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The mortgage process is complicated, but we've got you covered. Here are a few answers to some commonly asked questions.

Let’s face it: The mortgage process is pretty complicated. Even if you’ve gone through it before, it’s easy to get tripped up with all the steps, documentation, and financial jargon of it all.

Are you planning on applying for a mortgage soon? Want to make sure you’re prepared for the process? Before diving straight in, here are some answers to commonly asked mortgage questions.

What’s the difference between an interest rate and APR?

The big difference when talking about APR vs. an interest rate is that one includes fees and one doesn’t.

Let’s break it down:

  • Interest rate: This is how much you’ll pay—as a percentage of your loan balance—to borrow the money. This rate can be fixed or variable (see below for more detail).
  • APR: Or annual percentage rate, is the yearly cost of your loan. It includes interest, fees, discount points, and more.

When comparing loan estimates from lenders, you’ll want to look at both of these numbers to gauge which option is more affordable.

What does it mean when a loan is fixed-rate or adjustable-rate?

Fixed-rate or adjustable-rate—sometimes called variable-rate—refers to the loan’s interest rate. With a fixed-rate loan, your interest rate is set for the entire loan term (often 30 years). If your loan has an adjustable rate, then your initial interest rate only lasts a set number of years (usually three, five, seven, or ten). After that, the rate goes up or down depending on the market index it’s tied to. 

Adjustable-rate loans are riskier than fixed-rate ones since your rate can rise, sending your monthly payments up with it. As a result of this added risk, adjustable loans typically have lower rates than fixed ones do—at least initially.

What are closing costs?

Closing costs are the fees you’ll pay to close on your mortgage loan. They include things like your lender’s origination and application fees, charges for a credit check, attorney’s fees, the costs of a title search and title policy, and dozens of other line items.

The cost of each fee and charge varies widely and depends on your lender, your loan amount, when you’re buying the home, and a number of other factors. According to Freddie Mac, you can generally expect to pay two to five percent of your loan amount in closing costs. Your lender should give you a loan estimate detailing your expected closing costs when you initially apply for your mortgage.

How much do I need for a down payment?

Despite what you might've heard, you don’t need a 20 percent down payment to buy a home.

How much do you need then? The short answer: It really depends on your mortgage loan. If you’re getting a conventional mortgage, you can pay as little as three percent, and with an FHA loan, the minimum is 3.5 percent (as long as your credit score is over 580). USDA and VA loans actually require no down payment at all.

Keep in mind that while a low down payment seems nice on its face, it also means a higher loan balance, bigger monthly payments, and more in total interest costs, so make sure you budget accordingly.

What credit score do I need to get a mortgage?

This also varies greatly. Every loan product has a different minimum credit score threshold, and lenders can set stricter ones if they like. Generally speaking, you can expect to need at least a 500 credit score for an FHA loan, a 620 for a conventional or VA loan, and a 640 for a USDA loan.

Borrowers with higher credit scores will typically qualify for better interest rates than those on the lower end of the credit spectrum.

Is an inspection the same thing as an appraisal?

No. A home inspection benefits the buyer, whereas an appraisal is for the lender’s benefit. During a home inspection, a third-party inspector will evaluate the property you’re looking to buy. They’ll make sure it’s safe, hazard-free, and up to code, and they’ll give you a report detailing their findings. You can then use that information to negotiate repairs with the seller (or repair credits, if they’re unwilling).

An appraisal, on the other hand, is ordered by your mortgage lender to confirm the home is worth the money they’re loaning you. The appraiser will use local sales data, as well as a physical evaluation of the home, to determine the property’s current market value.

If it comes out equal to or more than what you offered for the home, your sale will proceed forward. If the appraised value is lower than your offer, you’ll need to negotiate with the seller or make up the difference out of pocket. Your lender will only let you borrow up to the appraised value of the property.

Have more mortgage questions?

Need more help understanding the mortgage process? Get in touch with the 55places Mortgage team today. We’ll guide the way.