Mortgage FAQ: Common Questions

How much house can I afford?

A common guideline is the 28/36 rule: keep total housing costs under 28% of gross monthly income and all debt payments under 36%. On $7,000 of gross monthly income that caps housing at $1,960 and total debt at $2,520. Many lenders will approve up to a 43% to 50% debt-to-income ratio, but the payment a lender will approve and the payment you will feel comfortable with are rarely the same number. Run your own figures through the affordability calculator before you start looking at listings.

What credit score do I need?

• Conventional: 620+ (740+ for best rates).
• FHA: 580+ with 3.5% down, 500-579 with 10% down.
• VA/USDA: More flexible, typically 620+.

Those are floors, not pricing. A conventional loan at 620 with 5% down will price worse than the same loan at 740, often by 0.5% to 1.0% of the rate, which is roughly $120 to $240 a month on a $400,000 loan. Check your credit reports at least 60 days before you apply so you have time to dispute errors and pay down balances that are sitting near their limits.

How much down payment do I need?

• Conventional: 3-20%+ (under 20% requires PMI).
• FHA: 3.5% minimum.
• VA: 0% for eligible veterans.
• USDA: 0% in eligible rural areas.

On a $400,000 home, 20% down is $80,000. Putting 5% down leaves a $380,000 loan at 95% loan-to-value, which triggers PMI of roughly $158 to $317 a month. FHA's 3.5% option is $14,000 down, but mortgage insurance stays on the loan for the life of the term if you put down less than 10%. Compare the scenarios with the down payment calculator.

What is the difference between pre-qualification and pre-approval?

Pre-qualification is a quick estimate based on what you state about income, debts, and credit, often with only a soft credit pull and no documents. Pre-approval requires a hard credit check plus pay stubs, W-2s or tax returns, and bank statements, and ends with a letter stating a loan amount, a loan program, and a rate. Sellers treat a pre-approval letter as proof of financing, and a fully underwritten approval can close in under 30 days instead of the usual 30 to 45.

How long does a pre-approval last?

Most pre-approval letters are valid for 60 to 90 days. After that the lender rechecks your profile, because a new car loan, a job switch, or a missed payment can shrink the amount you qualify for. Keep your finances boring once you are approved: no new credit accounts, no co-signing, no large unexplained deposits, and no job changes between application and closing. If your house hunt runs past the expiration date, ask the lender to reissue the letter the week you find a home.

What is escrow?

Escrow is an account your servicer funds from your monthly payment so that property taxes and homeowners insurance get paid when they come due. If your taxes run $4,200 a year and insurance runs $1,800, your escrow portion is $500 a month, because $6,000 divided by 12 is $500. Most servicers also collect two months of taxes and insurance as a cushion at closing. An annual escrow analysis tells you whether the amount needs to change.

What is actually inside my monthly payment?

Four parts: principal, interest, taxes, and insurance, known as PITI, plus PMI or HOA dues when they apply. Principal and interest on a $400,000 loan at 6.5% is $2,528.27 a month. Add about $300 for property taxes, $125 for insurance, and $158 for PMI at 95% loan-to-value, and the payment is roughly $3,111. The loan portion never changes on a fixed rate; the escrow portion changes when your tax bill or insurance premium does.

Why did my monthly payment go up?

Usually it is escrow, not your interest rate. Property taxes are reassessed after a sale: a $400,000 purchase in an area with a 1.25% tax rate costs $5,000 a year, or $417 a month, and a reassessment can add $50 to $150 overnight. Insurance premiums also reset at renewal and frequently rise 10% to 20% a year. Your servicer's annual escrow analysis shows the exact new figure. A fixed interest rate, by contrast, never changes for the life of the loan.

What is the difference between principal and interest?

Interest is what the lender charges you for borrowing; principal is the part that reduces what you actually owe. The lender calculates interest as the outstanding balance times the monthly rate, and 6.5% divided by 12 is 0.541667%. Month one on $400,000 therefore costs $2,166.67 in interest, leaving only $361.61 for principal. As the balance falls, the interest charge falls with it, so more of the same $2,528.27 payment reaches principal. The full pattern is in our amortization guide.

Should I lock my rate?

A rate lock guarantees your interest rate for a set window, commonly 30, 45, or 60 days, running from the day you lock until closing. Lock once your purchase contract is signed and the appraisal is ordered, because locks frequently expire before the closing date and extensions cost money. An extension of another 15 to 30 days often runs 0.125% to 0.25% of the loan amount, which is $500 to $1,000 on a $400,000 loan. Ask whether the lender offers a float-down option before you sign the lock agreement.

What is a good mortgage rate?

A good rate is one that is competitive for your credit score, down payment, and loan type on the day you lock. Rates move daily, so no single number is good for everyone. As a spread, borrowers with credit scores above 760 typically price 0.5% to 1.0% better than borrowers near 660 on the same day, and a 15-year loan usually prices 0.25% to 0.5% below a 30-year fixed. Get three Loan Estimates inside a 14-day window and compare them section by section.

Can I negotiate mortgage rates?

Yes. Rate sheets have room in them, and lenders compete on both rate and fees. Get quotes from at least three lenders within a 14-day window so the credit inquiries count as a single inquiry for scoring purposes, then ask each one to beat the best Loan Estimate you already hold. Negotiate the origination fee and lender credits as well: a 0.5% origination fee on $400,000 is $2,000 you may not owe elsewhere. Compare the APR, not just the note rate. Our compare mortgage tool lines the offers up.

What is the difference between the interest rate and the APR?

The interest rate, called the note rate, is what is applied to your balance each month: 6.5% on $400,000 produces $2,166.67 of interest in month one. The APR adds lender fees, points, and certain closing costs and spreads them across the loan term, so the same loan might display a 6.78% APR. Use the note rate to size your payment and the APR to compare offers of the same type. When one offer carries points and another does not, APR is the fairer yardstick.

What are discount points, and should I buy them?

One discount point costs 1% of the loan amount, which is $4,000 on a $400,000 loan, and typically buys about 0.25% off the rate. Moving from 6.5% to 6.25% lowers the payment on $400,000 from $2,528.27 to $2,462.87, a saving of $65.40 a month. Dividing $4,000 by $65.40 gives a break-even of about 61 months. Points pay for themselves only if you keep the loan past that point; if you sell or refinance in year three, you overpaid. Run your quote through the points calculator.

Fixed vs. ARM: Which is better?

Fixed-rate loans hold the same payment for the full term: 360 identical payments on a 30-year fixed. ARMs start with a fixed rate for 5, 7, or 10 years, then reset annually against an index plus a margin, usually capped at 2% per adjustment and 5% above the starting rate. An ARM wins if you sell or refinance inside the fixed period. If you expect to hold the loan 10 years or more, a fixed rate removes the risk entirely. Compare both with the ARM vs fixed comparison.

What's the difference FHA vs. conventional?

FHA loans accept credit scores down to 580 with 3.5% down, or 500 to 579 with 10% down, and they carry mortgage insurance: a one-time upfront premium of 1.75%, usually financed, plus an annual premium that lasts for the life of the loan under 10% down or 11 years above it. Conventional loans want 620 or better and drop PMI automatically at 78% of the original value. On a $400,000 loan the upfront premium adds $7,000 to the balance. Full details are in our FHA versus conventional guide.

What is the difference between a conforming and a jumbo loan?

Conforming loans meet the size limits set by Fannie Mae and Freddie Mac, which are reset every January. The baseline limit was $647,200 in 2022 and passed $800,000 by 2025, with higher limits in expensive markets. Anything above your local limit is a jumbo loan: expect a 700+ credit score, lower debt-to-income ratios, and several months of cash reserves. On a $750,000 home with 20% down, the $600,000 loan is conforming; the same home with 5% down leaves a $712,500 loan that may exceed the limit.

Should I choose a 15-year or 30-year term?

On a $400,000 loan at 6.5%, the 30-year payment is $2,528.27 with $510,178 of total interest, while the 15-year payment is $3,484.43 with $227,197 of interest. That is $956 more each month and $282,981 less interest over the life of the loan. The 15-year pays the balance down roughly twice as fast, but it fails the budget test if it leaves no margin for repairs, savings, or a job change. Many buyers take the 30-year and send extra principal instead. See the full term comparison and the 30-year calculator.

Can I buy a house with no money down?

Yes. VA loans require no down payment for eligible veterans and service members, and instead charge a one-time funding fee of 1.2% to 3.3% of the loan amount, 2.15% being the common figure with nothing down, which can be financed. USDA loans allow 100% financing in eligible rural areas with a 1% upfront guarantee fee and a 0.35% annual fee. Both still require closing costs, so budget 2% to 5% of the loan amount or negotiate seller concessions. Check VA loan math and USDA fees.

What are closing costs?

Closing costs run 2% to 5% of the loan amount, so $8,000 to $20,000 on a $400,000 loan. They include an origination fee of 0.5% to 1% ($2,000 to $4,000), an appraisal of $300 to $600, title search and insurance of $1,000 to $2,000, plus underwriting, recording, and credit-report fees. Then come prepaid items: your first year of homeowners insurance and an escrow cushion of about two months of taxes and insurance. Prepaids are bills you would have paid anyway, but they land on the same settlement statement.

Who pays closing costs, the buyer or the seller?

By contract, the split is negotiable and custom varies by state. Buyers routinely pay the lender fees while sellers pay the title work. You can also ask the seller to contribute toward your costs: conventional loans cap seller-paid concessions at 3% of the price when your down payment is under 10%, FHA allows up to 6%, and VA limits certain seller-paid items to 4%. A price reduction sometimes beats a credit, because a lower price reduces your loan amount and your loan-to-value instead of just your cash to close.

Can I roll closing costs into my loan?

Some of them. You cannot finance a down payment, but certain fees are built to be added to the balance: the VA funding fee of 1.2% to 3.3% and the FHA upfront premium of 1.75%. On a refinance, a no-closing-cost option pushes the $8,000 to $15,000 into a higher rate instead, often 0.25% to 0.5% more each year. That only wins if you sell or refinance again within a few years, so compare the total cost, not the cash at the table.

What is the Loan Estimate and when do I get it?

Your lender must deliver a Loan Estimate within three business days of receiving a mortgage application. It is a standardized three-page form showing the rate, APR, monthly payment, and every cost and credit, split into loan costs and other costs, so it lines up against the next lender's version. The Closing Disclosure, which replaced the old HUD-1 settlement statement, arrives at least three business days before closing with the final numbers. Review both line by line: a fee that was never quoted cannot simply appear at closing.

What is PMI?

Private mortgage insurance protects the lender, not you, if you default. It is required on conventional loans with less than 20% down and it is priced as a percentage of the loan amount, generally 0.5% to 1.0% a year at 90% loan-to-value. On a $380,000 loan that is $1,900 to $3,800 a year, or $158 to $317 a month, with credit scores above 720 usually landing near the low end. It is a real cost of low-down-payment buying, so weigh it against saving longer for a full 20%.

How do I get rid of PMI?

First, request cancellation in writing once your balance reaches 80% of the original value: $320,000 on a $400,000 purchase. Second, your servicer must cancel it automatically at 78% of original value, or $312,000, as long as you are current on payments. Third, if your home has appreciated, ask for cancellation at 80% of the current value using a new appraisal that costs $300 to $600. Dropping $158 of monthly PMI pays for that appraisal in under three months, so request it as soon as you qualify.

What is FHA mortgage insurance and how is it different from PMI?

FHA charges MIP rather than PMI: a one-time upfront premium of 1.75% of the loan amount, which is $7,000 on $400,000 and is usually financed, plus an annual premium billed monthly, commonly 0.40% to 0.85% of the balance. The difference that matters is duration. With less than 10% down you pay FHA MIP for the life of the loan; with 10% or more it lasts 11 years. Conventional PMI ends automatically at 78% of the original value. Fee details are on the FHA loan calculator.

Do VA or USDA loans require mortgage insurance?

Neither charges monthly mortgage insurance, but both charge a fee in its place. VA loans have no monthly MI, and veterans receiving compensation for service-connected disabilities pay no funding fee at all; everyone else pays a one-time fee of 1.2% to 3.3% that can be rolled into the loan. USDA loans charge a 1% upfront guarantee fee plus a 0.35% annual fee spread across twelve payments. On a $400,000 USDA loan that annual fee is $1,400, about $117 a month, so compare programs on total monthly cost.

When does refinancing make sense?

When the savings beat the cost. Take the closing costs, typically 2% to 5% of the new loan or $8,000 to $20,000 on $400,000, and divide by your monthly savings. $8,000 in costs against $250 a month gives a 32-month break-even, so you must keep the loan longer than that to come out ahead. A new rate at least 0.5% to 1.0% below your current rate usually clears break-even; a 0.25% move rarely does. Our refinance calculator finds your exact break-even month.

What does it cost to refinance?

Budget 2% to 5% of the new loan amount, itemized the same way as a purchase: origination of 0.5% to 1%, an appraisal of $300 to $600, title and recording fees, plus prepaid taxes, insurance, and per-diem interest for the days between closing and your first payment. On a $400,000 refinance expect $8,000 to $20,000 unless you accept lender credits in exchange for a higher rate. Ask for a full fee worksheet before you lock so the number you were quoted matches the number on the Closing Disclosure.

Will refinancing reset my amortization schedule?

Yes, and that is the hidden cost. After five years on a $400,000 loan at 6.5% you owe $374,444 and have paid $126,140 in interest against only $25,556 of principal. Refinance into a fresh 30-year term and you restart that curve, so the first twelve months of the new loan again send about 85% of every dollar to interest. Keeping the remaining 25 years, or refinancing into a shorter term, is what makes principal move. Run the trade-off through the calculator before you sign anything.

What is the difference between a rate-and-term and a cash-out refinance?

A rate-and-term refinance replaces your loan at a new rate or length without touching your equity, and it usually allows up to 95% to 97% loan-to-value on a primary residence. A cash-out refinance hands you cash at closing, is capped at 80% loan-to-value by most conventional lenders, and typically prices 0.25% to 0.5% worse. On a $400,000 home with a $280,000 balance, the 80% ceiling lets you borrow $320,000 and take roughly $40,000 minus costs, which is the number to compare against a home equity loan or HELOC.

How much cash do I need to close?

Down payment plus closing costs plus prepaid items, minus any seller credits. On a $400,000 home at 5% down: $20,000 down, $8,000 to $12,000 in closing costs, and $2,500 to $4,000 of prepaid taxes and insurance puts you near $33,000 before reserves. Most lenders also want a two-month cushion for taxes and insurance, and some programs want six months of payments in the bank. Gift funds from family are allowed on most loans when a signed gift letter states the money does not have to be repaid.

What can derail a mortgage after pre-approval?

Four common failures: a job change or gap in employment, a new debt such as a car loan or furniture financing, large deposits you cannot document, and credit inquiries you did not plan for. Underwriting re-verifies employment and credit shortly before closing, so treat the period between application and funding as a freeze. Do not change jobs, co-sign anything, move money without a paper trail, or open new credit, even store cards offering 20% off. Hold off on big discretionary buys until you have the keys.

Why was my mortgage application denied, and what now?

Denials usually come down to debt-to-income ratio, credit, or the appraisal. If your DTI exceeds the program limit, commonly 43% to 50%, paying down a car loan or card balances can fix it in 30 to 60 days. A low appraisal can be contested with comparable sales, met with more cash, or solved by renegotiating the price. Credit problems often turn around after 30 to 60 days of on-time payments. Ask for the reason in writing: a lender must give you one, and often a clear path back to approval.