Buying a house and getting a mortgage are really two separate decisions happening at the same time.
You’re deciding:
Which house should I buy?
And:
How should I finance it?
The second question sometimes gets far less attention.
That’s unfortunate, because your mortgage can affect your finances long after you’ve forgotten what you negotiated off the purchase price.
You don’t need to become a mortgage expert before buying a home. But understanding the basics can help you ask better questions, compare your options and make decisions that work for your life after closing.
If you’re preparing to buy a home, here are 12 mortgage questions worth understanding before you begin.
1. What Is a Mortgage?
A mortgage is a loan secured by real estate.
You provide some of the purchase money—your down payment—and a lender provides the remainder of the money needed to purchase the property.
You then repay that money over an agreed period, with interest.
A common mortgage term is 30 years, although other terms are available.
Your mortgage payment may include more than repayment of the loan. Depending on the circumstances, your monthly payment to the lender or servicer may also include amounts collected for property taxes, homeowners insurance and mortgage insurance.
That’s why the mortgage rate and the actual monthly housing expense are two different things.
2. How Much Mortgage Can I Afford?
This is actually two questions:
How much will a lender approve?
and
How much do I want to spend every month?
They aren’t necessarily the same number.
A lender evaluates factors such as your income, debts, credit, assets and proposed financing to determine what you may qualify to borrow.
But the lender doesn’t live your life.
Maybe you travel frequently.
Maybe you have children in college.
Maybe you want to continue investing aggressively.
Maybe you’d rather buy a modest home and have more disposable income.
That’s why I prefer starting with a comfortable monthly housing budget , not simply the highest purchase price a lender will approve.
Read more: What Is the Real Monthly Cost of Owninga Home?
3. How Do I Apply for a Mortgage?
Start before you find the house.
Gather your financial information and speak with reputable mortgage professionals.
You’ll generally need documentation relating to your:
- Income and employment ● Bank and investment accounts ● Existing debts ● Credit ● Down-payment funds
- Identification ● Tax returns in circumstances where they’re required
The lender reviews your financial situation and can provide information about the amount and types of financing for which you may qualify.
Once you purchase a property, the loan goes through additional processing, appraisal, underwriting and final approval before settlement.
Getting started early gives you time to resolve questions before you’re trying to meet the deadlines of a real estate contract.
Read more: How to Apply for a Mortgage: From Preapprovalto Closing
4. What’s the Difference Between Prequalification and
Preapproval?
You’ll hear both terms when you begin talking with lenders.
Traditionally, a prequalification has been a more preliminary estimate based largely on financial information provided by the borrower, while a preapproval generally involves a more detailed review of the borrower’s finances and credit.
But lenders don’t necessarily use these terms in exactly the same way.
That’s why I think the better question is:
“What has the lender actually reviewed and verified?”
Has the lender reviewed your credit?
Income?
Assets?
Debts?
Supporting documentation?
A stronger preapproval can be helpful when you’re ready to make an offer because the seller isn’t only evaluating your price. The seller is also considering the likelihood that your financing will actually make it to closing.
And remember: a preapproval is still not final loan approval. The property and your finances will go through additional review after you have a contract.
Read more: Preapproval vs. Prequalification: What’s the Difference?
5. Should I Talk to More Than One Mortgage Lender?
I think you should.
When buyers ask me for a mortgage recommendation, I generally prefer giving them more than one reputable lender.
That’s not because I don’t trust the people I recommend.
It’s because lenders can have different rates, fees, loan products and areas of expertise.
One lender might be particularly competitive with conventional financing. Another may have an excellent program for a first-time buyer. Another may be highly experienced with VA, USDA, investment properties or self-employed borrowers.
Your real estate agent can tell you about experiences working with particular lenders.
But you should still compare the financial offers.
And don’t compare only the advertised interest rate. Look at the overall financing package.
Read more: Why You Should Shop Around for MortgageRates Before Buying a Home
6. Will Shopping Mortgage Lenders Hurt My Credit?
This is one reason some buyers hesitate to compare lenders.
They’ve heard that credit inquiries can lower a credit score.
Mortgage rate shopping, however, receives special treatment under credit-scoring models. Multiple mortgage inquiries made within the applicable rate-shopping period are generally treated as a single inquiry for scoring purposes.
The exact window can depend on the scoring model being used, so I still recommend doing your serious mortgage shopping within a concentrated period.
Once you’re ready to have your credit evaluated for a mortgage, that’s a good time to compare lenders rather than automatically accepting the first offer.
Read more: Why You Should Shop Around for MortgageRates Before Buying a Home
7. What Type of Mortgage Should I Get?
There isn’t one mortgage that’s best for everyone.
Depending on your circumstances, options may include:
Conventional: Common nongovernment financing witha variety of down-payment options.
FHA: Government-insured financing that can be usefulfor borrowers with smaller down payments or certain credit situations.
VA: Available to eligible veterans, active-duty servicemembers and certain surviving spouses, potentially allowing financing without a down payment and without traditional monthly PMI.
USDA: Financing for eligible borrowers purchasingeligible properties, potentially allowing 100% financing. This is particularly worth understanding when looking at properties in eligible areas outside Lancaster City’s more densely developed areas.
Jumbo: Financing for loan amounts exceeding applicableconforming loan limits.
There are also specialized investment-property loans, first-time buyer programs and down-payment assistance programs.
The important question isn’t:
“Which loan has the lowest advertised rate?”
It’s:
“Which financing structure makes the most sense for my situation?”
Read more: Types of Mortgage Loans Explained: Conventional, FHA, VA, USDA & More
8. What Is an Interest Rate—and Is the Lowest Rate
Always Best?
Your interest rate is essentially part of the price you pay for borrowing money.
A lower rate generally reduces the amount of interest you’re paying and can reduce your monthly principal-and-interest payment.
But don’t compare mortgages based solely on rate.
A lender offering a lower rate could potentially be charging higher upfront costs or discount points.
You should also look at the APR, lender fees, mortgageinsurance, points, lender credits, cash to close and total monthly payment.
That’s why asking:
“What’s your rate?”
isn’t enough information to choose a mortgage.
Sometimes the loan with the lowest advertised rate isn’t the loan that makes the most sense once you compare the entire transaction.
9. What Are Mortgage Discount Points?
Discount points allow you to pay money upfront in exchange for a lower mortgage interest rate.
One point generally equals 1% of the loan amount.
So one point on a $400,000 mortgage would cost $4,000.
But paying one point does not mean your interest rateautomatically drops by one percentage point.
The actual rate reduction depends on the loan and pricing available.
The important calculation is the break-even point.
If paying $4,000 saves you $100 per month, it takes approximately 40 months to recover the upfront cost.
If you expect to sell or refinance before then, paying the points may not make financial sense.
If you expect to keep the mortgage for many years, the calculation could look very different.
This is also where comparing a rate buydown with other uses for your money becomes important. Sometimes keeping additional cash available after closing is more valuable than obtaining the lowest possible rate.
Read more: What Are Mortgage Discount Points—and ShouldYou Pay Them?
10. Do I Need 20% Down—and What Is PMI?
No. Many homebuyers do not need a 20% down payment.
Depending on the loan program and your qualifications, you may be able to purchase with considerably less.
The reason you hear so much about 20% is that on a conventional mortgage, reaching that threshold will generally allow you to avoid initial private mortgage insurance, or PMI.
PMI generally protects the lender—not the borrower—against some of the risk associated with a smaller down payment.
But that doesn’t automatically make PMI bad.
Suppose putting 20% down would use nearly all of your available savings. A smaller down payment might mean paying mortgage insurance, but it could also allow you to keep money available for emergencies, repairs, moving expenses and everything else that comes with owning a house.
Other loan programs handle mortgage insurance differently. FHA financing uses mortgage insurance premiums, USDA loans use guarantee fees, and VA loans generally don’t have traditional monthly PMI, although a funding fee may apply to many VA borrowers.
Don’t assume that the largest down payment is automatically the best financial decision.
Ask the lender to show you several scenarios.
Read more: PMI & Mortgage Insurance Explained: DoYou Really Need 20% Down?
Read more: How Much Should You Put Down on a House?3% vs. 5% vs. 10% vs. 20%
11. What Is a Mortgage Appraisal—and What Happens
If It Comes in Low?
Once you’re under contract, your lender may require an appraisal.
An appraisal is an independent opinion of the property’s value. The lender cares about that value because the house serves as collateral for the mortgage.
An appraiser may consider factors including:
- Location ● Size ● Condition ● Lot ● Features and improvements ● Comparable sales ● Current market conditions
One important distinction:
An appraisal is not a home inspection.
An appraisal primarily helps the lender evaluate the property and its value. A home inspection helps you understand the physical condition of the house.
And sometimes an appraisal comes in below the agreed purchase price.
For example, suppose you agree to purchase a house for $450,000 but it appraises for $425,000.
Now there is a $25,000 appraisal gap.
Depending on the contract and circumstances, the buyer and seller might renegotiate, the buyer might contribute additional cash, the parties might meet somewhere in the middle, or there may be other options.
The protections available to you depend heavily on the terms of your agreement of sale, which is why buyers should understand appraisal contingencies and appraisal-gap provisions before making an offer.
Read more: What Is a Mortgage Appraisal—and What HappensIf It Comes in Low?
12. How Much Money Do I Need at Closing—and What
Will the House Really Cost Me?
This is where all of the earlier questions come together.
Your down payment and your cash to close aren’t necessarilythe same number.
A buyer may need money for:
- Down payment ● Lender costs ● Title and settlement expenses ● Prepaid interest ● Homeowners insurance ● Initial escrow funding ● Applicable mortgage costs
Then there may be amounts reducing what you need to bring, including your deposit already paid, applicable seller concessions or lender credits.
Seller concessions can sometimes be particularly useful for buyers who would benefit from preserving cash after closing. Depending on the loan and transaction, a seller may be able to contribute toward certain allowable buyer closing costs.
That’s why a $10,000 reduction in purchase price and a $10,000 seller credit don’t necessarily have the same effect on a buyer’s finances.
But settlement is only the beginning.
Your ongoing monthly housing expense might include:
Principal + interest + property taxes + homeowners insurance + mortgage insurance + HOA or condo fees + applicable additional insurance
And you may still need to budget for:
- Electricity ● Natural gas, propane or heating oil ● Water and sewer ● Well or septic maintenance ● Trash ● Internet ● Routine maintenance ● Repairs
This is particularly important in Lancaster County, where two similarly priced homes can have very different ownership costs.
One might have public water and sewer.
Another might have a private well and septic system.
One might use natural gas.
Another might use heating oil or propane.
One might be newer and relatively predictable to maintain.
Another might be a beautiful older Lancaster County home that deserves a larger maintenance reserve.
The listing price tells us what the seller is asking for the real estate.
It doesn’t tell us what your life in that house willcost.
Read more: Closing Costs Explained: What Buyers andSellers Are Actually Paying
Read more: Seller Concessions: When Asking the Sellerto Pay Closing Costs Makes Sense
Read more: What Is the Real Monthly Cost of Owninga Home?
The 12 Mortgage Questions Every Buyer
Should Understand
You don’t have to know every mortgage rule before buying a home.
But you should understand enough to ask good questions.
Before you buy, make sure you understand:
1. What a mortgage actually is. 2. How much you can comfortably afford—not merely how much you can borrow. 3. How the mortgage application process works. 4. What your preapproval actually means. 5. Why comparing lenders can be worthwhile. 6. How mortgage rate shopping affects your credit. 7. Which loan programs might fit your situation. 8. Why the lowest interest rate isn’t necessarily the best deal. 9. Whether paying mortgage points makes financial sense. 10.How your down payment and mortgage insurance work together. 11.What happens during the appraisal process. 12.How much cash you’ll need—and what the house will really cost you after closing.
Talk with reputable mortgage professionals.
Compare your options.
Ask questions when something doesn’t make sense.
And don’t focus so heavily on getting to settlement that you forget about what happens the day after settlement.
The goal isn’t simply to get approved for a mortgage.
The goal is to choose financing—and a house—that you can comfortably live with after closing.
That’s a much better definition of affordability.
This article is for general educational purposes and isn’t financial, tax or legal advice. Mortgage programs, qualification requirements, rates, fees and guidelines can change. Buyers should discuss their individual circumstances and current loan options with a qualified mortgage professional.
