When does mortgage underwriting take place, within the broader context of the mortgage lending process? This is a common question among first-time home buyers and mortgage applicants.

The short answer is that it takes place somewhere in the middle of the process. It happens after the loan application has been completed, and before the final approval and funding. In fact, mortgage underwriting is a necessary step that paves the way for the final loan approval.

Mortgage Underwriting Defined

Elsewhere on this website, we’ve offered an in-depth explanation of the mortgage underwriting process. That article also provides a basic definition of underwriting. This is a process lenders use to determine a borrower’s ability and willingness to repay a loan. They do this by looking at the borrower’s credit history, income, debts, and other financial components.

It can take anywhere from a few days to a few weeks, depending on several factors.

Getting back to the question at hand: When does the mortgage underwriting process actually take place? It usually happens in the “middle” of the overall lending process. This will be easier to understand if we look at underwriting within a broader context.

When Does It Take Place

First, a disclaimer: The mortgage lending process can vary from one borrower to the next, for a variety of reasons. There are many steps in the process, and a lot of variables along the way. So your experience might differ slightly from the series of steps listed below. With that being said, mortgage underwriting generally takes place somewhere in the middle of the loan process.

So that’s when mortgage underwriting takes place within the broader scope of the lending process. It generally takes place after the application has been completed, and after the home has been appraised. It occurs before final loan approval and funding. It’s a necessary step that paves the way for the final approval.

What Should the Home Buyer Do at This Stage?

We’ve talked about when underwriting occurs. It takes place after the initial loan application, and after the home appraisal (in most cases).

The next logical question is: What should the home buyer be doing at this stage in the mortgage process? The most important thing is to stay in touch with your loan officer, and handle any paperwork requests in a timely fashion. This will help keep things on track for the closing.

Much of the underwriting process happens “behind the scenes,” from the borrower’s perspective. It happens without direct involvement or participation from the home buyer / borrower.

But there are occasions when the underwriter will request items from the borrower. This might be additional documents needed to underwrite the loan, or a letter of explanation relating to a certain financial transaction.

As a borrower, the best thing you can do is handle these requests as quickly as possible. This will help prevent any unwanted delays that might interfere with closing. Aside from that, much of the underwriting process is out of your hands. You just have to wait for the review process to be completed.

Related: What underwriters might ask for

In recent years, technology and streamlining have expedited this process a bit. Today, mortgage companies are able to approve loans in less time, compared to five or ten years ago. There seems to be a big push in the industry right now for delivering faster results to borrowers.

The mortgage financing contingency is one of the most common contingencies included within real estate purchase agreements or contracts. Essentially, these clauses give home buyers a way to back out of the deal if they are unable to secure a mortgage loan to complete the purchase. Here’s an overview of how mortgage financing contingencies work, along with an example clause.

What Is a Mortgage Contingency, Exactly?

Within the context of a real estate transaction, a contingency is something that must happen in order for the deal to move forward. The sale of the home can be contingent upon certain conditions or events. These necessary conditions are spelled out within the real estate contract (a.k.a. purchase agreement).

In a previous article, we looked at some of the most common contingencies used by home buyers. The mortgage financing contingency is one of the most commonly used clauses. It basically says that the sale of the home is contingent — or dependent — upon the buyer’s ability to get a loan.

Real estate purchase agreements are binding legal agreements made between the person selling the home, and the person(s) buying it. So it’s important for both parties to understand all of the clauses that are included within the contract. And in some cases, it’s wise for buyers to include certain contingencies within the purchase agreement to protect their interests. The mortgage loan contingency is one such example.

Sample Financing Clause in a Real Estate Contract

As far as the actual wording goes, financing contingencies can vary from state to state. Most states have a standard document known as the residential real estate purchase agreement (or something similar). These documents usually have a fill-in-the-blank section that pertains to the mortgage contingency, if the home buyer chooses to include one.

Here is a sample financing contingency from a purchase agreement:

Here are the most important parts of this sample mortgage contingency:

• Timeframe — In this example, the home buyers have given themselves 45 days to get a loan commitment from their lender. That’s 45 days from contract acceptance to the final loan commitment. After that time, this contingency will expire.
• Notification — This contract clause also stipulates that the home buyer must notify the seller in writing, if they are unable to secure financing.
• Refund — If the buyers do not get their loan, the contract becomes “null and void.” This means the buyers can back out of the deal without losing their earnest money deposit. The deposit would then be refunded, as stated in the example contract above.

In the above sample, the buyers gave themselves 45 days to get a loan commitment from their lender. But this is not a standard requirement. The number of days used for mortgage financing contingencies can vary, as explained below.

How Many Days Should You Aim for?

There is no official rule or law that says how long, or how many days, the mortgage contingency should remain active. It can vary from one real estate contract to the next. Usually, it’s up to the home buyer. But the seller must agree to it as well, so the number of days for the financing contingency will have to be acceptable to both parties.

On average, mortgage contingencies included within purchase agreements tend to range from 30 to 60 days. But again, it can vary. And it’s not binding until both parties agree to it in writing, with signatures on the contract. *

Beware of Contingencies in a Hot Housing Market

In most cases, it makes sense for home buyers to include a financing contingency within the real estate purchase agreement or contract. It prevents them from losing the earnest money deposit due to something that’s beyond their control.

But there are some scenarios where buyers should tread carefully. For instance, in a hot housing market where sellers tend to receive multiple competing offers, having too many contingencies could work against the buyer.

Contracts (and the clauses and stipulations that go into them) are an important part of the purchase process. Buyers should carefully consider all of the components that go into the purchase agreement, and that includes any contingencies. When in doubt, ask your real estate agent for advice.

* Disclaimers: This article explains how mortgage contingencies work, and it includes generic language and details that might not apply to your specific situation. Real estate laws and requirements can vary from one state to the next. This article is meant for a general audience and does not constitute legal advice.

First-time home buyers tend to have a lot of questions about the mortgage approval process. One of the most common questions we get from our readers is: What are the steps in qualifying for a home loan as a first-time buyer? And what are the minimum qualification requirements for getting a first mortgage loan? Here’s what you need to know.

How to Qualify for a Home Loan as a First-Time Buyer

Mortgage lenders look at a variety of factors when considering loan applications. Income, credit scores, debt ratios, and down payment funds are some of the most important factors for first-time buyers qualifying for a home loan. So let’s talk about each one.

1. Credit Score Requirements

Credit scores are one of the most important qualification requirements for a home loan. This is true for first-time and repeat buyers alike.

Credit scores are three-digit numbers that basically show how you have borrowed and repaid money in the past. They are computed automatically by sophisticated algorithms that use information found within a person’s credit reports. The FIFO credit scoring model is the one most commonly used by mortgage lenders. So it’s generally the one that matters most, when it comes to qualifying for a home loan as a first-time buyer.

Minimum credit-score requirements can vary from one mortgage program to the next. The FHA loan program is one of the most lenient, in terms of credit standards. First-time home buyers who use an FHA loan must have a credit score of at least 580, if they wish to use the 3.5% down payment option.

Conventional home loans (which are not insured or guaranteed by the government) typically have higher credit score requirements. To qualify for a conventional loan, first-time home buyers might need a credit score of 600 or higher. That number is not necessarily written in stone, but it does signify a common cutoff point used by mortgage lenders. Some set the bar even higher at around 620. It can vary.

Related: What’s needed to buy a home?

The bottom line is that a higher credit score will help you when qualifying for a home loan as a first-time buyer. It could also help you secure a lower mortgage rate, which could save you money over time.

2. Basic Income Requirements

Your income level will also affect your ability to qualify for a mortgage loan as a first-time buyer. This is true for repeat buyers as well.

For obvious reasons, mortgage lenders want to ensure that you have sufficient income to repay your home loan obligation.

3. Debt-to-income  Ratios

Household debt is another important qualification requirement for first-time home buyers seeking a mortgage loan. Mortgage lenders will review your current debts to ensure that you are not taking on too much additional debt with the acquisition of home loan.

To do this, they look at something known as the debt-to-income ratio, or DTI. This is basically a comparison between the amount of money you earn and the amount you spend on your recurring debts.

Here again, there is no single threshold that applies across the entire mortgage industry. A lot of lenders today set the bar somewhere around 40% to 43%, in terms of total debt-to-income ratio. Borrowers who have compensating factors might be allowed to have a total DTI as high as 50%. It varies.

The bottom line here is that if your combined monthly debts “soak up” more than 50% of your income, you might have trouble qualifying for a home loan as a first-time buyer.

4. Documents, Documents, Documents

We just talked about how mortgage lenders will verify income and debt levels. They do this by looking at your tax records for the last couple of years, bank statements, pay stubs, and more. Be prepared to provide these and other financial documents when qualifying for a home loan.

5. Minimum Down-Payment Requirements

Down payments are another important requirement for first-time buyers. Unless you use a government-backed program, such as a VA or USDA loan, you will probably have to make a down payment of some kind.

The minimum down-payment requirement for qualifying for a home loan can vary, depending on the type of mortgage being used. Conventional loans can require as little as 3% down in some cases, though some lenders might require 5%. The FHA mortgage loan program allows for a down payment of 3.5% of the purchase price or appraised value.

The good news is that first-time home buyers can obtain down payment funds from a third-party, such as a family member or close friend. Most mortgage programs allow for down payment gifts, which is money given by a third party to the borrower who is actually buying the home.

The important caveat is that the money must truly be a gift, and not an interpersonal law. In fact, the person providing the funds will have to provide a gift letter as well, which must state that they do not expect any kind of repayment.

So those are some of the important considerations when qualifying for a home loan as a first-time buyer. Generally speaking, borrowers seeking a mortgage loan need a decent credit score, a manageable level of debt, and in many cases a down payment.

This is part of an ongoing blog series where we answer common questions among home buyers. Today’s question deals with jumbo loan mortgage rates in relation to smaller mortgage products.

Do jumbo loans have higher interest rates than their smaller conforming counterparts?

The answer might surprise you. Over the last few years, jumbo loans have actually had lower rates than conforming products, on average. The secondary market for these “oversized” mortgage loans has been very competitive in recent years, resulting in lower pricing.

What Is a ‘Jumbo’ Mortgage Exactly?

A jumbo loan is a relatively large mortgage loan. It exceeds the size limits set by the Federal Housing Finance Agency (FHFA). Freddie Mac and Fannie Mae use these limits when purchasing loans from lenders. A loan that can be sold to Freddie or Fannie is referred to as a conforming loan. It falls within the size limits established by the FHFA.

When a mortgage loan exceeds these conforming limits, it is referred to as jumbo.

I know what you’re thinking. A jumbo loan is basically a really big mortgage, so it probably comes with a higher interest rate. Right? Not always.

In fact, weekly application surveys conducted by the Mortgage Bankers Association (MBA) have shown the exact opposite — at least in recent years. Their data reveal that jumbo loans often have lower rates than conforming products.

Jumbo Loans Have Lower Rates, on Average

Let’s look at the MBA’s latest weekly survey (as of the publication date). On November 15, 2017, the industry group reported the following findings:

• The average “contract interest interest rate” for a 30-year fixed mortgage with a conforming loan balance (equaling $424,100 or below) averaged 4.18% for the week.
• The average contract interest rate for a 30-year fixed mortgage with a jumbo loan balance (greater than $424,100) was 4.12% during the same week.

If you were to search their archives and look at application surveys going back several months, you would find the same trend. On average, jumbo loans tend to have lower interest rates than their smaller conforming counterparts. Surprise!

Why Is This the Case?

This might seem counterintuitive. Why would a larger mortgage loan – which would seem to be a bigger risk to the lender and/or investor – come with a lower rate? After all, lenders generally charge higher rates for riskier loans.

In short, there has been growing demand for jumbo mortgage products among investors, creating a more competitive market for these “oversized” non-conforming loans.

Here’s how Joel Kan, an economist with the MBA, explained it to CNBC:

“A strong appetite for jumbo loans and a highly competitive market has led to increased availability and lower pricing of jumbo loans over the past few years.”

But it hasn’t always been this way. A few years back, jumbo loans tended to have higher interest rates than smaller conforming mortgage products. This trend began to change a few years ago. Since around the middle of 2013, jumbo mortgage products have come with lower interest rates (on average) than conforming loans.

Other Factors That Can Influence Your Rate

The type of loan you use can affect the mortgage rate you received from a lender. As we’ve covered (thoroughly) above, jumbo loans tend to have lower interest rates than conforming. But that’s just one factor that can affect your borrowing costs.

Here are some other factors that can influence the rate you receive from a mortgage lender:

• Your credit score: These three-digit numbers are essentially an indicator risk. A lower score suggests that a person might have had trouble repaying their debts in the past. A higher score usually indicates a person who manages their debts and pays bills on time. Borrowers with higher credit scores tend to qualify for lower mortgage rates, and vice versa.
• Fixed versus adjustable: On average, adjustable-rate mortgage loans (or ARMs) tend to start off with lower interest rates than their fixed counterparts. You can see this clearly enough if you look at the weekly survey conducted by Freddie Mac. Of course, the interest rate assigned to an ARM loan can change over time, making it less predictable than a fixed mortgage.
• Discount points: Some borrowers choose to pay points at closing in exchange for a lower mortgage rate on their loans home loans. In this context, a point is equal to 1% of the base loan amount. It’s a trade-off. The borrower pays more money up front in exchange for a lower rate, which could save them a significant amount of money over time.

Disclaimer: This article answers the question, do jumbo loans have higher interest rates than conforming? This article includes data, statistics and commentary provided by third parties not associated with our company. The rate you receive on a home loan will vary based on a number of factors, including those covered above.

This is part of an ongoing series that addresses common questions from home buyers. Today we have a two-part question: How does the down payment affect private mortgage insurance or PMI, and how much do I have to put down to avoid paying PMI?

The short answer: If you make a down payment below 20% when buying a house, you might be required to pay for private mortgage insurance. These policies are usually required when the loan-to-value (LTV) ratio rises above 80%. That’s the industry standard. You could avoid PMI by making a larger upfront investment.

PMI Trigger: A Loan-To-Value Ratio Above 80%

Private mortgage insurance, or PMI, is a special kind of insurance policy that protects mortgage lenders from losses resulting from borrower default (or failure to pay). It is the home buyer who typically has to pay for a PMI policy, even though it protects the lender.

So we’ve answered the first question: How does the down payment affect private mortgage insurance when buying a house? If you take out a single loan and put less than 20% down, you will likely be required to pay for PMI coverage.

On the other hand, if you put down more than 20% when buying a house, and thereby keep the LTV ratio at or below 80%, you should be able to avoid private mortgage insurance entirely.

And that answers the second question: How much of a down payment should I make to avoid paying for a PMI policy? If you are using a single loan to buy a house, an upfront investment of 20% or more will generally allow you to avoid this extra cost.

There are scenarios where a borrower could put down less than 20% and still avoid private mortgage insurance. Depending on the circumstances, this might be accomplished by “piggybacking” two different loans so that neither has an LTV above 80%.

To Be Clear, a 20% Down Payment Isn’t Always Necessary

A survey conducted by Realtor.com found that many home buyers think they have to put down at least 20% when buying a house. But this is simply not true.

These days, there are quite a few mortgage financing options that allow for a smaller down payment. The FHA loan program allows borrowers to put down as little as 3.5% of the purchase price. Some conventional (non-government-insured) mortgage loans allow for down payments as low as 3%.

Here are two examples of conventional home loan programs that allow for 97% financing:

• Freddie Mac’s Home Possible Advantage® product fact-sheet states the following: “Minimum down payment of 3 percent allowed for Home Possible Advantage.”
• Fannie Mae’s HomeReady® fact sheet says the program allows for “financing up to 97% loan-to-value (LTV) for purchase of one-unit principal residence.”

A study by Freddie Mac found that the average down payment among first-time buyers in 2016 was 6%. During that same year, the average upfront investment from repeat home buyers was 14%. This is further evidence that it’s not always necessary to make a down payment of 20% when buying a house.

Everything’s a Trade-off

Of course, if you do make a smaller investment, you could encounter private mortgage insurance. So there’s a very clear trade-off here.

The upside is that PMI coverage allows home buyers to purchase a house sooner, and with less money down. Without the private mortgage insurance industry, the low-down-payment financing options mentioned above probably wouldn’t be available anymore. Without PMI, most home buyers would be required to make an investment of 20% or more – and that would have a dramatic effect on the housing market by shrinking the pool of eligible borrowers.

Another advantage of making a larger down payment is that it reduces the size of your monthly payments. It’s simple math. The more you pay up front, the less you are financing. This results in a smaller mortgage payment each month.

There is a trade-off with almost every choice you make when taking out a home loan, and that goes for the down payment as well.

This is part of an ongoing series that answers frequently asked questions from home buyers. Today’s question is: How do mortgage down payment assistance programs work?

Before we get to the logistical details, let’s start with a basic definition. What is a down payment assistance program, exactly?

What Is a Down Payment Assistance Program?

These programs offer some form of financial help to home buyers who don’t have a lot of money to put down when buying a house. They are often referred to as “DPA” programs, or DPAPs, for short.

There are several different kinds of down payment assistance programs. Some are offered by housing-related nonprofit organizations, while others are managed by state or local government agencies. Most of them include partnerships with select mortgage lenders.

Three Common Types of Assistance

Let’s move on to talk about how down payment assistance actually works. While these programs are offered by many different organizations, they usually fall into one of three categories:

1. Down payment grants: A grant is different from a loan in the sense that it doesn’t have to be paid back (if certain conditions are met). Down payment assistance grants are funds that the home buyer does not have to repay as long as he or she occupies the home for a certain period of time. At least, that’s usually how they work. Occupancy is a common requirement associated with down payment grants. But the specific rules and requirements can vary from one program to another.

2. Second mortgage loans: This is the most common form of down payment assistance program available these days (as of summer 2017). The primary or “first” mortgage is applied to the purchase price of the house, with a second loan that covers the upfront investment. As with down payment grants, stipulations for second mortgage loans can vary widely depending on the agency that offers it. Many of the second loans offered by state and local housing agencies have very low interest rates – or even zero interest. It’s also common for the payments to be deferred for a certain period of time. In some cases, the loan is completely forgiven once a certain number of years has passed.

3. Tax credits: Some housing finance agencies and government organizations offer mortgage credit certificates to home buyers who meet specific requirements. Strictly speaking, it’s not a down payment assistance program, like the two mentioned above. But it can reduce the home buyer’s tax burden and free up additional money for the down payment and closing cost expenses.

In some cases, the grant or second loan will be offered along with a primary mortgage loan that is offered by a partnering lenders. They’re usually 30-year fixed-rate mortgage loans, since that’s the most stable and predictable financing option for borrowers.

Some DPAs Are Limited to ‘First-Time’ Buyers

Some down payment assistance programs are limited to first-time home buyers, while others are more broad in nature. But the exact definition of a “first time” buyer can vary from one program to the next.

In some cases, eligibility might be limited to people who have never owned a home in past. Other times, the down payment assistance program might be offered to people who haven’t owned a home within the last three years. So the precise definition of a first-time buyer might be narrow or broad, depending on the agency that is offering the program.

Counseling, Size Limits, and Income Requirements

Educational counseling requirements are another common feature of down payment assistance programs. This means that the home buyer must receive some form of counseling or training from an approved counselor or agency. The training topics can vary, but they usually relate to mortgage finance and home buying. Counseling sessions are often brief and, in many cases, can be completed within a few hours.

With many down payment assistance programs, there are usually limits to the purchase price and/or loan amount. A lot of times, the agency offering the program will use median home values to set these limits.

Income restrictions are also common. For instance, if a program is geared toward low- to moderate-income home buyers, it might limit the borrower’s income to 115% of the median home value in the area (a common threshold). That’s just one example of how these limits might be set. But it can vary from one down payment program to the next.

An Real-World Example of a Down Payment Assistance Program

You’ll have an easier time understanding how a down payment assistance program works if we look at a real-world example. The Arizona Public Housing Authority (APHA) is a good example, because it offers a couple of the options mentioned above – grants and second mortgage loans.

APHA offers a loan program called “Home Plus.” It’s a 30-year fixed-rate mortgage with down payment assistance in the form of a grant. The size of the grant varies depending on the amount being borrowed, and it can range from 0% to 5%. It’s truly a grant, in the sense that there are no repayment terms.

APHA also offers a “Pathway to Purchase” program. This option includes “an attractive 30-year fixed-rate mortgage with a down payment assistance second mortgage equal to 10% of the purchase price, up to a maximum of $20,000.”

This just one example of a government housing agency partnering with lenders or other groups to create down payment assistance programs for local home buyers. I chose this particular agency because they offer two of the DPAP options described earlier — grants and second mortgage loans.

Using Gift Money From a Family Member / Third Party

When people mention a “down payment assistance program,” they are usually referring to the grants and/or second mortgages discussed in the previous section.

But there’s another form of assistance that can be equally helpful, and a lot of first-time home buyers don’t even know it exists. This is the down payment gift.

These days, most mortgage programs allow buyers to receive funds donated from a third party. These funds can be used for the down payment and, in some cases, the closing costs.

The list of approved donors varies based on the type of home loan you’re using, but it’s generally a broad category. For example, some mortgage programs allow funds to be provided by close friends, family members, employers, or nonprofit organizations.

A key requirement for this kind of down payment assistance is that the person donating the funds must also provide a letter stating that they do not expect any repayment. In other words, the money being provided must truly be a gift, and not a short-term loan from one person to another.

This article answers the question, How do down payment assistance programs work? Our website offers hundreds of articles and tutorials, many of which are closely related to this topic. You can use the “Learn” link in the main menu to access additional tutorials.