What You Need to Know About Lending
BRANDEN GRIFFITH
June 12, 2024
Buying a home is usually the largest investment you’ll make in your life. The options you have to finance the purchase, as well as choosing the lender you choose to work with, shouldn’t feel mysterious, challenging, or worst of all, uncomfortable.
Our goal is to build a team of professionals around you that have your best interests in mind, getting you to the finish line on closing day feeling like you have made a wise and informed decision at every step of the way.
Here are a few terms and facts to know about lending as you begin the buying process.
Pre-qualification
Pre-qualification is a lender’s opinion of how much of a loan you qualify for, often based on self-reported income and debt. This is based partially on their experience, but is NOT a guarantee of your affordability. They can’t offer that until they do the work to evaluate and confirm your finances.
Pre-approval
A pre-approval is a much more in-depth look into your borrowing capacity and comes with a commitment to lend at a certain interest rate. This requires a complete loan application with credit and verifications. Having a pre-approval from your lender is key because it gives us negotiating power with your offer. A buyer with pre-approval stands out to sellers because it gives a much higher likelihood of a successful sale. Our goal is to always put you in a position with the highest negotiation power possible.
Choosing a Lender
Not all lenders are equal and it is important to compare more than just rates — look at communication, responsiveness, fees, and how well they explain things. A great lender helps you feel confident every step of the way, and we are happy to connect you with lenders who we trust.
How much is required for a down payment?
The down payment is the portion of the home’s purchase price you pay upfront. Most buyers put down between 3% and 20% of the purchase price, depending on loan type and eligibility. A higher down payment can reduce your monthly payment and help you avoid mortgage insurance.
What is Mortgage Insurance
If your down payment is less than 20%, you’ll likely pay PMI (Private Mortgage Insurance) on conventional loans or MIP (Mortgage Insurance Premium) on FHA loans. It protects the lender and adds to your monthly payment.
Loan types
There’s no one-size-fits-all loan. Some common options include:
– Conventional: Good credit, flexible terms
– FHA: Lower down payment, available to lower credit, some property condition restrictions
– VA: Available to veterans, no down payment required
– Jumbo loan: Every county has a different loan amount that qualifies a loan as “jumbo”
Debt-to-Income Ratio (DTI)
Your DTI is the percentage of your monthly income that goes toward debts (like loans, credit cards, and your future mortgage). A conventional loan requires a maximum DTI of 45% with few exceptions. To calculate your DTI, divide the total amount of debt you owe by your gross annual income. Multiply that number by 100, and this is your DTI.
What are Mortgage "Points"?
A rate buydown lets you pay extra upfront (called “points”) to lower your mortgage interest rate. Sometimes a seller or builder may contribute to this up-front payment through closing costs. It can save money long-term if you plan to stay in the home.
Appraisals
Most often, lenders require an appraisal to confirm the home’s value. Appraised value is determined by taking recent sales of similar properties in the area and making price adjustments based on features of the property such as size, number of rooms, etc.
Interest Rate vs. APR
Your interest rate is the cost to borrow money. The APR (Annual Percentage Rate) includes that plus lender fees and other costs. Comparing APRs gives you a better sense of the loan’s total cost.
Use a mortgage calculator to estimate your monthly payment based on the price, interest rate, loan term, taxes, and insurance. It’s a great tool to play with different scenarios and budget confidently.
KEY TAKEAWAYS
"Whether it takes days or potentially months to find your next property, this process is designed to get you the best result, every time. ."
— BRANDEN GRIFFITH
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