You have started to understand what you can afford. Now it's time to understand how the purchase will actually be financed.
A mortgage is more than an interest rate. It's the financial structure that turns your purchase plan into an actual transaction.
Affordability helped you understand what price range may fit your financial situation. Financing is about understanding how you will actually fund the purchase.
Before you start making offers, you should understand how much you may be able to borrow, what lenders look at, what type of mortgage you are considering and what needs to happen before financing can support a purchase.
Understand how income, debts, credit, assets and other factors can affect the mortgage you may qualify for.
Understand the major components of a mortgage, including rate, term, amortization and payment structure.
Understand what a pre-approval can tell you and why it is not the same thing as final mortgage approval.
Know what information and documentation may be required before your financing can move forward.
A mortgage pre-approval can help you understand the amount you may qualify for and may provide a rate hold depending on the lender. But final approval can still depend on the property, your financial circumstances and the lender's underwriting requirements.
Your purchase price, down payment and mortgage are connected. Understanding the relationship between them makes the financing process much easier to follow.
The price of the property you agree to purchase.
The portion of the purchase price you contribute from your available purchase funds.
The amount borrowed from a lender to finance the remaining portion of the purchase.
The scheduled payments used to repay the mortgage according to the terms of your mortgage agreement.
A mortgage pre-approval is an important part of the homebuying process, but it should not be confused with a guaranteed mortgage.
Lenders consider multiple parts of your financial position when assessing a mortgage application.
Your employment and income information help establish your ability to service the mortgage.
Existing obligations such as loans, credit balances and other debts affect your overall debt-service position.
Your credit history and credit profile can form part of the lender's assessment.
Lenders may need documentation showing your down payment, closing-cost funds and other assets.
Your employment situation and supporting documentation may be reviewed as part of the application.
Final approval can also depend on the property being purchased and the lender's requirements for that property.
Two mortgages can have similar payment amounts today but very different structures, costs and flexibility.
Your interest rate affects the cost of borrowing and the amount of your mortgage payment.
The term is the period your mortgage contract is in effect before you generally need to renew or renegotiate.
The amortization period is the estimated time required to repay the mortgage based on the applicable payment and interest assumptions.
Prepayment privileges, penalties and other mortgage features can affect your flexibility and the cost of changing or paying off your mortgage.
There isn't one mortgage structure that works for every borrower. The important thing is understanding what changes and what stays predictable under each structure.
A fixed interest rate generally stays the same throughout the mortgage term.
Greater payment predictability during the term.
Rate remains fixed for the agreed term.
Breaking the mortgage can involve a penalty.
A variable interest rate can change during the mortgage term, depending on the mortgage agreement and changes in the applicable rate.
Payments or interest costs may change.
More exposure to changing interest rates.
Mortgage features and penalties vary by lender and product.
Federally regulated lenders apply a minimum qualifying rate to uninsured mortgages. The current qualifying rate is the greater of your mortgage contract rate plus 2% or 5.25%.
The qualifying rate is used to assess whether you can service the mortgage at a higher rate than the rate you may actually receive. Confirm the current requirements with your mortgage professional or lender.
The amount you put down can affect whether mortgage loan insurance is required and how your mortgage is structured.
If your down payment is less than 20% of the purchase price, you will typically need mortgage loan insurance, subject to the applicable eligibility requirements.
Being organized can make the mortgage process easier and help your mortgage professional understand your financial position.
Be prepared to provide identification and personal information.
Depending on your circumstances, this may include employment information, pay documentation or tax-related records.
Be able to document where your purchase funds are coming from and that the required funds are available.
Have information available about loans, credit balances and other financial obligations.
Your lender or mortgage professional may require statements or other documentation confirming assets and available funds.
You don't need to become a mortgage expert. You need to understand the sequence of decisions that gets you from financial preparation to mortgage-ready.
Confirm your income, debts, credit position, assets and available purchase funds.
Understand your potential mortgage options and the information required for your application.
Learn how your income, debts, down payment and applicable qualification rules affect the mortgage amount available to you.
Understand rate type, term, amortization, payment structure, prepayment privileges and potential penalties.
Obtain a financing assessment so you understand your position before seriously shopping for a property.
Enter the property search with a clear understanding of your financing position and what still needs to be confirmed.
You should be able to explain where your down payment is coming from, approximately how much you may need to borrow, how your mortgage will be structured and what still needs to be confirmed before you make an offer.
Financing is no longer a black box. You understand what lenders look at, how pre-approval works, the major parts of a mortgage and what needs to happen before financing can support a purchase.
Educational Notice: This page is intended for general educational purposes only and does not provide mortgage, financial, tax or legal advice. Mortgage products, qualification requirements, rates and lending policies can change. Always confirm your specific financing circumstances with a qualified mortgage professional or lender.
