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What First-Time Homebuyers Need to Know Before Getting a Mortgage

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Tip: Lowering your debt-to-income ratio (DTI) could help you secure a mortgage.

2. What's the difference between being pre-qualified and pre-approved for a mortgage?

Think of a pre-qualification as a quick snapshot of your qualifications to take out a mortgage loan. The pre-qualification takes into account your credit score and self-reported income and gives you (and your realtor) a ballpark idea of how much house you can afford. It's an approximation, not a promise, cautions the Consumer Financial Protection Bureau.2

A pre-approval is more complex. To obtain a pre-approval, you'll need to provide more than just your Social Security number and income. Most banks will want you to fill out a loan application and provide documentation of your income, assets, and debts, and submit a full credit report (not just a credit score). With the pre-approval, you'll receive a conditional commitment in writing from the bank that you are approved for a specific loan amount. In competitive housing markets, a pre-approval gives you an edge over other buyers (and it may be required to make an offer).

3. What's a debt-to-income ratio?

Your debt-to-income ratio (DTI) is the current amount of debt you have relative to your income. Some experts weigh this ratio even more heavily than your credit score.3 A high DTI might signal to the bank that you have too much debt for your income level and don't have room in your budget to pay a mortgage. A low DTI shows that you have a good balance between debt and income and can take on a mortgage.

4. What's an escrow account? Why do I need one?

In short, an escrow account is a holding account. Lenders hold money in escrow to pay property taxes and homeowner's insurance, which ensures that they are paid on time (to protect you and the bank's investment) and helps reduce the financial strain on the buyer. Each month, in addition to the mortgage principal and interest, you pay a portion of these estimated annual costs as part of your mortgage payment. The bank holds this extra money in your escrow account and then pays your insurance and tax bills when they are due.

5. What's an appraisal?

As the National Association of Realtors (NAR) explains, an appraisal report provides an approximate dollar value of your home.4 Appraisals are conducted by experts (appraisers) who are licensed or certified by the state. Appraisers look at several factors, such as the size and condition of the home, comparable sales in the neighborhood, and any other features that add or detract from the value of the property. Lenders require an appraisal to determine the property's value and the maximum possible loan amount.

6. Why do we have to have a home inspection report?

Many banks request that you get a home inspection report prior to purchasing a property. As the NAR explains, investing in a detailed home inspection up front will save you money in the long run.5 The last thing you want is to purchase a home only to discover down the road that it needs costly repairs. The inspector will spend hours looking at every corner and detail of the home and documenting its condition. With the report in hand, you can go back to the seller and request repairs or a reduction in sale price to cover the cost of repairs. If you skip the home inspection and there are obvious problems, the appraiser may note them and reduce the value of the home, which will impact how much you can borrow against the home.

7. What does amortization mean? (What's an amortization chart for?)

Think of the amortization chart as a road map for paying off your loan. It's a table that shows how much of every monthly payment is applied to principal, how much is applied to interest, and how much your loan balance is after that particular monthly payment is made. In addition to showing you how each loan payment is applied, the amortization chart can help you plan and predict when your loan will be paid off. If you'd like to see your loan payment and amortization schedule, use this calculator from FINRA.6

Still have questions? 

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Important Disclosure Information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Bankrate.com, “Questions to expect from mortgage lenders,” accessed February 20, 2019. Back
  2. Consumer Financial Protection Bureau, “What’s the difference between a prequalification letter and a preapproval letter?” accessed February 20, 2019. Back
  3. Investopedia, “Debt-to-Income Ratio – DTI Definition,” accessed February 20, 2019. Back
  4. National Association of Realtors, “Appraisal & Valuation,” accessed February 20, 2019. Back
  5. National Association of Realtors, “Home Inspections,” accessed February 20, 2019. Back
  6. FINRA, “Loan Calculator,” accessed February 20, 2019. Back

Mortgage Basics ebook

This guide can help answer your questions and even tell you how to get prequalified for a mortgage.