What do lenders generally focus on when you apply for a loan?

Lenders look most closely at the "three Cs"—cash, credit, and collateral. Cash means you have enough money for a downpayment and closing costs. Good credit means you have borrowed money in the past and repaid your debts on time and in full. Collateral is security for the mortgage loan represented by the home you are financing. Lenders want to be certain that the property you're buying has enough value to support the amount you're borrowing.

What is the right type of mortgage for me?

This is possibly the most difficult part of the home buying process. There are three main types of mortgages: fixed interest rate, or fixed-rate mortgages; adjustable rate mortgages or ARMs; and interest-only mortgages. The four questions and answers that follow describe each of these, along with their advantages and disadvantages.

What are Fixed Interest Rate Mortgages?

As the name implies, the interest rate on a fixed-rate mortgage remains the same throughout the life of the loan. Fixed interest rate mortgages generally have repayment periods of between 10 and 30 years, and sometimes as long as 40 years. Shorter repayment terms generally offer lower interest rates but higher monthly payments. Longer repayment terms have lower monthly payments; however, because of the longer term, you’ll also pay more in interest over the life of the loan.

What are Adjustable Rate Mortgages (ARMs)?

Adjustable rate mortgages, or ARMs offer a fixed interest rate for an initial period, after which time the rate adjusts annually based on different criteria. For instance, the rate on a 5/1 ARM is fixed for the first five years, and then adjusts each year after that. ARMs may be beneficial if you expect your income to increase steadily in the coming years, or plan to move in a few years and are not concerned by potential rate increases. But be wary: while ARMs typically offer lower initial interest rates, adjustments to the rate can be dramatic and have the potential to make the loan unaffordable.

What are Two-Step Mortgages?

The two-step mortgage is a type of ARM that adjusts only once, either five or seven years into the loan. After that single adjustment, the mortgage will remain at a fixed rate for the remainder of the 30-year repayment term.

What is an Interest-Only Mortgage?

Interest-only mortgages are in some ways similar to ARMs. For an initial period, the borrower repays only amortizing interest (payments that do not go toward the principal of the loan). The benefits of an interest-only loan are lower initial monthly payments. Disadvantages are that the borrower will repay more interest over the life of the loan, and that after the interest only period ends, monthly payments will rise significantly.

When do I find out what the interest rate will be?

You will be quoted an interest rate the day you apply. This rate may not be available to you when you actually close the loan, unless you lock it in. A rate-lock guarantees your rate for a specific period of time, usually 30 to 60 days.

Remember, interest rates affect how much you can borrow. Higher rates can reduce the size of the mortgage for which you qualify.

Do all lenders have the same rate-lock policies?

No. Find out whether the rate lock will expire before the loan is processed, and whether the lender promises rapid turnaround time. If the rate-lock expires before the loan is processed and closed, it has no value. Ask if the lender provides a "rate re-lock" option in times of falling interest rates. Also, find out the lender's policy if they fail to approve your loan during the rate-lock period.

What are closing costs?

Closing costs encompass a variety of fees to complete the mortgage application process and actually obtain the loan. Fees vary from lender to lender, and each fee is associated with one part of the mortgage. Use the list below to verify that either you, an attorney, or your lender has completed all the necessary steps in the mortgage process:

• Application fee
• Origination fee
• Credit report fee 
• Appraisal fee 
• Lender's attorney fees 
• Title search 
• Title insurance 
• Document preparation fee 
• Plot plan 
• Underwriting fee 

What is private mortgage insurance (PMI)?

Private mortgage insurance allows borrowers to purchase homes with a low downpayment (less than 20% of the purchase price), and protects the lender in the event the buyer fails to repay the loan. The cost of PMI is added to your monthly mortgage payments and closing costs.

MassHousing’s mortgage insurance features MI Plus, a unique borrower protection that helps pay the mortgage (up to $2,000 per month for six months) if the borrower loses their job. In addition, MassHousing offers discounted mortgage insurance premiums for borrowers with lower incomes.

What is escrow and what are the escrow requirements?

Escrow is the process by which money is put into the custody of a third party

• until certain conditions of an agreement are met;
• to cover the borrower's upcoming expenses, such as real estate taxes and homeowner's insurance.

The payments you make into an escrow account are made over the life of the mortgage loan, and are part of your monthly mortgage payment.

What is a mortgage commitment?

When your loan is approved, the lender will send you a commitment letter, a formal loan offer stating the loan amount, terms, loan obligation fee, annual percentage rate and amount of principal, interest, taxes, and insurance. Furthermore, this letter states the amount of time necessary to accept the offer and close the loan.

The mortgage commitment letter may contain additional conditions that you must satisfy in order to close your loan. Until all of the conditions are satisfied and approved by the lender, your loan will not close. It is important to review the commitment letter carefully before you sign it. Remember, by signing the letter you agree to all of the loans terms it sets forth.

How long does it take to get a mortgage commitment letter?

It takes at least four to five weeks for the lender to evaluate and approve your application. The lender verifies all information on the loan application, including income, deposits and employment.

The lender must, by law, provide prospective borrowers with an itemized estimate of the costs to close a loan within three days of receiving the loan application. The lender must also provide you with a copy of the government publication A Home Buyer's Guide to Settlement Costs.

Among other things, the property must be appraised by a professional appraiser. An appraisal is a report that lenders use to determine the current market value of a property. It usually compares your home to at least three similar homes in the neighborhood that have sold within the last year. The appraisal ensures that the property you are buying has enough value to support the mortgage loan.

Lenders will not lend more than a certain percentage of the appraised value of the property. For example, MassHousing lends up to 97%.

How can I speed up the process?

The most common way to speed things up is to reduce the time your lender is waiting for something. Respond to requests for additional information from your lender promptly. You can also contact your lender to check on loan status. 

What can I do if my mortgage application is rejected?

Good communication between you and your lender is extremely important throughout the application process, but especially when an application has been rejected. Applications can be rejected because of inadequate income, poor credit or too much debt. Check your credit report to make sure it is accurate. Don’t assume that if you’ve been denied by one lender, you will be denied by another.

By law, lenders are required to notify you in writing if your application is rejected or denied. Discuss the situation with your lender so you can:

• Clarify a situation that caused the rejection
• Try to improve your ability to qualify for a future mortgage

There are some instances in which the rejection is beyond your control. In other cases, you may be able to remedy the situation, either immediately or over a short period of time.