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A pre-qualification gives borrowers a solid understanding of how much house they can afford. Buyers supply their lender with information such as current debts, assets, income, and employment. Credit scores are pulled by the lender, and all of this is reviewed to determine an approximate range of how much loan the borrower is likely to be eligible for. Having a pre-qualification in hand, sellers know you’re serious because you’ve done your homework and can make an informed offer. Plus, borrowers don’t end up wasting time and energy on homes above their financial reach.

Though many people use these terms interchangeably, prequalifications and preapprovals are not the same. While they both offer information about the loan amount the borrower is likely able to secure, and neither is a commitment to lend, they also differ distinctly.

Prequalifications are often provided within the same day of request and are based solely on basic data provided by the borrower. A preapproval is provided after an in-depth review, and verification, of the borrower’s complete loan application and credit information. With a prequalification, the lender will give an estimate for a loan amount. The preapproval, though conditional, details an exact loan amount and interest rate being offered to the borrower. Neither a prequalification or preapproval is a guarantee the borrower will receive a loan, but either one is instrumental in proving a borrower’s offer is legitimate.

The days of hefty down payments are largely a thing of the past. It’s best to pay as much upfront as possible, reducing the mortgage amount and potentially avoiding the need for private mortgage insurance (PMI). But many loans, such as FHA, VA, USDA and others, offer down payment flexibility. Some sellers are also willing to contribute towards down payment or closing costs.

A variety of down payment assistance options are also available, some providing up to 100% financing. In general, down payment requirements vary widely, and it is best to speak with a mortgage lender for guidance based on individual scenarios.

Discount points are a way to pay money upfront to buy down the interest rate. One point is typically equal to 1% of the loan amount, so for a loan amount of $350,000, one point costs $3,500. This can be a beneficial initial cost because points could be tax deductible, and most lenders will allow a buyer to pay for up to 3 points. It’s best to talk with a tax professional for more details on tax-related information.  Keep in mind, it’s wise to crunch the numbers to make sure the upfront payment is less the amount of money that would be paid over the life of the loan at the higher rate.

Closing costs are the amount of money paid at the time of closing the loan and are separate from the loan amount. These generally range from 2% to 5% of the loan amount and encompass expenses such as appraisal fees, title insurance, loan origination fees, attorney fees, and prepaid expenses like property taxes and homeowners insurance. Buyers can sometimes negotiate closing costs with the seller or roll them into the loan, and some programs offer no lender fees, which substantially reduces the total closing cost amount.

Escrow is a neutral legal holding account where initially invested funds are kept while the mortgage application is still in process. When a borrower decides on a home, they deposit earnest money into an escrow account, which shows the borrower’s commitment to the purchase. An independent escrow officer manages the necessary paperwork and ensures all conditions, such as inspections and repairs, are met before releasing the funds to the lender at the time of purchase. Because this is a neutral transaction, buyers and sellers have greater peace of mind knowing this safeguard is in place to protect against fraudulent activity.

Once the loan has closed, an escrow account is set up for making future tax and insurance payments. Each month you pay your monthly mortgage payment and 1/12 of the estimated annual taxes and insurance charges. These funds are held in escrow until the taxes and insurance are due, at which time your lender will make these payments from escrow on your behalf.

DTI is the way a lender measures a borrower’s ability to manage debt alongside their income. We compare all monthly debt payments, plus the proposed housing expenses (including principal, interest, taxes, insurance, and other fees), with gross monthly income to determine how much loan a borrower is capable of repaying. In general, the lower a borrower’s DTI the better, with an ideal range being at or below 36%. But if your DTI is on the higher side, financing options may be available to meet unique circumstances.

The Fair Isaac Corporation (FICO) score is the nation’s most popular credit score calculation and is determined based on an individual’s credit profile. FICO reports a specific score tailored for mortgages, and scores commonly range from 300 – 850. The higher the number the better the credit rating (and better chances for receiving financing and lower interest rates). This number is important because it affects loan eligibility, interest rates and terms.

Low credit scores do not mean it’s impossible to get home financing. Many loan programs offer funding to individuals with less-than-ideal credit scores, depending on factors, such as DTI and loan-specific guidelines. It’s also possible to repair low or damaged credit by improving credit and financial literacy and taking certain actions to address weaknesses in credit performance.

For more information on boosting or repairing credit scores, check out our Credit Boost blog and talk with a reputable credit repair specialist. For suggestions on how to find a credit repair professional, contact a loan officer in your area.

The best loan for each individual depends on many factors. Most loans fall into two categories: fixed rate and adjustable-rate loans. Fixed rate loans are usually set up with a 30 year term (although 15 year options are available), and the principal and interest payments associated remain consistent for the life of the loan. This is because the interest rates are established when the loan is dispensed. These are often conventional or federally funded and offer the buyer the stability of knowing what to expect for the duration of the loan.

Adjustable-rate loans have an initial fixed interest rate for the first couple of years and then fluctuate (causing changes in the monthly payments) based on the market conditions. Often the initial interest rate is lower than with a fixed-rate loan, which is helpful for borrowers who plan to move before the loan is subject to market changes.

Private mortgage insurance (PMI) is a policy that may be required for individuals with lower down payments to protect the lender, in the event the borrower stops making payments. This is often necessary with conventional loans and can be required when refinancing with a conventional loan when the home’s equity is less than 20% of the value of the home.* As the borrower makes continued payments and the home’s equity builds, it may be possible to cancel PMI once a certain threshold is reached.