Mortgage basics, explained simply

A pre-qualification is a quick estimate based on what you tell a lender. It's a fine starting point, but sellers don't give it much weight.

A pre-approval means a lender has pulled your credit and reviewed documents like pay stubs, tax returns and bank statements. It tells you what you can really afford and shows sellers your offer is solid.

If you're going to shop seriously in the next few months, get pre-approved first. It saves you from falling for a home you can't finance and makes your offer stronger.

Private mortgage insurance (PMI) is added to most conventional loans when you put down less than 20%. It protects the lender, and it's the reason you can buy without waiting years to save a full 20%.

On a conventional loan, you can ask to remove PMI once your balance reaches 80% of the home's original value, and it drops off automatically at 78%. Rising home values can also get you there sooner through a new appraisal or a refinance.

FHA loans work differently. Their mortgage insurance often lasts for the life of the loan unless you put 10% or more down, which is why many FHA borrowers refinance into conventional later.

Most lenders average the net income from your last two years of tax returns. If this year is lower than last year, they may use only the lower number.

Some expenses on your return can be added back, such as depreciation, depletion and certain one-time costs. A lender who knows business returns can often find income another lender missed.

If your returns still don't tell the full story, bank statement, 1099 and P&L loans let you qualify on your actual cash flow instead.

Closing costs are the fees to finalize your loan and transfer the home. They typically run between 2% and 5% of the loan amount.

They include lender fees, the appraisal, title insurance, recording fees, and prepaid items like property taxes, homeowners insurance and interest.

You can sometimes lower what you pay at closing with seller concessions or lender credits. You'll see every cost on your Loan Estimate before you commit.

Lenders look at your debt-to-income ratio (DTI): your monthly debts, including the new house payment, divided by your gross monthly income. Many loans allow a DTI in the mid-40s or higher with strong credit or savings.

What a lender will approve and what feels comfortable aren't always the same. Pick a monthly payment you can live with, then work backward to a price.

Try the payment calculator to test different prices, then get pre-approved to see your real number.