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Read our collection of guides and articles about refinancing to help you on your mortgage journey.

![A comprehensive guide to a second home loan](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F5fd9119897cd43f988df2db8824d200b)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">Second homes, or vacation homes, must meet specific guidelines to be eligible for a second home loan.</p>

<p class="learnfont">Second home mortgage qualifications are typically more strict than for a primary residence.</p>

  <p class="learnfont">Beyond a mortgage, several alternative financing options can help you pay for your second home.</p>

  </div>
  <br><br>
<h2 style="margin-bottom:24px;">Table of contents</h2>
<ul>
    <li><a href="#1">What is a second home mortgage loan?</a></li>
    <li><a href="#2">Things to Consider When Taking Out a Mortgage Loan for a Second Home</a></li>
    <li><a href="#3">Second home loan mortgage requirements</a></li>
    <li><a href="#4">Alternative ways to finance a second home</a></li>
    <ol style="margin-left:24px">
        <li><a href="#5">Home equity line of credit (HELOC)</a></li>
        <li><a href="#6">Cash-out refinance</a></li>
    </ol>
    <li><a href="#7">How to Buy a Second Home With a Mortgage: The process</a></li>
    <ol style="margin-left:24px">
        <li><a href="#8">Get pre-approved for a second home mortgage loan</a></li>
        <li><a href="#9">Work with a local agent</a></li>
        <li><a href="#10">Hunt for your new home</a></li>
        <li><a href="#11">Make an offer</a></li>
        <li><a href="#12">Close on your mortgage</a></li>
    </ol>
    <li><a href="#13">Get a second home loan with Better Mortgage</a></li>
</ul>
<br>

If there’s a special place in your heart you frequently visit, then you may be ready to ditch hotel rooms and rentals and buy a more permanent place of your own. Second homes can serve a variety of purposes, from vacation spots to practical dwellings in prime locations.

Here’s how second homes differ from other property types, how second mortgages work, and what you can expect from the buying process once you’re ready to get started.

<div id="1"><br></div>

## What is a second home mortgage loan?
A second home loan is a mortgage used to finance a secondary or vacation residence. 

Second home loans differ from those used for [primary residences and investment properties](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) because each property type represents a different level of risk for lenders. For instance, because you’re not dependent on your second home as a primary place to live, lenders assume you may be more likely to stop making mortgage payments if you fall on hard times. 

For a property to be [considered a second home](https://better.com/content/buying-a-second-home/) and deemed eligible for a second home loan, it must meet the following guidelines:

- The home must be a single-unit dwelling.
- The property must be suitable for year-round occupancy, even if you only intend to use it for part of the year.
- You’re required to have exclusive use of the property, meaning no long-term leases or timeshare scenarios.
- The home may not be under the control of a property management company.
- In most cases, it must be located a certain distance from your primary residence.

You may be able to rent out a second home when you’re not using the property, but rentals are typically restricted to 180 days per year. And any projected rental income cannot be considered for mortgage qualifying purposes.

[Unlike second property mortgages, investment property mortgages’](https://better.com/content/second-home-vs-investment-property) allow for even longer rental terms (year-round), but also come with the toughest qualifying guidelines because they tend to have higher delinquency rates than other occupancy types. Lenders will typically expect that you are truly using the property as a second home and not a full investment property that allows for tenancies longer than 180 days.

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

<div id="2"><br></div> 

## Things to consider when financing a second home
While [purchasing a second home](https://better.com/content/buying-a-second-home/) is an exciting adventure, financing requirements can be a bit more strict than those for a primary mortgage. Second mortgages also tend to come with higher interest rates because of the increased risk they represent to lenders.

<div id="3"><br></div>

## Second home loan mortgage requirements

Here’s what your typical mortgage requirements [qualify for a second home loan](https://better.com/content/buying-a-second-home/) are:

- At least 20% of the purchase price as a down payment
- A lower debt-to-income ratio, usually less than 43%
- A good-to-excellent credit score
- Proof of enough cash reserves to cover several months’ worth of mortgage payments

<div id="4"><br></div>

## Alternative ways to finance a second home
If you think it will be a challenge to get a second mortgage based on the requirements above, or you’d prefer a different way to pay, there are other alternatives to consider. These options will allow you to leverage the equity you’ve built up in your primary residence, and use it toward your second home.

<div id="5"><br></div>

### Home equity line of credit (HELOC)
A [home equity line of credit](https://better.com/content/when-and-why-would-i-need-second-mortgage) allows you to borrow against the equity from your primary home on an as-needed basis and pay it off with interest over time. It works similarly to a credit card where you can borrow up to a specified credit limit, and the amount gets replenished as you make payments. 

Keep in mind that because HELOCs are secured by your primary residence, your lender may be able to foreclose on your home if you stop making payments.

<div id="6"><br></div>

### Cash-out refinance
A [cash-out refinance](https://better.com/content/guide-to-cash-out-refinance) is similar to a traditional refinance in that you replace your current primary mortgage with a brand new one. However, with a cash-out refi, you tap into your current home’s equity to free up extra cash for your new second home. 

Of course, this will add to your existing mortgage balance by increasing the amount you owe, which may result in a higher mortgage payment. Also, when you refinance, you typically reset the payoff clock on your mortgage, especially if you’re getting a new 30-year home loan, so going this route for a second home may take you longer to pay off your first mortgage. 

<div id="7"><br></div>

## How to buy a second home with a mortgage: The process
If you decide to move forward with a second home loan, then here are the steps you can expect from the homebuying and mortgage process. 

<div id="8"><br></div>

### Get pre-approved for a second home mortgage loan
Before you start shopping around and going to open houses, you’ll want to confirm [how much you can afford](https://better.com/how-much-home-can-i-afford) with Better Mortgage to spend. A [pre-approval](https://better.com/content/how-to-get-pre-approved-for-a-mortgage) can give you an idea of the amount you’ll be approved to borrow. 

Not all lenders offer second home financing. But luckily, Better Mortgage does! With our online process, you can get pre-approved in as little as 3 minutes, without affecting your credit score. 

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

<div id="9"><br></div>

### Work with a local agent
Once you’ve been pre-approved, you’re ready to connect with a [Better Real Estate Agent](https://better.com/with/find-an-agent). Because you’ll likely be buying a second home in a different area from where you currently live, it’s a good idea to interview a few local agents. They should be able to answer your questions about various neighborhoods, traffic patterns, and local events and help guide you through your search.

<div id="10"><br></div>

### Hunt for your new home
After connecting with a [Better Real Estate Agent](https://better.com/with/find-an-agent), it’s time for the fun part: shopping for homes. Think about taking a trip to the area where you want to buy and asking your agent to set up multiple showings to make the best use of your time.

<div id="11"><br></div>

### Make an offer
Once you’ve found the perfect second home, it’s time to [make an offer](https://better.com/content/how-to-make-an-offer-on-a-home). You’ll work with your agent to decide how much to offer, draw up the paperwork, and negotiate with the seller. If your offer is accepted, you’ll be ready to move on to the last step in the process.

<div id="12"><br></div>

### Close on your mortgage
[Most homes close within 1-2 months](https://www.forbes.com/advisor/mortgages/how-long-does-it-take-to-close-on-a-house/ "external") of when the seller first accepted the offer. During this time, you’ll have any requested inspections, receive an appraisal report, complete your mortgage documentation, and attend a final walk-through.

Then, you’ll be ready to head to closing where you and the seller will sign paperwork and your lender will send over the necessary funds. At the end, you’ll be handed the keys and officially be the proud owner of a second home and you can close 10 days faster than the industry average with Better Mortgage.

<div id="13"><br></div>

## Get a second home loan with Better Mortgage
Buying a second home is an exciting opportunity. But before you dive in, it helps to know exactly how much second home you can afford. 

Our pre-approval process takes as little as 3 minutes and can give you the confidence to make an offer on your second home.

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

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Thinking of buying a vacation home? Find out the requirements the property must meet to be eligible for a second mortgage. 

A Comprehensive Guide to a Second Home Loan

Blog post image for A comprehensive guide to a second home loan

A comprehensive guide to a second home loan

![Learn about a good debt-to-income ratio for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fed9faca9999f4ad2aea95c52bcba5236)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">What a debt-to-income (DTI) ratio is</p>

<p class="learnfont">Why DTI matters when buying a home</p>

  <p class="learnfont">How to calculate your debt-to-income ratio</p>

  <p class="learnfont">What mortgage lenders consider a good DTI and how to lower yours</p>

  </div>

## Table of contents

- [What is a debt-to-income ratio for mortgages?](#1)
- [How to calculate debt-to-income ratio for a Mortgage](#2)
- [DTI Requirements by Mortgage Type](#3)
- [What is a good debt-to-income ratio for a mortgage?](#4)
- [Conventional loan DTI requirements](#5) 
- [FHA loan DTI requirements](#6)
- [How to improve your DTI ratio](#7)

When you apply for a mortgage or any other type of loan, the top three things lenders look at are your income, your credit score, and your debt-to-income ratio, or DTI.
The first two are fairly self-explanatory—but what is DTI? And how do lenders use it in the mortgage process?

In short, your DTI is the balance between all the money you have coming in every month (income) and how much you’re obliged to pay every month to creditors (debt). This helps lenders know how safe or risky it would be to approve your loan.

Below, we’ll help you understand all the factors that make up your DTI, how to calculate it for yourself, and how to optimize it to get the best terms in your mortgage.

<div id="1"></div><h2>What is a debt-to-income ratio for mortgages?</h2> 

A DTI ratio simply represents how much of your gross monthly income is spoken for by creditors, and how much of it is left over to you as disposable income. 

It’s most commonly written as a percentage. So, for example, if you pay half your monthly income in debt payments, you would have a DTI of 50%. 

<div id="2"></div><h2>How to calculate debt-to-income ratio for a Mortgage</h2> 

Okay easy enough, but your ratio is likely not as clear-cut as “half your income” (and, as you’ll see later on, ideally it’ll be much less). How do you calculate your debt-to-income ratio? There’s math involved, but thankfully it’s pretty basic (no trigonometry required).

Simply divide all your monthly debt payments by your gross (pre-tax) income, and then multiply that number by 100. This will give you your DTI percentage.  

![Formula for calculating your debt-to-income ratio](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F16baf6fd48da4deea516590cbeed3ca6)

In some cases, what constitutes “income” and “debts” is clear-cut. In other cases, not so much. Generally, lenders follow these guidelines for what to include for each. 

__Debt__ includes:

- Future or estimated monthly housing expenses (mortgage payment, homeowners insurance, property taxes)

- Student loans

- Auto loans

- Personal loans

- Minimum required credit card payments 

__Income__ includes:

- Pre-tax monthly salary (determined by dividing your annual salary by 12)

- Income from additional jobs or side hustles

- Revenue from rental property or other investments

- Regular income from annuities, trust funds, and retirement accounts

- Any child support or alimony payments you receive

Let’s look at a real-world example:

![How to calculate your debt-to-income ratio for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fa8e85d916c06432988ffc7343ae72bcd)

<p class="legal">The above scenario is for illustrative purposes only.</p>

<div id="3"></div><h4> DTI Requirements by Mortgage Type</h4>

Different types of mortgages have their own DTI requirements. For example, at Better Mortgage, the maximum DTI for FHA loans is 55%, and 50% for Conventional loans, while VA loans do not have a set maximum. It's important to understand these requirements when considering different mortgage options.

<div id="4"></div><h2>What is a good debt-to-income ratio for a mortgage?</h2> 

The lower your DTI, the better—this means less of your income is tied to recurring debt payments, and you’ll likely be more able to continue making payments on time even if you experience a minor financial setback. Borrowers with higher debt obligations relative to their incomes are less able to absorb those setbacks, and are at greater risk of defaulting on their loan. This is why high DTI is the [#1 reason](https://www.corelogic.com/intelligence/buy-stories/debt-to-income-is-the-number-one-reason-for-denied-mortgage-applications/ "external") mortgage applications get rejected.

So, what’s the magic number when it comes to DTI? Well, it varies slightly based on the [type of mortgage](https://better.com/content/types-of-mortgage-loans/), the lender, and other aspects of your financial profile.

Typically, though, most lenders prefer to see a DTI of under 36%. In other words, the total of your monthly debts, including your estimated monthly mortgage payment, will be less than 36% of your monthly gross income. However, it may be possible to get a mortgage with a DTI of up to 50% depending on the lender. If you have a DTI of 50% or higher, then it could be challenging or even impossible to get approved for a mortgage until you [lower your debt-to-income ratio](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/).

![Debt-to-income (DTI) ratio brackets for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F53b282d1d03741d4a43ff67b4718aa51)

<div id="5"></div><h4>Conventional loan DTI requirements</h4>  

A [conventional mortgage](https://better.com/content/conventional-loan-requirements/) is a home loan offered by a private lender—such as a bank or a mortgage company. Private lenders tend to have a little wiggle room when it comes to DTI, depending on the exact loan you’re applying for and your personal situation. But that wiggle room can only go so far, because DTI requirements are typically based on policies created by government-backed lenders like [Fannie Mae](https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios) in order to protect customers. 

While many lenders require a DTI of no more than 43%, some lenders, including Better Mortgage, can provide mortgages to borrowers with DTIs up to 50%. This means even if your DTI is 49.999%, you could be eligible for a home mortgage loan.

<div id="6"></div><h4>FHA loan DTI requirements</h4>

[FHA loans](https://better.com/content/fha-homeready/) are mortgages backed by the Federal Housing Administration (FHA) and offered by an approved list of lenders (including Better Mortgage). The FHA is a government organization that insures these loans if their borrowers default. 

FHA mortgages require a lower minimum down payment and credit score than many conventional loans. This flexibility helps make homeownership more attainable for first-time homebuyers or those with lower income levels who may be ineligible for conventional loans. 

The maximum DTI for FHA loans is usually up to 50%, though this [may go higher](http://www.fhahandbook.com/debt-ratios.php "external") if you can meet other compensating factors. 

<div id="7"></div><h2>How to improve your DTI ratio</h2>

If you’ve run the numbers and you’re concerned that your DTI isn’t as low as you’d like it to be, there are two main ways you can decrease it: reduce your debt or increase your income. [Lowering your DTI](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/) can make the mortgage process go smoother, so it might be worthwhile if you have time before you apply for a new mortgage or refinance. 

Here are a few DTI reduction strategies to consider:

- Pay down or pay off your car loan before applying for your mortgage.

- Start paying off your credit cards in full, one by one. (Just don't close the cards after you pay them off, as this can hurt your credit score.)

- If possible, refinance or consolidate current loans to reduce your monthly payments.

- Consider adding a [co-borrower](https://better.com/content/should-you-add-a-co-borrower-to-your-mortgage/) with a low DTI to your loan.

- Pick up a side gig or part-time job to help pay down debt.

- Expecting a raise or promotion in the next few months? Consider waiting to apply until it goes through.

- Consider using some of your down payment savings to pay down debt. Just make sure you’ll meet down payment guidelines, which can be as little as [3% to 5%](https://better.com/content/5-percent-down-payment/).

## Get clarity on your DTI with a pre-approval

At Better, we want you to be as prepared for buying a home and the mortgage process as possible.

Applying for a [pre-approval](https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=what-is-good-dti) takes as little as 3 minutes and will provide you with a clear picture of how much you can afford. You’ll undergo a soft credit check (which doesn’t affect your score) that allows our underwriters to look at your debts, income, and credit in detail to obtain a more accurate picture of your DTI.

Although your DTI ratio is just one important factor to consider when buying a home, carrying less debt relative to your income will make it easier to get a mortgage and help ensure you’ll be able to afford your home for years to come.

Better Mortgage can help you understand your DTI and the financing options available to you. Start your pre-approval process today.

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=what-is-good-dti">Get pre-approved</a>  
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Learn all about what a debt-to-income ratio (DTI) is, what a good debt-to-income ratio looks like, and why it matters when taking out a home mortgage.

What is a good DTI ratio for a home loan?

Blog post image for What is a good DTI ratio for a home loan?

<p><a href="https://better.com/start-refinance"><img src="https://media.better.com/content/prod/2018/03/5Questions_mainimage.jpg""></a></p>

<p>Ready to refinance? It's time to find the right lender. We're so confident Better is the best lender out there, we're giving you the questions you need to test us. Here are the 5 most important questions to ask potential lenders before you refinance. </br>
<br>  </p>

<h3 id="1whatratescanyouofferforanocostrefinance">1. What rates can you offer for a no-cost refinance?</h3>

<p>If you’re like <a href="https://better.com/content/no-cost-mortgage/">most borrowers</a>, you might be interested in a “no-cost” loan so your refinance has no out-of-pocket costs. Lenders often advertise their lowest possible rates, which typically don’t factor in the lender credits needed for a no-cost refinance. So while a lender’s rates might look competitive, they actually might not be for the specific type of loan you want. Make sure lenders are quoting you personalized rates based on your specific refinance goal and situation. <a href="https://better.com/content/dont-take-the-bait-heres-the-reality-of-refi-rates/">Learn more about bait-and-switch tactics here.</a> <br />
<br>  </p>

<div style="text-align: center">  
<a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start-refinance">Get a custom rate quote</a>  
</div>  

<p><br>  </p>

<h3 id="2whatfeesdoyouchargedoyouchargecommissionorlenderfees">2. What fees do you charge? Do you charge commission or lender fees?</h3>

<p>Just like when you got your original mortgage, refinancing will entail fees. Some are mandatory and will be similar across all lenders (like third party appraisal fees, credit checks, flood certification, recording fees, titles fees, and prepaids). On the other hand, lender fees (like origination, application, or underwriting fees) are charged by – you guessed it – the lender. These fees can add a considerable amount to your closing costs. At Better Mortgage, we’ve eliminated both commission and lender fees, which helps keep closing costs as low as possible for our customers. <a href="https://www.better.com/content/how-does-better-make-money">Read about how Better makes money here.</a> <br />
<br>  </p>

<h3 id="3whatmortgagediscountsamieligiblefor">3. What mortgage discounts am I eligible for?</h3>

<p>You may think affordable lending programs and discounts are just for first-time homebuyers. But discounts are often available to experienced homebuyers and refinancers – many lenders just don’t have the tools or incentive to check your eligibility for these programs and pass the savings on to you. </p>

<p>For example, we worked with one refinance customer who was eligible for a <a href="https://better.com/content/fha-homeready/">HomeReady discount</a> but wasn’t told about it when they got their first mortgage. Later, when they were looking to refinance, another lender mistakenly told them they weren’t eligible. Better Mortgage was able to help them refinance with the discount, so they paid only $137 in closing costs and saved $280 on their first mortgage payment alone. <br />
<br>  </p>

<h3 id="4doyouhaveapricematchprogram">4. Do you have a price match program?</h3>

<p>Your current lender will likely tell you that they can get you the lowest refinance rate. See if they can put their money where their mouth is by asking if they have a price match program. At Better Mortgage, we stand by our pricing. <br />
<br>  </p>

<h3 id="5canigetaloanestimate">5. Can I get a Loan Estimate?</h3>

<p>No matter what a lender says, the only way to compare loans apples-to-apples when you’re rate shopping is to get an official <a href="https://better.com/content/a-quick-guide-to-your-loan-estimate/">Loan Estimate</a>, or LE. Unlike a fee sheet (or any other document a lender may give you), an LE is a standardized document detailing all the costs associated with your mortgage.</p>

<p>Using your Better Mortgage account, you can create your own Loan Estimates to see the breakdown of your refinance loan pricing depending on the terms you are considering. Plus, you can use our refinance calculator to see how much refinancing could save you. <br />
<br>  </p>

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Thinking of refinancing? You might want to start off the refinance process by asking your loan officer these 5 important questions.

5 Questions to ask your loan officer before you refinance

Blog post image for 5 questions to ask your loan officer before you refinance

5 questions to ask your loan officer before you refinance

<p><em>Matty Kimura, a Processing Expert at Better Mortgage, gives a rundown of the documents you’ll need for your mortgage application.</em></p>

[![ Beige Bicycle with Basket Leaning Against Peach Home with Text That Reads "Let's Take the Work Out of Paper Work](https://media.better.com/content/prod/2017/12/prepare-headerimage6.png)](https://better.com/start)

<p>Are you thinking of buying a house? Or maybe you’ve heard rates are low and you want to refinance your current loan. Either way, you’ll need a mortgage. To help you prepare, let’s go over the types of documents you’ll be asked for, who will be looking at them, and why they matter.</p>

At Better Mortgage, we have an experienced, non-commissioned support staff dedicated to helping you every step of the way, but coming prepared is the best way to close on a mortgage successfully and without a hitch. To start, we’ll need you to collect some important documents to help us understand your income, debts, and assets. These are the foundation for our underwriting team to make sure you can afford your new mortgage. The docs we need are pretty standard fare across most lenders, but what makes Better Mortgage better is our smart technology, which personalizes document requests based on your situation. We won’t ask you for stuff that doesn’t make sense, which saves everyone a lot of time and headache. <br />
<br> <br />

[![ Here's What You Should Have Ready to Go When You Start Your Application](https://media.better.com/content/prod/2017/12/heres_what_you_should@2x.png)](https://better.com/start)

<h2 id="income">Income</h2>

<p>There are many important parts of a loan application, but calculating and verifying your income may be the most critical. </p>

<p>Income-related documents are used to understand and verify not only your earning history but also the likelihood that you’ll earn the same or more in the future. Since a mortgage is committing you to years of payments, it’s our responsibility as a lender to make sure you can pay both now and down the line. This especially holds true for people who earn self-employment income. Verifying how much money you make is the first step to confirming you’ll be able to repay your loan.</p>

<p>The income documents we need will depend on how you make money. Here’s a breakdown of what we’ll ask for based on how you earn:</p>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="ifyouearnwageorsalariedincome">If you earn wage or salaried income:</h3>

<ul>
<li>Most recent paystub</li>
<li>W2 statement for the past year</li>
<li>Most recent personal tax return</li>
</ul>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="ifyouearnrsuincomehttpsbettercomcontentrsuincome">If you earn <a href="https://better.com/content/rsu-income/">RSU income</a>:</h3>

<ul>
<li>Written Verification of Employment (WVOE) from your employer confirming RSU earnings from the previous 2 years</li>
<li>RSU agreement/vesting schedule for next 3 years</li>
</ul>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="ifyouearnselfemploymentincomecontractincomeorrevenuefromabusinessyouown">If you earn self-employment income, contract income, or revenue from a business you own:</h3>

<ul>
<li>1099 statements for the past year</li>
<li>K-1 statements, if you own part of an S-Corporation or Partnership</li>
<li>Most recent 2 years of business tax returns, if you file and/or receive them</li>
<li>Most recent 2 years of personal tax returns</li>
<li>A year-to-date profit and loss statement, if an underwriter cannot verify your business’ income trend from tax returns</li>
</ul>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="ifyouearnrentalincomefrominvestmentproperties">If you earn rental income from investment properties:</h3>

<ul>
<li>Most recent yearly personal tax return</li>
<li>A signed lease agreement, especially if you did not claim rental income on your most recent tax return</li>
</ul>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="ifyoureceivechildsupportalimonypayments">If you receive child support/alimony payments:</h3>

<ul>
<li>A full copy of your divorce decree</li>
<li>Most recent personal tax return</li>
</ul>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="ifyouearnfixedincome">If you earn fixed income:</h3>

<ul>
<li>Award letters for pension, Social Security, and/or disability income</li>
<li>Bank statements reflecting the most recent benefits</li>
<li>Most recent personal tax return</li>
</ul>

<p><br></p>

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<p><br></p>

<h2 id="debts">Debts</h2>

<p>On the flip side of income is your monthly debts. Together they make up your debt-to-income (DTI) ratio, a very important standard in any mortgage application.</p>

<p>Your DTI can be calculated by adding up your monthly debt (including student loans, car loans, credit card bills, and your future mortgage payments) and dividing that by your monthly income (money you earn before taxes). Better Mortgage can approve loans with up to 50% DTI – but the lower your DTI, the more financing options will be available to you. DTI seems straightforward but there are some specifics to take into account and <a href="https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/">many ways to reduce your DTI</a> too.</p>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="hereswhatwellusetodetermineyourmonthlydebt">Here’s what we’ll use to determine your monthly debt:</h3>

<ul>
<li><p><strong>Your credit report.</strong> One of the first things you’ll do in the loan process is authorize a “hard credit pull.” This is how we learn information about your debts. Credit reports contain a few important pieces of information from the three credit bureaus: your credit score, balances and payment history on your accounts, any significant derogatory credit events, inquiries for new lines of credit, and prior addresses and names. <a href="https://better.com/content/how-your-credit-score-affects-your-mortgage/">Learn more about credit scores and mortgages here.</a></p></li>
<li><p><strong>If you have opened any new accounts</strong> that have not been fully reported on your credit profile yet, we’ll need a monthly statement.</p></li>
<li><p><strong>If you have any recent derogatory events on your credit report</strong>, especially bankruptcies, foreclosures, and short-sales, we’ll need release documents to confirm the date that the loan was settled.</p></li>
<li><p><strong>Verification of your property’s expenses.</strong> For refinances, this will include a mortgage statement and your homeowner’s insurance policy. Depending on the situation, we’ll also need confirmation of homeowner’s association dues and a solar panel agreement. If you’re buying a home, we’ll need a homeowner’s insurance quote.</p></li>
<li><p><strong>If you are divorced,</strong> we’ll need a full copy of your divorce decree to verify any recurring payments that are part of your ongoing debts.</p></li>
<li><p><strong>If you own other property,</strong> we’ll need to verify property-related expenses for that real estate as well. We’ll already have information on the mortgages on those properties from your credit report, but we will still need mortgage statements to link the accounts to the properties, and confirmation of homeowner’s insurance fees and homeowner’s association dues.</p></li>
</ul>

<p><br></p>

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<h2 id="assets">Assets</h2>

<p>In addition to your income and debts, we’ll also need proof of your assets. This allows us to verify you have the funds needed for closing, along with reserves if you happen to own additional real estate. </p>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="Green Line" /></p>

<h3 id="toverifyyourassetswellneed">To verify your assets, we’ll need:</h3>

<ul>
<li><p><strong>At least 2 months of bank statements,</strong> including the full transaction history and current balances. </p></li>
<li><p><strong>If there are any large or recurring payments, or large deposits</strong> that fall out of typical use, we’ll need documentation for those transactions. For example, a large deposit into your checking account could be the result of liquidating funds from an investment account. In this case, statements from your investment account that line up with the deposit transaction would suffice. Or if you received a gift toward your down payment from a family member, we will need a letter confirming that it was truly a gift and not a loan.</p></li>
<li><p><strong>If you are using funds from your retirement account,</strong> we’ll need the terms of withdrawal to confirm that you would be able to draw from the account without unexpected penalties.
<br></p></li>
</ul>

[![ The Next Step: Reviewing Your Documents](https://media.better.com/content/prod/2017/12/Next_step@2x.png)](https://better.com/start)

<p>Once you’ve provided your initial documentation, an underwriter at Better Mortgage will review your application in its entirety. Based on the information and documents you provide, we may need to reach out to you for further clarification – this is to make sure that we fully understand your circumstances. At Better Mortgage, we follow Fannie Mae’s underwriting guidelines, which is the industry standard. And while underwriting guidelines have tightened up because of the 2008 financial crisis, we make every attempt to limit tedious requests and approve your application.</p>

<p>If you’re a first-time homebuyer or refinancer – or even if you’re an expert and have closed multiple times before – we know this can seem daunting. In any case, we are here to help and make this as easy as possible for you.</p>

<p><img src="https://media.better.com/content/prod/2017/12/ruled-line@2x.png" alt="" /></p>

<h2 id="weredigitalwhichmeansyoucan">We’re digital, which means you can:</h2>

<ul>
<li><strong>Upload your documents</strong> 24/7 instead of faxing or mailing them</li>
<li><strong>E-sign most forms</strong> instead of printing, signing, and then scanning</li>
<li><strong>Link your online bank accounts</strong> and tax preparation software instead of tracking down monthly statements and tax returns</li>
<li><strong>Log in</strong> to see the status of your application and any documents we still need from you</li>
<li><strong>Relax and enjoy</strong> the convenience of not having to visit a bank branch (you can always call, text, or email our team)</li>
</ul>

<p>Tracking down documents can be a pain, but at Better Mortgage, we’re committed to building technology to make your mortgage faster and simpler than ever before. Let’s get started.</p>

<p><br></p>

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Mortgage paperwork can often seem confusing, but this handy guide breaks down exactly what documents you’ll need.

What documents will I need for my mortgage?

Blog post image for What documents will I need for my mortgage?

<p><em>Sathi Roy, a non-commissioned Mortgage Expert at Better Mortgage, explains how you can make your refinance journey as seamless as possible.</em></p>

[![ Top Right Corner of Modern Grey Building Against Blue Sky and "Get Ready to Refi"](https://media.better.com/content/prod/2017/10/5tipsrefi-headerimage.png)](https://better.com/start-refinance)

<p>Considering refinancing your mortgage? Here are some steps you can take ahead of applying to make the process go smoother.</p>

<p><br></p>

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<p><br></p>

<h3 id="1determineyourrefinancegoal">1. Determine your refinance goal</h3>

<p>The most important step to take before embarking on your refinance journey is determining why you are considering a refinance in the first place. There can be many advantages to refinancing your mortgage. You may be able to save money by getting a lower rate and lower monthly payments. On the other hand, if you're comfortable making the same or higher monthly payments, you can use a refinance to pay off your mortgage faster. Lastly, refinancing can help you consolidate your debt or cash out some of your home equity to pay for repairs or emergency expenses. Pinpointing what you’d like to achieve can give you a better idea of the type of loan you should be looking to refinance into. You can learn about some common <a href="https://better.com/content/6-reasons-to-refinance-your-mortgage/">reasons to refinance here</a>.</p>

<h3 id="2dothemath">2. Do the math</h3>

<p>Once you’ve figured out your motivation for refinancing, it’s time to determine what loan will help you reach that goal. In a nutshell, if you’re looking to lower your monthly payment, pay off your loan faster, or save in interest over the life of the loan, a <strong>rate-and-term refinance</strong> may be your best bet. On the other hand, if you want to take cash out or consolidate your debt, a <strong>cash-out refinance</strong> may be the answer.</p>

<p>Beyond the type of refinance, you should also consider the type of loan (adjustable-rate or fixed-rate mortgage), the term (length), and whether you want to <a href="https://better.com/content/no-cost-mortgage/">take credits</a> to offset the closing costs of your refinance, or pay points to lower your rate. Our handy <a href="https://better.com/mortgage-rates/refinance">rate quote tool</a> makes it easy to understand how these numbers affect how much you can save by refinancing. Once you <a href="https://better.com/start-refinance">create an account</a> with us, you can also create your own Loan Estimates to see the breakdown of all the costs associated with your refinance depending on which point or credit options you are considering. 

<h3 id="3cleanupyourfinances">3. Clean up your finances</h3>

<p>Whether or not you get the best refinance loan possible can, in part, depend on your financial situation. For example, the higher your credit score, the better the rates you’ll be able to refinance into, which can lead to significant savings over the life of your mortgage. If you’d like to improve or maintain your credit score, <a href="https://better.com/content/how-your-credit-score-affects-your-mortgage/">this article</a> offers useful tips to help you do just that. </p>

<p>You may also want to streamline your finances beforehand to reduce the chance of any delays derailing your refinance timeline. If you’ve previously frozen your credit, unfreeze it well before you start applying for a refinance so your lender can easily check your credit score when necessary. If you have any outstanding tax liens, make sure to pay them off; otherwise, you won’t be able to refinance at all. Lastly, if you have a second mortgage like a home equity line of credit (HELOC), decide whether or not you want to pay that off as part of your refinance. Make sure to share your decision with your refinance lender as soon as possible so they can make the necessary arrangements.</p>

<p><br></p>

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<h3 id="4gatheryourpaperwork">4. Gather your paperwork</h3>

<p>Refinancing your home usually involves similar paperwork as your original mortgage loan required. To make the process go as smoothly as possible, you may want to collect all of the necessary financial documents even before your lender asks for them. You’ll typically be asked to provide:</p>

<ul>
<li>2 years of personal tax returns</li>
<li>2 years of business tax returns (if you own more than 25% of a business)</li>
<li>2 years of W-2s or 1099s</li>
<li>2 months of bank statements</li>
<li>Proof of any alimony or child support payments</li>
</ul>

<p>If you’re applying with Better Mortgage, you’ll have the option to link your bank accounts and upload your documents digitally. As our underwriting team reviews your initial application, we’ll let you know what follow-up documents we need, based on your specific financial situation. </p>

<h3 id="5prepyourhomefortheappraisal">5. Prep your home for the appraisal</h3>

<p>Just like when you first purchased your home, your refinance lender will also request a <a href="https://better.com/faq/appraisals/what-is-an-appraisal">home appraisal</a> to determine your home’s market value. The appraised value of your home is important because it determines how much equity you have in your home relative to the home’s value. The more home equity you have, the better the rates lenders can offer you. If you’re interested in a cash-out refinance, the amount of equity you have plays an important role in determining your eligibility and how much cash you can take out.</p>

<p>An appraiser takes several factors into consideration when determining your home’s value such as the value of comparable homes, your home’s size and features, and the current condition of the house. While it’s not exactly feasible to double your home’s square footage before refinancing, it doesn’t take much effort to make some general improvements to ensure your home is in its best condition.</p>

<p>The most important way to make the most of your appraisal is ensuring that your home meets regulations for health and safety measures, like smoke/carbon dioxide detectors and permitted additions. If you don’t address these issues beforehand, the appraiser might have to re-inspect the property, which can involve extra fees, delays, or even loan ineligibility. Next, prep and stage your home as if you are about to sell it. Make any necessary repairs to broken windows, holes in the wall, etc., and get rid of any clutter. Even the smallest cosmetic changes can add up to boost your home’s value. Also, you may want to itemize any upgrades you’ve made to the home and share your list with the appraiser so they can see how your home compares to other similar properties. </p>

<h3 id="getstarted">Get started</h3>

<p>Refinancing can seem like a hassle, but if you’re proactive and prepare ahead of time, the journey can actually be simple and incredibly rewarding. Better Mortgage’s 100% digital application makes refinancing even easier. You can begin your Better refinance journey by checking today's rates. 

<p><br></p>

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Considering a mortgage refinance? These 5 tips can help you make the refinance journey as smooth and successful as possible.

5 Ways to Prepare for a Refinance

Blog post image for 5 tips to prepare for a refinance

5 tips to prepare for a refinance

[![ Top of Modern Style Home with Text That Reads: How to Understand Your Mortgage Costs](https://media.better.com/content/prod/2017/10/blog_totalcoastmortg_headerimg.png)](https://better.com/start)

<p>Mortgages – and all the costs associated with them – can be confusing, even if you’ve been through the process before. Here’s a framework to help you understand all the components and costs related to a mortgage so you can shop with confidence. </p>

<p>Let’s start with the basics. When you buy a home and get a mortgage, you’re responsible for <strong>upfront costs</strong> (including your down payment and closing costs) and continuing <strong>monthly mortgage payments</strong>.</p>

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<h3 id="upfrontcosts">Upfront Costs</h3>

<p><strong>Down payment</strong><br>
This is how much you are putting towards owning your home upfront (your lender is loaning you the rest). While 20% is often cited as a benchmark, for creditworthy borrowers with a steady income, a 3-5% down payment can be a <a href="https://better.com/content/5-percent-down-payment/">financially sound option</a>.</p>

<p><strong>Third-party fees</strong><br>
In a nutshell, third-party fees are charged by outside parties to make sure all the details and fine print associated with buying your home are taken care of. Third party fees are generally broken out into two different categories on your official <a href="https://better.com/content/a-quick-guide-to-your-loan-estimate/">Loan Estimate</a>, and include:</p>

<p><em>Services you cannot shop for <sup id="fnref:1"><a href="#fn:1" rel="footnote">1</a></sup></em><br>
These fees may vary slightly from lender to lender and can include:</p>

<ul>
<li>Appraisal: ~$550</li>
<li>Credit Report: ~$50 per borrower</li>
<li>Flood Certification: ~$14</li>
<li>Homeowners’ association certification: ~$325</li>
<li>Subordination fee (this fee may apply if you have a second lien, such as a HELOC)</li>
</ul>

<p>At Better Mortgage, the cost of the appraisal is paid when you lock your rate in.</p>

<p><em>Services you can shop for <sup id="fnref:2"><a href="#fn:2" rel="footnote">2</a></sup></em><br>
These are made up of title service fees, which essentially have to do with ensuring you have a legal claim to the property you are purchasing. In most states, the fee for conducting your closing is also a part of the title service fees.</p>

<p><strong>Other Fees</strong><br>
<em>Taxes and other government fees</em><br>
These include property taxes and recording fees (so your ownership of your home is in the public record). Different municipalities have different property tax rates, so these fees can vary depending on where your home is located (but will be exactly the same no matter which lender you choose, even if different lenders may have slightly different formulas to estimate it on your initial Loan Estimate).</p>

<p><em>Prepaids</em><br>
Prepaids are just what they sound like – advanced payments for some of the ongoing fees that are associated with your mortgage, including your homeowners insurance, property taxes, and interest. This estimate is probably the one most subject to change, as different municipalities and insurance providers require different amounts up front. Since many of these fees are paid monthly or quarterly, even the day of the month can affect what your total prepaid cost will be at closing. (Once again, even though lenders may estimate these slightly differently on your initial Loan Estimate, they will end up being the same on closing day, no matter which lender you choose).</p>

<p><strong>Costs or discounts associated with your rate (points or credits)</strong><br>
This is where you can really start comparing lender pricing. As we explain in our <a href="https://better.com/content/how-mortgage-rates-work/">mortgage rates post</a>, there are many factors that determine the rates that are available to you, including the market, your credit score, your loan type, and your property details.</p>

<p>But <em>you</em> also have control over your rate. You can “buy” a lower rate by paying a lender more up front in the form of prepaid interest called <strong>“points”</strong>. Or you can take lender <strong>“credits”</strong> to lower your closing costs, in exchange for a higher rate. (If you choose to take credits, this may show up as a negative number in your loan estimate). Each <strong>lender</strong> is going to decide how much they will charge you in points or other lender fees to give you those rates. <a href="https://better.com/content/no-cost-mortgage/">Learn more about points and credits here.</a></p>

<p><strong>Lender fees, origination fees, and application fees</strong><br>
These are additional fees that lenders may charge as the cost of doing business. Be sure to ask any lender you are talking to for an explanation of their fees and pricing, along with an official <a href="https://better.com/content/a-quick-guide-to-your-loan-estimate/">Loan Estimate</a>. </p>

<h3 id="monthlymortgagepayments">Monthly mortgage payments</h3>

<p>Your monthly mortgage payment, sometimes referred to as “PITI”, consists of four components: principal, interest, taxes, and insurance.</p>

<p><strong>Principal</strong>: This is money going toward the actual balance of your loan. The more you pay, the more equity (or ownership) you have in your house. As time goes by, you’ll pay more toward your principal and less toward interest. </p>

<p><strong>Interest</strong>: This is money going toward paying interest on your loan. As time goes by, you’ll pay less interest and more toward your principal. </p>

<p><strong>Taxes</strong>: Property or real estate taxes are determined locally, and vary from area to area. Tax rates can be quite high in certain areas, so it’s a good idea to research rates in advance as they can add significantly to your monthly payment. </p>

<p><strong>Insurance</strong>: Insurance can include homeowners insurance (which you’ll need to purchase after your offer has been accepted and before your loan is closed) as well as private mortgage insurance (PMI), which is typically required if you put less than 20% down. </p>

<p><strong>Potential changes to your monthly payments</strong><br>
If you have a fixed-term mortgage, such as a 15-year or 30-year fixed mortgage, your total cost of your <strong>principal and interest</strong> will remain the same each month (although the ratio of principal to interest will change). If you have an adjustable-rate mortgage (ARM), you will have the same payments for the initial fixed period, after which your interest rate will adjust and your payments will likely increase.</p>

<p>Your <strong>insurance</strong> premiums may go up from year to year depending on inflation, additions or upgrades you make to your home, or any claims you file. If you are paying PMI, you will likely be able to stop paying it after your loan-to-value ratio (LTV) is less than 80% (which essentially means you own more than 20% of your home).</p>

<p><strong>Property taxes</strong> are a percentage of your home’s value, so if the value of your home increases over the years, your property taxes will increase too.</p>

[![ Table: Components of Your Mortgage](https://media.better.com/content/prod/2017/10/Components.png)](https://better.com/start)

<h3 id="howtofindthebestpricedmortgage">How to find the best-priced mortgage</h3>

<p>Now that you know what all those fees and line items really mean, you’re ready to compare prices from different lenders.</p>

<ol>
<li>Ask the lenders you are talking to for a <strong>Loan Estimate</strong>, which is <a href="https://consumerfinance.gov/owning-a-home/loan-estimate/">a standard document created by the Consumer Finance Protection Bureau</a>. At Better Mortgage, once you’ve created an account you can log in and create as many Loan Estimates as you like based on different rates and terms that you are interested in.  </li>
<li><strong>Compare apples to apples.</strong> Make sure each Loan Estimate has the same loan amount, loan type (such as 30-year fixed), property value, and rate.  </li>
<li><strong>Don’t focus on “other costs”</strong> (taxes, government fees, and prepaids). These are estimated and will ultimately be the same across lenders (although a wildly different estimate may be a red flag).  </li>
<li><strong>Focus on the total loan cost and lender credits.</strong> This is where you’ll see the true difference in pricing between lenders. Look at <strong>Section D</strong> in your Loan Estimate, along with the <strong>“Lender Credits” line item in Section J</strong> to truly compare the difference between lenders. (It’s also common for the seller’s title company to be used. If this is the case you can also ignore title fees in your comparison since it will be the same across lenders.)</li>
</ol>

<p>At Better Mortgage, we’ve streamlined the mortgage process and <a href="https://better.com/content/5-reasons-why-loan-officer-commission-is-bulls-t/">done away with Loan Officer commissions and lender fees</a>, passing the savings to you. So once you have your Loan Estimates from us, feel free to shop around. We’re confident that we can get you the best terms. </p>

<h3 id="readytogetstarted">Ready to get started?</h3>

<p>We want to put you in control of your mortgage experience, while offering support and transparency along the way. Make a Better Mortgage <a href="https://better.com/start"> account</a> to create your own Loan Estimates, or <a href="https://better.com/schedule-call?TRACKINGSOURCE=blog_wittcoam">schedule a call with a non-commissioned Mortgage Expert</a> to talk about your options.</p>

<p><br></p>

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<p><br></p>

<div class="footnotes"><ol><li class="footnote" id="fn:1"><p>At Better Mortgage, we’ve worked to standardize these costs and pass the savings to you, capping as many third-party fees as possible. If your appraisal fee ends up costing more, we will cover it. Less? We'll pay back the difference. <a href="#fnref:1" title="return to article">↩</a></p></li>
<li class="footnote" id="fn:2"><p>At Better Mortgage, we do our best to keep title fees down. If you are able to find a cheaper provider, we are happy to use them. In many cases, the seller’s title company may be used.  <a href="#fnref:2" title="return to article">↩</a></p></li></ol></div>

Mortgages can be confusing, even if you’ve gotten one before. Here’s a breakdown of all the costs that come with getting a mortgage.

What’s the Total Cost of a Mortgage?

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What is the total cost of a mortgage?

<p><em>Sathi Roy, a non-commissioned Mortgage Expert at Better Mortgage, gives an overview of mortgage rates</em></p>

[![Orange Home On the Right Against Blue Sky with Text That Reads: Which Factors Affect Mortgage Rates?](https://media.better.com/content/prod/2017/10/howrateswork-headerimage.png)](https://better.com/schedule-call?TRACKINGSOURCE=blog_hmrw)

<p>"What factors determine the mortgage rates I can get? What are points and credits, and do I need them? How do I compare rates between lenders?" As someone who talks to both first-time homebuyers and refinance customers every day, I know how confusing and intimidating mortgage rates can seem. My goal is to help our customers clearly understand their options so that they can shop with confidence. That means being able to make informed decisions about the best loan product, rate, and terms for their situation.</p>

<p><br></p>

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<h3 id="whatfactorsgointomortgagerates">What factors go into mortgage rates?</h3>

<p>1) First, there’s a <strong>baseline</strong> for rates that is determined by the <strong>market</strong> – in very simplified terms, this is dependent on how the economy is doing. Lending institutions, and people like you and I, have no control over this baseline, which is why rates can fluctuate from week to week or even day to day. For example, in the current climate, mortgage rates typically range from about 3.5 to 5%.</p>

<p>2) Then there’s the <strong>property</strong> itself. Is it a detached single-family unit, or a condo? Your primary home, or an investment property? All those factors can affect your rate.</p>

<p>3) The <strong>type of mortgage</strong> you’re getting matters too. You can get loans with different payment terms, such as 15-year or 30-year fixed mortgages, which means you lock in the same interest rate and monthly payment amount for the life of the loan. There are also <a href="https://better.com/content/what-is-an-arm/">adjustable-rate mortgages</a>, which have a fixed rate for a set period (such as 5, 7, or 10 years), after which rates adjust each year according to the market. Depending on what kind of loan you’re looking for, the available rates will be different. </p>

[![ Green Diagram: What Affects Your Rates? The Market, Type of Mortgage, Your Credit Score, Down Payment Size, Your Point or Credit Choices...](https://media.better.com/content/prod/2017/10/whataffectsrates.png)](https://better.com/mortgage-rates/purchase)

 Green Diagram: What Affects Your Rates? The Market, Type of Mortgage, Your Credit Score, Down Payment Size, Your Point or Credit Choices...

<p>4) Your <strong>credit score</strong> plays a big role in determining your rates. It helps lenders evaluate your ability to pay back your loans, based on your borrowing history. The higher your credit score, the better rates you’ll be able to get, which can lead to significant savings over the life of your mortgage. <a href="https://better.com/content/how-your-credit-score-affects-your-mortgage/">Read more about credit scores and mortgages here.</a></p>

<p>5) The size of your <strong>down payment</strong> can also play a role in your rates (though not as much as your credit score). The exact impact of your down payment percentage depends on your unique financial scenario. We recommend talking to your dedicated Mortgage Expert to figure out how different down payment scenarios might affect your monthly mortgage payment.</p>

<p>6) <strong>You have control over your rate too</strong>. You can “buy” a lower rate by paying a lender more up front in the form of prepaid interest called “<strong>points</strong>.” Or you can take lender “<strong>credits</strong>” to lower your closing costs, in exchange for a higher rate. <em>(While buying a lower rate may seem appealing, keep in mind that depending on how soon you sell or refinance your home, it may not be worth the upfront expense.)</em> <a href="https://better.com/content/no-cost-mortgage/">Learn more about points and credits here.</a></p>

<p>7) Of course, the final factor is the <strong>lender</strong>. Each lender is going to take all of these factors into account and determine the rates they will offer you. They also decide how much they will charge you in points or other lender fees to give you those rates. Be careful – this is where lenders are known to <a href="https://better.com/content/dont-take-the-bait-heres-the-reality-of-refi-rates/">bait and switch</a>.</p>

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<h3 id="findingtheratethatworksforyou">Finding the rate that works for you</h3>

<p>At Better Mortgage, we’ve built tools to help you run the numbers on different scenarios, so that you can easily see a breakdown of monthly payments and closing costs for different rates, terms, and points/credits. You can get started in seconds by checking today’s rates for home <a href="https://better.com/mortgage-rates/purchase"> purchase</a> and <a href="https://better.com/mortgage-rates/refinance"> refinance</a>.</p>

<p>But to get the most accurate rate quotes, here’s what I recommend to customers:</p>

<ol>
<li><a href="https://better.com/start"> Create an account on Better.com</a>  </li>
<li>Enter some property details and basic financial information. Since there are various factors that can go into determining your rate, the more information we have to work with, the better.  </li>
<li>Once you’ve entered your information, use the points and credits tool on our rate table to run the numbers on different scenarios for your situation.  </li>
<li>Create your own <a href="https://better.com/content/a-quick-guide-to-your-loan-estimate/">Loan Estimate</a> for each scenario, so you can compare the exact breakdown of costs for different options. </li>
</ol>

<p>Keep in mind that your Loan Estimate will include all closing costs, including an estimate of required third-party fees (like title, appraisal, recording fees, and taxes). These costs won’t impact your rate, but they may impact the size of your down payment since you’ll need to pay them upfront.</p>

<p>Of course, we’re always here to help guide you. You can get on the phone with a non-commissioned Mortgage Expert like me to talk through your options. <a href="https://better.com/schedule-call?TRACKINGSOURCE=blog_hmrw">Schedule a call today.</a></p>

<h3 id="gettingbetterprices">Getting Better prices</h3>

<p>At Better Mortgage, we’ve streamlined the mortgage process and <a href="https://better.com/content/5-reasons-why-loan-officer-commission-is-bulls-t/">done away with Loan Officer commissions and lender fees</a>, passing the savings to you. So once you have your Loan Estimates from us, feel free to shop around. We’re confident that we can get you the best terms.</p>

<h3 id="readytogetstarted">Ready to get started?</h3>

<p>We want to put you in control of your rates and your mortgage experience, while offering support and transparency along the way. Start exploring your options by checking today’s rates for home <a href="https://better.com/mortgage-rates/purchase"> purchase</a> and <a href="https://better.com/mortgage-rates/refinance"> refinance</a>, <a href="https://better.com/start"> creating an account</a>, and <a href="https://better.com/schedule-call?TRACKINGSOURCE=blog_hmrw">scheduling a call with a Mortgage Expert</a>.</p>

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Whether you’re buying or refinancing a home, mortgage rates can seem confusing. Here’s a quick overview to help you shop rates with confidence.

How mortgage rates work

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[![ Shadowy Image of Modern and White Computer Chair, Desk and a Laptop](https://media.better.com/content/prod/2017/07/blog_improvingyourDTI_headerimg.jpg)](https://better.com/preapprovals/purchase)

<p>When I talk to customers about getting a mortgage, they’re often concerned about their <a href="/content/how-your-credit-score-affects-your-mortgage">credit score</a>, which is an indicator of their ability to pay back loans and can affect the rates they’ll be able to get. While credit scores are certainly important, what they often don’t know is that another number, <a href="/content/what-is-a-good-debt-to-income-ratio">debt-to-income ratio (DTI)</a>, can play an even bigger role in their ability to get a mortgage. In fact, a high DTI is the #1 reason mortgage applications get rejected<sup id="fnref:1"><a href="#fn:1" rel="footnote">1</a></sup>. So what's a DTI, exactly? Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. I’ll get into the specifics of this calculation next.</p>

<p>Most lenders typically offer loans to creditworthy borrowers with DTIs as high as 43-47%. That limit is based on policies by government-backed lenders like Fannie Mae, put in place to protect customers against predatory lending practices. As of July 29th, 2017, we are working with Fannie Mae to offer loans with DTIs of up to 50% for creditworthy borrowers<sup id="fnref:2"><a href="#fn:2" rel="footnote">2</a></sup>. However, <strong>the lower your DTI, the more financing options will be available to you</strong>. Let’s look at what goes into calculating that number.</p>

<p><br></p>

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<h2 id="howdtiiscalculated">How to calculate the debt to income ratio</h2>

<p>On the one hand, the math for [calculating your DTI](https://better.com/content/housing-expense-ratio) is simple – we add up what your monthly debt will be once you have your new home (such as student loans, car loans, credit card bills, and your future mortgage payment) and divide it by your gross monthly income (how much money you earn before taxes).</p>

[![ Debt to Income Ratio = Monthly Debt Payments / Monthly Gross Income x 100](https://media.better.com/content/prod/2017/07/blog_improvingyourDTI_graphics-02.png)](https://better.com/preapprovals/purchase)

<p>The tricky part about calculating DTI is that there can be several moving parts.  </p>

<h3 id="forexample">For example:</h3>

<ul>
<li>If you haven’t found your new home yet, we won’t know your exact mortgage payments, property taxes, or insurance payments, so we’ll have to estimate.</li>
<li>If you already own a home, we’ll need to include both your future and current mortgage payments as debt (unless the purchase of your new home is contingent on the sale of your old home).
<br> <br />
In addition, when we calculate income (the other half of the DTI equation), we use <a href="https://better.com/content/so-youre-wondering-how-much-house-can-you-actually-afford/">conservative calculations</a> because we want to make sure you get a mortgage that’s affordable, now and in the future.  </li>
</ul>

<h3 id="forexample">For example:</h3>

<ul>
<li>If you’re self-employed or compensated by commission or <a href="https://better.com/content/rsu-income/">RSUs</a>, we may not be able to count all 100% of that income, given that these forms of income tend to be less consistent. </li>
<li>If you are <a href="https://better.com/content/self-employed-heres-how-to-get-a-mortgage/">self-employed</a>, it’s typically beneficial to write off your business expenses to lower your tax bill. But those tax deductions may also lower your qualifying income, since underwriters are looking at your net (not gross) income. </li>
<li>If you have rental income from an investment property, we’ll need to see that income on your tax returns (or rental checks if your taxes haven’t been filed yet) and we’ll only be able to use a portion of that income to be conservative. </li>
<li>If you plan on turning your current home into a rental property, you’ll need to have a lease agreement in place for us to consider the potential income. </li>
</ul>

[![ Got More Questions? Our Free Guide Has the Answers. Get the Guide](https://media.better.com/content/prod/2017/10/FTHB_adforblogD.png)](https://better.com/content/the-guide)

<h2 id="wecanhelpgiveyouclarityaboutyourdti">We can help give you clarity about your DTI</h2>

<p>At Better Mortgage, our goal is to give you as much certainty as we can, as soon as we can, about how much you’ll be able to get financing for. </p>

<p>When you get our <a href="https://better.com/preapprovals/purchase">3-minute pre approval</a>, we run a soft credit check (which doesn’t affect your score). This allows Mortgage Experts like me to look at your debts and credit in more detail and get a more accurate picture of your DTI. </p>

<p>If you’re planning on buying soon, we also encourage you to upgrade to our <a href="https://better.com/content/vpal/">verified pre-approval</a>. Our underwriting team will review things like your tax returns, pay stubs, and any other documents specific to your financial situation, so we can tell you exactly how much you are qualified to borrow. This helps ensure there aren’t surprises about your DTI when you do apply for a mortgage. </p>

<h2 id="tipstoconsiderforloweringyourdti">Tips to consider for lowering your DTI</h2>

<p>[Lowering your DTI](https://better.com/content/what-percentage-of-income-should-go-to-mortgage) can have a big impact on the type of [financing you can get](https://better.com/content/how-to-qualify-for-a-mortgage). If you have some flexibility on when you plan on buying, taking time to lower your DTI (and improve your credit score) can save you a lot of money over the life of your loan.</p>

<h4 id="afewdtireductionstrategiestoconsider">A few DTI reduction strategies to consider:</h4>

<ul>
<li>If possible, pay off your car loan before applying for your mortgage.</li>
<li>If you plan on purchasing a car, considering waiting until after you’ve bought your home.</li>
<li>Start paying off your credit cards in full, one by one. (Don't close the cards after you pay them off, as this can hurt your credit score.)</li>
<li>If possible, refinance or consolidate current loans to reduce your monthly payments.</li>
<li>Consider adding a co-borrower with a low DTI to your loan (keep in mind that if they have a low credit score, it could negatively affect your financing options).</li>
<li>If you plan on using rental income, make sure you have lease agreements in place.</li>
<li>If you plan on living with a partner, parent, or roommate in your new home, talk to us about how we might include some of that income in your DTI calculation.</li>
</ul>

<h2 id="readytoexploreyouroptions">Ready to explore your options?</h2>

<p>We can help you understand your DTI and the financing options available to you. Start by getting your <a href="https://better.com/preapprovals/purchase">3-minute pre approval</a>. Then <a href="https://better.com/schedule-call?loanType=purchase&amp;TRACKINGLOCATION=iydtirdwafam&amp;TRACKINGBRANDING=purchase">schedule a call</a> so we go over the numbers with you.</p>

<p><br></p>

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<li class="footnote" id="fn:2"><p><a href="https://www.housingwire.com/articles/40382-fannie-mae-raises-debt-to-income-ratio-to-further-expand-mortgage-lending">https://www.housingwire.com/articles/40382-fannie-mae-raises-debt-to-income-ratio-to-further-expand-mortgage-lending</a> <a href="#fnref:2" title="return to article">↩</a></p></li></ol></div>

Learn how to lower debt to income ratio for mortgage approval. Understand what affects your DTI ratio, why it matters, and how to qualify for better rates.

How to lower debt to income ratio for mortgage approval

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<p><em>Viral Shah (Better Mortgage’s Head of Capital Markets) explains how an adjustable-rate mortgage works.</em></p>

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Choosing a mortgage type is one of the many decisions a homebuyer needs to make – and it’s a big one. After the 2008 housing crisis, many buyers were wary of adjustable rate mortgages (ARMs). But in instances where you’re planning on selling your home within 10 years, [they could be the better option](https://better.com/content/so-youre-considering-an-adjustable-rate-mortgage/).

Here’s a quick overview of what an adjustable rate mortgage is:

<h2>How do ARMs work?</h2>

While traditional fixed rate mortgages have the same rate for the entire life of the loan (typically 15, 20, or 30 years), adjustable rate mortgages (ARMs) are a bit different. ARMs have an initial fixed period where you will pay a fixed interest rate, followed by an adjustable period where the interest rate fluctuates. Current conforming ARMs use an index rate called the Secured Overnight Financing Rate (SOFR) to guide these adjustments. 

<strong>Naming:</strong> (Fixed period in years / number of adjustments per year). For example, *10/6m* means 10 year fixed with adjustments every 6 months after that. 

<strong>Fixed period:</strong> You’ll choose from a 5-year, 7-year, or 10-year fixed period, typically based on how long you expect to live in the house. After the fixed period, the rate adjusts twice per year (every 6 months).

<strong>Adjustable period:</strong> After the fixed period is over, the rate will adjust every 6 months based on the following formula: 30 day average of SOFR (Index) + (Margin). Investors set the value of the margin but it is typically between 2.75% and 3%. Regardless of what value is used, the margin always stays the same, but the value of the SOFR index will vary. The SOFR index is maintained by the New York Federal Reserve and can be accessed directly on the NY Fed website or on sites like the Wall Street Journal and its value changes daily. As of 2/22/2021, the 30-day average SOFR was 0.045%, which would mean your ARM loan interest rate could be .045% (Index) + (Margin) or between 2.795% and 3.045%.

<h2>How much can the rate move?</h2>

ARMs have “caps,” which limit the amount that the rate can increase. This protects you against sharp moves if you move into the adjustable period.

<strong>Initial Adjustment Cap:</strong> The most the total rate can increase by in the first adjustment period. Typically 2% for 5/6m ARMs and 5% for 7/6m or 10/6m ARMs.

<strong>Subsequent Adjustments Cap:</strong> The most the total rate can increase by in subsequent adjustments periods. Typically 1%.

<strong>Lifetime Adjustment Cap:</strong> The most the rate can increase above the initial fixed rate — ever. Typically 5%.

For example: If your initial 5/6m ARM fixed rate was 3%, once the fixed period is over, it can’t increase more than 4% every year, nor can it ever exceed 8% in total.

<h5>Example rates based on the current interest rate environment:</h5>

![Example Rates Based on the Current Rate Interest Environment](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fc8f48b0ce4ac43adbb003487ac4f1a6c)
<p class="legal">This table is for illustrative purposes only.</p>

At Better Mortgage, we recommend considering an ARM only if you’re reasonably certain you’re going to sell your house in 10 years or less: [here’s why](https://better.com/content/so-youre-considering-an-adjustable-rate-mortgage/).

If you’re curious about what ARM rates are like today, take a look at our [Rate Quote Tool](https://better.com/mortgage-rates/purchase). We’re here to help you figure out which option is right for you.

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<p class="legal">This blog is for informational purposes only and should not be used for legal or financial advice.</p>

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While traditional fixed rate mortgages have the same rate for the entire life of the loan (typically 15, 20, or 30 years), adjustable rate mortgages (ARMs) are a bit different.

What is an ARM?

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<p><em>The Loan Estimate is intended to provide a clear and concise summary of the terms and costs associated with any loan. Here’s how to read it with confidence.</em></p>

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<p><br><br> <br />
The Loan Estimate (LE) provides a clear and concise summary of the terms of your loan to help you understand the features, costs and risks associated with your mortgage as required by the Consumer Finance Protection Bureau (CFPB). Before moving forward with any lender, you should be sure to compare and understand your Loan Estimate.  </p>

<h2 id="yourinitialle">Your initial LE</h2>

<p>This is page 2 of sample LE in the CFPB-approved format. Make sure your lender provides an estimate in this format. Anything that looks different is not an official Loan Estimate.</p>

<p><a href="https://better.com/start"><img src="https://media.better.com/content/prod/2016/12/LE-page-2-no-annotation.png"></a> <br />
<em><p style="font-size:1.4rem;">Page 2 of the LE details your loan costs</p></em></p>

<h2 id="tipsforcomparinglesfromdifferentlenders">Tips for comparing LEs from different lenders</h2>

<p>Here are a few things to look out for: </p>

<h4 id="1thirdpartyfeesappearingononelendersleandnotanothers">1. Third-party fees appearing on one lender’s LE and not another’s</h4>

<p>You should raise this with your Mortgage Expert. While the fee amount can vary, the types of third-party fees associated with a loan are fairly constant. One lender may be missing something. </p>

<h4 id="2differencesinloanamountforarefinance">2. Differences in loan amount for a refinance</h4>

<p>A lender may increase your loan amount slightly to create a “<a href="https://better.com/content/no-cost-mortgage/">no closing cost loan</a>”. Borrowing a little more than the payoff on your current loan is one way to offset fees at the closing table, but this is increasing your debt to pay for your closing costs; it does not make them go away.  For an apples-to-apples comparison across lenders, you should get LEs with identical loan amounts.</p>

<h4 id="3promisesofcreditsafterclosethatdonotappearonthele">3. Promises of credits after close that do not appear on the LE</h4>

<p>This is a major red flag. The purpose of the LE is to create transparency and accountability. You lose both by transacting outside of the standard disclosure.</p>

<h4 id="4increasingcostsduringachangeincircumstance">4. Increasing costs during a change in circumstance</h4>

<p>Some lenders may advertise attractive rates and fees for one product, then switch into something less competitive (<a href="https://better.com/content/loan-estimate-101/">bait-and-switch</a>). You should ask about any additional fee and look at the relative competitiveness of the new product by continuing to shop before locking.</p>

<h2 id="abetterway">A Better way</h2>

<p>Better Mortgage is committed to a transparent and efficient mortgage process. Contact us by email (<a href="mailto:hello@better.com">hello@better.com</a>), phone (<a href="tel:888-501-3186">888-501-3186</a>), or chat with us via <a href="https://better.com/">Better.com</a> with any questions about your LE. We are happy to walk you through competing offers and answer any questions. No pressure, no sales — just a fast, easy and transparent process.</p>

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Your loan estimate is a summary of the terms and costs associated with your loan. Learn how to read and understand it with confidence.

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