal payments every month and do nothing differently, most of your mortgage payment goes toward interest, rather than toward the balance, at the beginning of your loan. As you continue to make payments, this shifts over time. As you near the end of your loan term, most of your payment will go toward the principal rather than to interest.
If you’re financially savvy and can afford it, you can save on interest and pay off your mortgage quicker by putting a little bit extra directly toward your principal every month, if your servicer allows it. Just make sure there are no prepayment penalties associated with your loan. Quicken Loans has none.
If you want to see how much time and money you could save by putting extra payments toward your principal, check out our amortization calculator.
The Life of Your Loan in 2 Phases
Broadly speaking, your interaction with your mortgage loan will break down into two phases: origination and servicing.
The origination of your loan covers everything from the point when you initially apply through your time at the closing table. Here’s a brief overview of the origination process.
Application: This is where you share contact information with the lender, as well as information about the property you’re looking to buy or refinance, if you have it. You’ll also be asked to share income and asset details.
Mortgage Approval: If you’re buying a house, there’s an intermediate step here where you will have to find the house before you can officially complete your application and get financing terms. In that case, lenders will give you a mortgage approval stating how much you can afford based on looking at your existing debt, income and assets.
Underwriting: Once you find the house, your loan proceeds to the underwriting stage, where the lender works to establish two things. The first is final verification of your income and asset information, as well as any other documentation you might need for a particular loan option. The second part of underwriting involves an independent appraiser who will also establish a value for the property.
Closing: Finally, this is when you pay your down payment and/or any closing costs associated with your loan. If you’re buying a new property, you also get the deed. This day involves signing a lot of paperwork.
After closing, you proceed to the servicing phase, where you make payments every month for, potentially, the next 30 years, depending on your loan term.
It used to be that banks would hold on to loans for the entire term of the loan, but that’s increasingly less common today, and now the majority of mortgage loans are sold to one of the major mortgage investors – think Fannie Mae, Freddie Mac, FHA, etc. – before being packaged up and traded on the bond market (more on the mortgage market).
Because of this, you’ll likely receive a legally required notice that your mortgage lender has sold your loan within a couple of months after closing on your mortgage. However, just because your loan has been sold doesn’t necessarily mean your relationship with your lender is over.
While it’s common for lenders to sell the servicing rights on their loans, Quicken Loans is proud to service 99% of the loans we originate.
The servicer is responsible for collecting your mortgage payment and distributing it to investors, as well as collecting monthly for mortgage insurance, homeowners insurance and property taxes if you have those items in escrow. Payments are made on these bills when they come due.
Your servicer should also be your first call if you think you’re going to have trouble making your mortgage payment. The servicer can go over any options you may have for assistance until you get back on your feet.
Before you start house hunting, you should know what your budget is, so you’ll want to get a mortgage approval. In much of the mortgage industry, this is called a preapproval. For reasons we’ll get into below, the term “preapproval” can be a little conspicuous. Different mortgage lenders may mean different things when they talk about preapprovals, so in order to clear up the confusion, Quicken Loans has a tiered approval system called the Power Buying Process™.
Before we get into that, though, it should be noted that it’s not unusual for real estate agents to require an approval or preapproval letter before they’ll start showing you homes. A preapproval will determine how much you’re eligible to borrow before you apply for the actual loan. Part of that process includes verification of income and an assessment of your assets, which include your bank accounts, investment accounts, retirement funds and any real estate.
The first step in the process is a Prequalified Approval. In this process, your credit is pulled to get your FICO® Score as well as a look at your outstanding installment and revolving debt. Quicken Loans Home Loan Experts will also ask for your best estimate of your total income and any assets you want to use toward qualifying for a mortgage. This helps calculate your debt-to-income ratio (DTI) – more on that below.
The weakness of a prequalified approval is that income and assets aren’t verified, so at best, it serves as an estimate. Because of this, Quicken Loans recommends that everyone take the next step.
By moving on to a Verified Approval, you give yourself a stronger offer in the eyes of sellers and their real estate agents, and you can buy with the confidence of knowing exactly what you can afford. Your offer will have equal strength to that of a cash buyer. The process starts with the same credit pull, but you’ll also have to provide documentation including W-2s or other income verification and bank statements.
Within 24 hours, someone from the Quicken Loans team will review your info. If you get a Verified Approval but don’t close your loan, through no fault of your own, after going through this process, we’ll give you $1,000.1
Debt-to-Income (DTI) Ratio
Along with assets, your lender will also take into consideration your debt-to-income ratio (DTI). Your DTI is the comparison of your gross monthly income (before taxes) to your monthly expenses showing on your credit report (i.e., installment and revolving debts). The ratio is used to determine how easily you’ll be able to afford your new home. Depending on the type of loan you’re looking to qualify for, this ratio is calculated in two ways. Let’s run through an example of each.
The first ratio calculated for every loan is the back-end DTI ratio. Let’s say your income was $48,000 per year. If you had a car payment of $200 per month, an assumed monthly mortgage payment of $1,200 per month and $250 in credit card balances, your DTI is 41.25% ($1,650/$4,000). The DTI guidelines vary depending on what type of loan you’re trying to get, but a good general rule is that your DTI should be no more than 43% in order to qualify for the most possible loan options.
Some mortgage investors place limits on the amount of debt you can take on before you have your mortgage in certain situations. In these cases, a front-end debt ratio is calculated, as well. This is simply a ratio of the rest of your debt, without including the mortgage, to your monthly income. Using the numbers from the above example, the front-end percentage would be just over 11.25% ($450/$4,000).
Earnest Money Deposit
When you put in an offer on a house, the seller has to accept your offer and then put you under contract with a purchase agreement to buy a home. When they do this, they take their home off the market to give you time to get the rest of your documentation to the lender and complete the appraisal and home inspection process.
In exchange, it’s standard to provide an earnest money deposit of between 3% – 6% of the purchase price at the time you sign the purchase agreement. Your real estate agent will be able to share the amount that is typically expected in your area.
When you’ve found a home you want to make an offer on, you should do some research on comparables. Comparables are properties that are similar to the house under consideration, with reasonably the same size, location and amenities, and that have recently been sold. Knowing a fair market value will help you decide on a price that you’re comfortable to offer.
If you’re not an expert in real estate market values (you don’t spend all your free time home shopping?), real estate agents who know your market can be really helpful. They’re out there buying and selling houses every day. If you’re looking, our friends at Rocket Homes can help you out.
Once you know how much you’re preapproved for, you’ll want to get an estimate on all the costs you’ll likely have to pay at closing. That’s impossible to provide up-front because you won’t know the purchase price of the house or the details of the purchase agreement, which can affect your loan amount and costs. However, once you have a signed purchase agreement in place, your lender will provide a detailed loan estimate within three business days.
A loan estimate assesses the expenses associated with a home loan, including inspections, title insurance, taxes and more. Additional costs may apply, depending on your state, loan type and down payment amount.
Pay close attention to the costs listed in this document. Many of the costs and fees can’t change very much between application and closing. For instance, if the costs of your actual loan change by more than a minimal amount, your loan estimate has to be reprinted.
However, fees charged by third parties, such as those for title insurance and the inspection and survey phase, may change by as much as 10% before closing. Make sure to ask your lender about anything you don’t understand.
One of the required steps after you get your documentation in is to get an appraisal done. There are two major purposes for an appraisal.
First, an appraisal establishes the condition of a property. The general rule is that there should be nothing that needs to be fixed so badly that it hampers the health and safety of the occupants or their ability to use the property. Although there are special requirements on occasion – FHA requires chipping lead paint to be dealt with if a house was built before 1979, and the VA usually requires pest inspections – the property condition requirements are pretty basic.
Beyond establishing the condition, the main purpose of an appraisal is to determine the fair market value of the property. An appraiser tours the home and takes pictures of the various features.
The appraiser then looks at comparable properties in the area in the same way you and your real estate agent did when you were getting ready to make your offer. The value of your home is then based on recent sales of similar properties. If you’re buying a three-bedroom ranch, the appraiser will look at other three-bedroom ranches.
All of this will be put together in a report used to justify the appraiser’s opinion on the value of your home. An appraisal is required in most situations because the lender can’t give you more for the loan than the home is worth.
Another process that will help protect you financially is a home inspection. A home inspection is exactly what it sounds like – a complete and thorough inspection by a professional who knows what to look for. It will reveal any issues from small to large that the property may have, so you know what you’re getting into before purchasing.
Unlike an appraisal, a home inspection isn’t required, but it’s always a good idea. If there are major issues, you can ask a seller to lower the price or fix the problem.
Seller concessions involve a clause in your purchase agreement in which the seller agrees to help with certain closing costs.
Sellers could agree to pay for things like property taxes, attorney fees, the origination fee, title insurance and appraisal. This list isn’t comprehensive.
There’s always a limit to the number of concessions that a seller can agree to. It varies depending on the type of property you’re getting as well as who the mortgage investor is, but you won’t be allowed to have the seller pay for costs exceeding more than a certain percentage of the loan amount.
You’ll also want to be careful with this. A seller might reject an offer with too many stipulations in it, particularly if the seller is confident about getting a more favorable deal when the next buyer comes along. It’ll be a good idea to go in knowing how long the property has been on the market and the number of price drops to determine how much leverage you might have.
Closing costs, also known as settlement costs, are fees charged for services that must be performed to process and close your loan application. These are the fees that were estimated in the loan estimate and include the title fees, appraisal fee, credit report fee, pest inspection, attorney’s fees, taxes and surveying fees, among others.
Finally, when you close your loan, you’ll get a closing disclosure at least three business days before your closing. The closing disclosure is designed to match the format of the loan estimate and go over your final numbers.
As mentioned earlier, third-party fees for things such as appraisal, home inspection and tax certification can change up to 10%. Your actual lender costs are controlled, in terms of how much they can change.
Another term that might come up is “mortgage insurance.” If you make a down payment of less than 20% in a conventional loan, you’ll end up paying for monthly private mortgage insurance. You can request that it comes off once you reach 20% equity. Conventional mortgage insurance comes in a couple of forms.
Borrower-paid mortgage insurance (BPMI) involves the borrower paying a fee on a monthly basis as part of their mortgage payment. This is a percentage of the loan amount divided into 12 equal monthly payments.
Then there’s lender-paid mortgage insurance (LPMI). In this arrangement, the lender pays the full premium for the mortgage insurance policy up front and the client avoids paying an additional monthly fee. In exchange, the client takes a slightly higher interest rate.
A slight variation in the LPMI strategy is sometimes referred to as single-pay mortgage insurance. In this arrangement, the borrower pays for all or part of the mortgage insurance policy up front in order to get a rate equal to what they would receive without LPMI.
FHA loans don’t have PMI, but they have mortgage insurance premiums (MIP). While PMI prices are set by the market and some negotiation with lenders, FHA MIP fees are set by the federal government.
For FHA, there’s an upfront MIP fee that can be paid at close or built into the loan amount, which is currently set at 1.75% of the loan amount. An annual premium is also collected. If you put 10% down, the premium is collected for 11 years. Otherwise, it’s for the life of the loan.
The amount of the annual premium depends on the size of your down payment or the amount of equity you have at the time of refinancing into the FHA loan, but if you make the minimum down payment of 3.5% on a loan amount of less than $625,500, the annual premium is 0.85% of the loan amount split into monthly payments.
The USDA also has guarantee fees, which function like mortgage insurance. They exist for the life of the loan regardless of down payment. The up-front guarantee is 1% of the loan amount. Beyond that, the annual premium is equal to 0.35% of your average scheduled unpaid principal balance. This means that the number is based upon what the balance would be if you just paid what was due every month according to your original amortization schedule.
Another part of your monthly mortgage payment involves taxes and insurance. An escrow account is an account that a lender uses to hold a borrower’s monthly payments toward property taxes and homeowners insurance so the borrower doesn’t have to worry about coming up with a large lump sum when these payments are due.
Once a year, your mortgage servicer will do something called an escrow analysis. This is the time when adjustments in your property taxes and homeowners insurance will be reflected in your monthly mortgage payment. Although mortgage insurance payments typically don’t fluctuate, this is something that’s escrowed, so if you have BPMI, you may see that included, as well. Occasionally, additional required hazard insurance will be escrowed, as well as flood insurance.
Titles And Deeds
One of the more confusing items in the closing process is the difference between a title and a deed. After all, both deal with your property ownership rights.
A title is proof of ownership that also has a physical description of the home and land you’re buying. The title will also have any liens that give others a right to the property in specific situations.
We often think of liens as a bad thing. While it’s true you can get a lien on your home for unpaid taxes or judgments, etc., there are also situations where placing a lien is fairly routine. By far, the most common lien is the one your lender places until your mortgage is paid off. A contractor might also place a lien until paid for work on your home.
The chain of title will show the ownership history of a specific house. It’s the job of the title insurer when you buy your home to make sure that no one other than the seller has rights to the property and could cause problems once you’ve taken possession.
A deed is the actual document you get when you close that says the home or piece of property is yours.
Now that we’ve gone over everything, let’s do a knowledge check. Here’s that paragraph from the beginning of this post:
Once you’re approved for a mortgage, find a home, research comparables, get a home inspection, maybe ask the seller to agree to seller concessions, figure out how much money you’ll need to have in escrow and how much of your monthly payment will go toward PMI, and then you’ll be ready for title work so you can prepare for ownership of the property and get to closing.
Now does it make sense? If so, you might be ready to apply. You can get started online or give Quicken Loans a call at (800) 785-4788 to speak with one of our Home Loan Experts.
1 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply. Verified Approval within 24 hours of receipt of all requested documentation.