Tips for Getting a Safe Mortgage You Can Afford
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• Figure out what you
can afford.
• Contact at least 3
different lenders or
brokers.
• When you call, say:
“I’m buying a (house or
condo) to live in. I’d like
to apply for a no-cost,
30-year, xed-rate, fully-
amortizing mortgage
for $ (insert sale price). I
want a loan that doesn’t
have a prepayment
penalty.”
• After you get 3 quotes,
check that they meet
your terms and then
choose the one with the
lowest APR. Next, ask
for a “rate lock.”
• Want an even lower rate?
Call the lenders with the
2 best offers and ask
them to do better.
Introduction
This guide gives you advice for
getting a safe, aordable mortgage.
If you’re a nancial whiz, there may
be other ways you can save money.
But this guide emphasizes safety
and aordability.
You might think it’s OK to sign
up for a mortgage that will not
be aordable over the long term,
because you can sell your home or
renance the loan before you run
into trouble. But that’s a big risk. If
you can’t renance or sell when the
monthly payments go up or your
income goes down, you could lose
A First-time Homebuyer Class Could Save You Money
Qualified housing counselors are specially trained to help you assess your
nancial situation and prepare for buying a home. They can teach you what to
look for when you shop for a house and how to pick a good loan. They may
also be able to tell you about special loan programs that could save you money.
Unlike a real estate agent, mortgage broker, or a lender, a housing counselor’s
job is to give you independent advice. And, because they are nonprot agencies,
their services often cost little or nothing. To nd a housing counselor approved
by the U.S. Dept. of Housing & Urban Development, call 1-888-995-4673 or
go to the Consumer Financial Protection Bureau’s website.
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your home to foreclosure. We think
the best deal is a mortgage you can
aord over the long term, without
worrying about whether you can
renance or sell later.
There are a number of steps to
getting a mortgage:
1. Decide what you can aord
2. Choosing the right loan terms
and loan program
3. Shop for a loan
4. Negotiate for a better deal
5. Get ready to sign.
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consumerfinance.gov/find-a-housing-counselor.
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The rst step is to gure out what you can aord. You should do this
before you shop for a house. Otherwise, if you get your heart set on a
house that’s too expensive, you’ll feel pressured to sign a mortgage you
can’t aord.
Budgeting If you don’t know where your money goes each month,
you’re not ready for a mortgage. You must have a realistic budget
before shopping for a house. Even if you already know your budget,
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we strongly recommend going to a rst-time homebuyer class.
Your budget should show how much you can aord for the total cost
of homeownership. That means paying for:
• utilities
• maintenance
• your mortgage payment
• any homeowner’s association or condo fees
• property taxes (and maybe school or other local taxes)
• homeowner insurance and
• ood or wind insurance (depending on where you live).
To get an idea of what you can aord, rst gure out what you spend
now. Homeownership will probably be more expensive than renting
because you will be responsible for taxes, insurance, repairs, and
other expenses that you might not be paying when you rent. Your
budget should also include enough money for unanticipated expenses.
Every house will need maintenance every month. Plus there will be
occasional repairs that could be very expensive (such as patching
your roof or replacing a broken refrigerator). So plan to save money
each month to cover big expenses. (Don’t forget food, closing,
transportation expenses, and all your other living expenses, too!)
Your Credit Report Get a copy of your credit report and
credit score. You may be eligible to get a free credit report from
annualcreditreport.com. To get your credit score, you may need
to pay a small fee. For more information about credit reports and
scores, see the National Consumer Law Center (NCLC) website.
Then, talk about any problems you see with your housing counselor
or credit counselor.
Moving expenses You’ll need enough money to pay moving
expenses. To plan a safe and aordable move, visit usa.gov/moving.
What Is Pre-Qualication?
Applying for a loan starts
with submitting a loan
application. If the lender
agrees to give you a loan,
that lender is “approving”
your application. But what if
you’re not ready to officially
apply for a loan? What if
you just want to get an idea
of how big a loan you can
get and what it would cost?
That’s a good question to
ask before you start house
shopping.
To get that information, ask
a lender to “pre-qualify”
you for a loan. To get pre-
qualified, the lender will
need to look at your credit
report, proof of income, and
possibly other supporting
documents. The important
thing to remember is that
a pre-qualification is not a
guarantee. All the details
(such as the interest rate
and closing costs) can
change. The lender will need
to review everything again
once you pick a house. If
you need a guarantee from
the lender, ask for a Loan
Estimate (see Step 3).
What Can You Afford?
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Credit reports: nclc.org/images/pdf/older_consumers/consumer_facts/cf_what_you_should_know_about_credit_report.pdf;
Credit scores: nclc.org/images/pdf/older_consumers/consumer_concerns/cc_understanding_credit_scores.pdf.
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There are two key parts to choosing the right loan:
• Choosing the right loan program
• Choosing the right loan terms
Loan programs There are two broad categories
of loan programs:
Special programs insured or guaranteed by a
government program or a non-prot agency.
These are sometimes called “agency loans.”
Everything else. These are called “conventional
mortgages.”
Special programs: The federal government,
some states and cities, Native American tribes,
some employers, and some nonprot groups oer
loans that are designed to help people buy homes.
Most of these programs have special restrictions.
Some are limited to veterans. Others are limited to
rst-time homebuyers, people buying in a certain
neighborhood, etc. If you are eligible, one of these
loans might be good for a number of reasons:
• they often allow lower down payments
• they may be cheaper than conventional mortgages
(but not always)
• they may have special protections.
Conventional mortgages: There are many, many
dierent types of conventional mortgages. They are
available from banks, credit unions, and non-bank
Getting the Right Loan
3
The loan terms we
recommend will minimize
the nancial risks of
getting a mortgage.
Down payment You may also need money for
a down payment. The minimum down payment
required can be as low as $0 and as high as 20% of
the purchase price of the house. VA loans (loans
guaranteed by the U.S. Dept. of Veterans Aairs),
loans through the U.S. Dept. of Agriculture’s Rural
Development program, and some other special
loan programs do not require a down payment.
FHA loans (loans insured by the Federal Housing
Administration) allow small down payments (as
low as 3.5%). Conventional mortgages (meaning
everything else) usually require down payments
of 3% to 20%.
Closing costs You’ll also need money for closing
costs. “Closing costs” are charges for making a loan.
They include fees charged by your local government
and charges by the lender and brokers. They can
add up to thousands of dollars. Closing costs are in
addition to the amount you will pay for the home.
So you may need enough cash for closing costs plus
a down payment.
Housing counselors can give you advice about how
big a down payment you need, what loan programs
you qualify for, and whether you qualify for any
special programs to help with your down payment
or closing-costs.
What Can You Afford?
mortgage companies. If you don’t qualify for (or
don’t want) a loan from a special program, you will
need a conventional mortgage.
Housing counselors specialize in helping you
choose the right loan program.
Loan Terms The “loan terms” are the most
important part of any loan. The loan terms
determine what you will pay each month and other
rules of the road. Choosing the right loan terms
can be complicated. This guide recommends safer
loan terms.
Nobody can predict the future. Will interest rates
go up or down? Will you get a raise or a pay cut or
lose your job in two years?
The loan terms we recommend will minimize the
nancial risks of getting a mortgage. A healthy
savings account and careful budgeting are important,
too. If you can tolerate more risk, you might want to
consider other options.
How to Use the APR (Lower is Better)
Getting the Right Loan
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Important Loan Terms:
• closing costs
• xed or adjustable (variable) interest rate
• maturity (15 years, 30 years, or something else?)
• escrow account
• prepayment penalty
• balloon payment or fully-amortizing
Closing costs All mortgage loans include closing
costs. For example, the lender may want to charge
you for the cost of an appraisal (so the lender
knows whether the home is worth what you are
paying for it) or the cost of preparing the loan
documents. You can pay these costs; the seller
sometimes pays part of them; or you can ask the
lender to pay them. The total closing costs should
only be 2% to 3% of the amount of money you
borrow. You can nd the average closing costs for
your state at bankrate.com.
A “no-cost loan” is a loan where you pay the
closing costs through the interest rate. Instead of
paying cash up front for the closing costs, the lender
will charge you a slightly higher interest rate on your
loan. In truth, there’s no such thing as a “no-cost”
loan because you pay one way or another. But that’s
what some lenders call it. A no-cost loan can be
good for two reasons: 1) you can use your savings
for the down payment or other expenses; and
2) research shows that no-cost loans can be cheaper.
When you are paying the closing costs in cash,
lenders have an incentive to overcharge you. But
when they’re paying the closing costs, they’re less
likely to overcharge.
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We recommend asking for a no-cost loan.
Fixed or Adjustable Interest Rate The interest
rate on your loan has a major eect on the size of
your monthly payment. Do you want an interest rate
and payment that stays the same or changes? A xed-
rate loan will stay the same so your payment will
stay the same (but be sure to read about Escrow
Accounts on page 5). The interest rate and your
payment on an adjustable-rate mortgage (sometimes
called a variable rate mortgage or an ARM) may
go up or down—nobody knows how much.
A xed-rate loan is the safest choice. It’s
predictable and easy to build a budget around a
xed-rate loan. The risk of an ARM is that your
payment might go up even when your income
doesn’t. During the Great Rescission, people with
ARMs were more likely to end-up in foreclosure
than people with xed-rate loans. Some people
say “Oh, if I can’t aord the payments, I’ll just
renance.” But there is no guarantee that you
will be able to renance or that renancing will
save you money.
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We recommend asking for a xed-rate loan.
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bankrate.com/finance/mortgages/closing-costs/closing-costs-by-state.aspx. This list does not include some important
charges, such as: title insurance, title search, taxes, other government fees, escrow fees and discount points.
The annual percentage rate (APR) is a tool for comparison
shopping. When looking at two loans, the one with the
lowest APR will be cheaper. Just make sure the loans have
similar terms. For example, you can’t compare a fixed-rate
mortgage with an adjustable-rate mortgage.
The APR is a shortcut for measuring the price of a loan.
Some people compare loans by looking for the lowest
monthly payment or the lowest interest rate. But those
numbers don’t give you enough information. The cost of
a loan depends on the interest rate, the closing costs,
how much you borrow, how long the loan will be, and
other details. The APR crunches all those numbers into
one, making it easier to compare loans.
Comparing the APR on loans is better than comparing
interest rates because the interest rate doesn’t include
any closing costs. The APR does. Imagine that you have
two loan offers with the same interest rate. But one has
lower closing costs and the other is for 15 years rather
than 30. Can you do the math to see which loan costs
less? If not, look at the APR instead. It’s an easy shortcut.
Has someone told you the APR is no good? Was it a
mortgage broker or loan officer? Remember that they
make more money if you choose an expensive loan. So
they don’t want you to shop around. The APR is not
perfect. But for most borrowers, it is safer and easier to
go with the APR. If you are sure that you will refinance
or sell your house in a few years, or if you are good with
math and can analyze the cost of different financing
terms, then there may be better ways to find the most
affordable loan. Otherwise, use the APR.
Maturity The “maturity” of a mortgage is
the number of years before it will be paid o. The
standard mortgage is for 30 years. But you can get
loans for 15 years too.
If you compare a 15-year and 30-year mortgage for
the same house, the 15-year loan will usually have
a lower interest rate but higher monthly payments.
Over the life of the loan (all 15 years added
together), a 15-year loan will usually be cheaper
because you pay less interest.
If you get a 30-year loan, you can still pay extra
each month and pay your loan o early. That will
save you money on interest, but it will give you the
exibility to pay the regular 30-year payment if you
want. This can be a little more expensive, but safer.
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We recommend asking for a 30-year loan.
But a 15-year loan is a good idea if you can
aord it.
Escrow account An “escrow account” is like a
savings account for taxes and insurance. If you have
an escrow account, the payment you make towards
it is in addition to your regular mortgage payment.
Each month, you will be required to make a
mortgage payment. If you have an escrow account,
When you make your total monthly payment, your
mortgage servicer will set aside the escrow part of
your payment in the escrow account each month.
Then, when your taxes and insurance are due, the
mortgage servicer will pay them from your escrow
account. The amount required for your escrow
payment may go up or down each year
if your taxes or insurance change.
An escrow account is a great budgeting tool.
Whether you have one or not, you will still be
required to pay property taxes and insurance on
your house. If you don’t have one and you can’t
come up with all the insurance or tax money at
once, you could lose your house. Many of the
people who lost their homes to foreclosure in
the Great Recession didn’t have escrow accounts.
Most mortgage lenders require escrow accounts
(unless you make a down payment of 20% or more),
but you should check to make sure.
Important reminder: Whenever a lender tells
you what your mortgage payment will be, ask if
that includes escrow.
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We recommend asking for a mortgage with
an escrow account.
Prepayment penalty If your mortgage has a
prepayment penalty clause, you will be charged extra
for paying o your mortgage early. For example, a
prepayment penalty in a 30-year loan might require
you to pay a penalty of several thousand dollars if you
pay o your mortgage in the rst two or three years.
Selling your house or renancing your mortgage before
the prepenalty time expires can be very expensive.
Some lenders will oer a lower rate or other
discounts if you agree to a prepayment penalty.
The penalty usually applies if you pay your loan o
within a certain period of time.
This is usually a bad deal. If you need to sell or
renance before the penalty expires (such as if you
lose your job, you have an ARM and the rate goes
up, you get a divorce, or you need a bigger house
for your family) you will be required to pay extra to
the lender. If you can’t aord the penalty, you won’t
be able to sell or renance. Prepayment penalties
are negotiable; ask to have it removed.
Many lenders oer good loans without prepayment
penalties. Shop around and you’ll nd one.
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We recommend saying no to prepayment
penalties.
Getting the Right Loan
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Many lenders offer good
loans without prepayment
penalties. Shop around and
you’ll nd one.
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A traditional mortgage payment always includes principal and interest. If you have a fixed-rate loan, that amount will stay
the same. If you have an escrow account, your total mortgage payment will include principal, interest, and escrow. The
escrow part may change if your tax or insurance bill changes.
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Start Shopping
Now that you know what type of loan you want and
what you can aord, it’s time to start shopping for
a loan.
It’s OK to start looking at houses so you know what’s
available in your price range. But don’t sign a contract
or make a deposit until you decide what you can aord
and nd a lender that will give you an aordable loan.
Signing a contract to buy a house before you get pre-
approved (see page 2: What Is a Pre-Qualication?)
for a loan is asking for trouble. Y
ou could get stuck
with an unaordable loan or you could lose your
deposit. It’s always safer to nd a lender and get pre-
qualied before you sign a contract to buy a house.
Getting a good loan is just like buying anything
else — you have to shop. We recommend
contacting at least three lenders.
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nmlsconsumeraccess.org.
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https://singlefamily.fanniemae.com/media/7896/display
First make a list of lenders to contact. Try credit
unions, your current bank (if you like it), friends
who have a mortgage they’re happy with. Then
ask people you trust about the names on your list,
have they heard anything bad about them? You can
check for complaints about lenders by searching
the Internet. You can also ask for a loan ocer or
mortgage broker’s “NMLS Number” so you can
conrm that he or she is properly licensed.
Take a look at a sample loan application
so you
know what information lenders ask for. Fill one
out so you’re ready to talk to lenders. Lenders must
give you a binding “Loan Estimate” once you give
them these six pieces of information:
• your name,
• your income,
• your social security number,
• the address of the property you are buying or
renancing,
• an estimate of the value of the property, and
• the mortgage amount you’re asking for.
Ask for a Loan Estimate as
soon as you choose a house.
Balloon payment or fully-amortizing A
“balloon payment” is a huge payment ($25,000,
$50,000, or more) that you are required to make at
the end of some loans. A “fully-amortizing” loan is
one that you pay o with regular payments that are
all about the same size.
Most mortgages are fully-amortizing. You make an
aordable payment each month and, if you keep
going long enough, one day the loan is gone.
Balloon payment loans are dierent. The payments
may be aordable for a while but only up to
the nal payment. The nal payment is huge —
sometimes tens or even hundreds of thousands of
dollars. If you can’t pay the balloon payment, you
will lose your house.
Some lenders will oer a lower regular monthly
payment in exchange for your promise to make a
balloon payment in the future. But this is risky.
Will you have enough money to pay it? Are you
sure you can sell or renance before the balloon
payment comes due? Will your house be worth
enough to pay the balloon when you’re ready
to sell or renance?
Unless you can predict the future, a balloon
payment is probably too risky for most people.
If you absolutely can’t avoid one, at least make sure
it’s a long way o in the future.
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We recommend saying no to balloon
payments.
Getting the Right Loan
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Negotiate!
You’ll usually get a better deal if you ask for
something better. You’re allowed to ask lenders to
change things you don’t like. All the details we’ve
talked about here are negotiable.
Remember: Lenders and brokers aren’t required
to give you the best interest rate or the best loan
you qualify for. Instead, if they can, they will try to
make money by giving you a more expensive loan.
So to get a fair, aordable loan, you must be willing
to negotiate.
If you don’t get oered a price you can aord
and the loan terms you asked for, you have
three choices:
• Cancel your plan to buy or renance, and wait
until your credit and income improve.
• Apply somewhere else.
• Negotiate with the lenders you’ve already
contacted.
Tips for Negotiating: Even if you’re happy with
at least one of the oers, you should still try to
negotiate to get a better deal from the same lender.
Negotiating is easier than it sounds. Just decide
what you want and ask!
• First, focus on the type of loan you want.
If you want a no-cost, fully-amortizing, 30-year,
xed-rate loan and the bank didn’t oer you one,
ask for it!
• Next, focus on the APR. If you want a lower
APR, just ask. For example, you can say: “I
applied to another bank and they oered me a
4% APR. Can you beat that?” Or you can simply
say, “I was hoping for a lower APR. Is this the
best you can do?”
Remember that nothing the lender says is binding
unless it’s written on an ocial Loan Estimate form.
Start contacting the lenders on your list. You can
call them on the phone or apply over the Internet.
If you don’t have a specic house in mind, ask for
a written pre-qualication for the type of loan you
want (we recommend a no-cost, fully-amortizing,
30-year, xed-rate loan). But remember that
the pre-qualication won’t be binding. Ask for
a Loan Estimate as soon as you choose a house.
It’s OK to give the address of a house you’re
interested in even if you haven’t made an oer yet.
Just remember that the information on a Loan
Estimate is only valid for ten business days and
the lender will have to re-do it if you buy a
dierent house.
When you apply, tell the lender that you’re
shopping around so they know they have to give you
a good oer to keep your business.
Lenders may only charge you for a credit report
when you ask for a Loan Estimate. And the fee must
be reasonable (around $15 to $30). They cannot
charge you a full application fee until you decide
you want to get a loan from them. If you’re worried
about the cost of applying to more than one lender,
that’s a sign that you might not be able to aord a
house yet. The cost of shopping around is worth it.
You’ll save a lot more money by getting a good loan.
And, no, applying to more than one lender within
a short period of time (such as in the same month)
won’t hurt your credit score.
After you get the pre-approval or Loan Estimate,
read it and make sure you understand what it says.
Ask questions if you don’t. Make sure it has the loan
terms you want.
• Check to make sure the interest rate they have
oered you is fair. You can do this by going to the
Consumer Financial Protection Bureau’s (CFPB)
website Owning a Home;
to check what rates
banks are oering in your state, click on Explore
Interest Rates.
• Look at the APR you were oered. Compare the
APR on each Loan Estimate or preapproval you
have received.
• The best loan will be the one with the lowest APR
and the other terms you asked for.
Start Shopping
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consumerfinance.gov/owning-a-home.
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consumerfinance.gov/owning-a-home/explore-rates.
Once you nd a lender you like, go shopping for a
house. Remember not to sign a contract until you
have found a lender that you trust. When you nd
a house that you’re ready to buy, tell your lender.
He or she will give you a revised Loan Estimate
based on the price of the house. Remember to
read it to make sure everything is OK. If you got
one before, the numbers on this one will likely be
dierent. It’s still a good idea to ask for a Loan
Estimate from more than one lender. Remember,
the cost will be worth it. The price of a few credit
reports is tiny when compared to how much you
can save on your mortgage.
When you get a Loan Estimate you like, ask the
lender to lock the rate. This will prevent the interest
rate from changing before your closing. Yes, rates
might go down in the meantime. But they could go
up too! Unless you’re a gambler, don’t take the risk.
The details on the Loan Estimate will be binding
for ten days, unless you tell the lender that you want
to go ahead with the loan during that time. If you
wait longer, the numbers may change again.
From this point, you’re ready to go. Read the
CFPB’s Closing Checklist
to get ready for the big
day. And if you still have any questions or problems,
you can ask a housing counselor for advice.
Get Ready to Sign
©
2015, National Consumer Law Center, Inc. All rights reserved.
What About Points?
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There are two kinds of points, both of which are paid
at closing:
When you pay discount points, you
are paying the lender to give you a lower interest rate.
The more you pay in discount points, the lower the rate
should be.
These are fees the lender charges you
for work the lender does to close the loan. The more you
pay in origination points, the more expensive the loan is.
Should I Pay Points?
Try to avoid paying origination points.
If you see them on the Loan Estimate (sometimes just listed
as “points”), tell your lender you don’t want to pay them.
For most people, the easiest thing to do is to ask for a
lower APR and let the lender decide whether to achieve
that by lowering the interest rate or charging discount
points.
If you’re very good with numbers and have a lot of
financial knowledge, the decision to pay discount
points depends on how long you plan to keep the loan.
If you will keep it a long time, discount points might
be worth it. If you plan to refinance or sell in a short
time, they may be wasted money. You’ll need to do a
spreadsheet or consult an accountant for a final answer.
• If you want a lower interest rate, you can ask for
that too. Try saying: “According to the CFPB’s
website, other banks in (my state) are oering
lower interest rates. Can you give me a lower
rate?” or “What is the best interest rate/discount
point combination that you have?”
• It never hurts to ask: “Is this the lowest rate that
I qualify for?”
• If you don’t like the way the bank treats you, go
somewhere else. If they treat you badly when
you’re applying for a loan, they won’t get any
better later.
It never hurts to ask: “Is
this the lowest rate that I
qualify for?”
Negotiate!
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consumerfinance.gov/owning-a-home/resources/checklist_mortgage_closing.pdf.
