Financial Basics for Home Lending

Get to know a few key elements involved in buying a home, or refinancing.

Buying a home is likely one of the biggest purchases of your life, and as expected, there are many factors involved in the process. Let’s take a closer look at some of the basics of what’s involved:

Credit Score Basics

Your score could have a big impact on your financial future.

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When you buy or refinance, your credit score is one of the first things a lender looks at. It helps them determine if you qualify for a loan, and what interest rate they can offer you.

Your credit score reflects how reliable you are as a borrower, and is determined by your track record of borrowing and repaying banks, credit card companies and other lenders. Factors include:

  • Length of Credit History – The longer you’ve been borrowing, the better.
  • Amounts Owed – Having too much outstanding debt could adversely impact your score.
  • Payment History – Lenders want to see that you pay regularly and pay on time. Even one missed or late payment could affect your score.
  • New Credit – If you’ve recently opened new credit card accounts, lines or loans, it may have a negative effect on your credit score.
  • Types of Credit Used – Lenders want to know what kind of credit you’re already using—standard credit cards, store credit cards, student and car loans, etc.

Keep track of your score.

To get a handle on your credit history and score, you can order one free credit report per year from annualcreditreport.com and buy a copy of your FICO score from MyFICO.com FICO scores range from 300 to 850, and anything above 680 is considered good. Excellent scores, usually above 740, can help qualify you to get the best rates.

Find areas of improvement.

If your credit score isn’t what you’d like it to be, there are ways to improve it. Look at the itemized report that comes with your credit score and if there are any negatives, start correcting them as soon as possible.

  • If there are any misreported items in your report, gather supporting documents and dispute them.
  • Contact creditors and negotiate payment plans for any past due accounts.
  • Pay down balances when possible and avoid new charges
  • Pay all of your bills on time. Pay at least the monthly minimum, because a late payment for a credit card or bill gets reported to credit agencies. 
  • Carefully balance your checking account to avoid bouncing checks.

The bottom line.

You should do what you can to improve your credit score before you apply for a mortgage or refinance. Even a small increase in FICO score could translate into a lower rate and big savings over the life of your loan.

Factors That Determine Your Rate

Getting a lower mortgage rate could save you thousands or tens of thousands of dollars over the life of your loan.

When you begin considering a home purchase or refinance, start keeping an eye on rates. They tend to fluctuate based on federal interest rates, bond prices, and what’s going on in the housing market. 

Different loan types and terms have different rates, so be sure to investigate all your options. Shorter loan terms typically mean lower rates. And you may be able to pay points in order to get a lower interest rate.

If you’re considering a purchase or a refinance, make sure you’re in a financial position to get the best possible rate. Lenders look at your risk profile to determine the exact refinancing rate they will offer you, and it takes an excellent score—usually 740 and above—to get the best possible rate. However, we have many rate options appropriate for those with scores starting at 620.

To learn more about the options and find out what rates you may qualify for, contact a PNC Mortgage loan officer.

Home Buying:

Lenders start with the par rate, then look at your risk profile to determine what rate they will offer you, which is usually based on a combination of the following factors:

  • Credit score – This is the first and biggest factor a lender considers. The better your credit score, the better rate you can get. It takes an excellent score—usually 740 and above—to get the best possible rate.
  • Down Payment – The more money you have to put down, the less risk a lender will associate with approving a loan for you, which could qualify you for a lower rate.
  • Loan terms – In general, a shorter loan term will let you secure a lower interest rate.
  • Loan to Value Ratio (LTV) – This is the difference between the loan amount you are requesting and the appraised value of the home you’re purchasing. The higher the LTV, the higher the rate.
  • Points – Lenders allow you to pay points in order to get a lower interest rate. Typically, each point represents 1% of the loan amount.

Refinancing:

Just like when you purchased your home, lenders look at your risk profile to determine the exact refinancing rate they will offer you—usually based on a combination of the following factors:

  • Credit score – Your credit score is the first and biggest factor a lender considers when determining your rate. It takes an excellent score—usually 740 and above—to get the best possible rate.
  • Loan to Value Ratio (LTV) – This is the difference between the loan amount you are requesting and the appraised value of your home. The higher the LTV, the higher the rate.
  • Points – You may be able to pay points in order to get a lower interest rate. A point represents 1% of the loan amount.

Escrow Basics

Your Annual Escrow Statement

An Escrow Account on your loan allows PNC Mortgage to make payments for certain bills related to your property, such as estate property taxes, homeowners insurance and mortgage insurance. Home buyers are generally required to have an escrow account until a certain loan to value ratio is met.

Every year you’ll receive an Annual Escrow Account Disclosure Statement that details the activity in the account for the year, as well as a projection for the next year’s payments:

Monthly Payments

To get your initial monthly payment, estimates of your tax and insurance bills are totaled and divided by 12. In following years, the previous year’s payments are totaled and divided by 12 to calculate your new monthly escrow payment amount for the next year.

Shortage & Surplus

If this figure is higher than last year’s monthly payment amount, your escrow account will have a shortage. If this year’s monthly payment amount is lower than last year’s, your account will have a surplus.

Shortages and surpluses may also be caused by increases or decreases in property taxes and or homeowner’s insurance. If this is the case, please contact your local tax office or your insurance agent for further assistance.

In the case of a shortage, the difference between your previous and current monthly payments will be divided by 12 and added to your monthly balance. You can also choose to pay the shortage up front in a lump sum. To do this, contact PNC Mortgage Customer Service.

In the case of a surplus, the difference between your previous and current monthly payments will be returned to you if your account is current at the time of the escrow analysis.  If the surplus amount is $50 or more, a check for the surplus amount will be mailed to you. If the surplus amount is less than $50, either we’ll mail you a check for the surplus amount or we’ll deduct it from your monthly payments.

Reading Your Annual Statement

Your annual Escrow Analysis Statement contains all the information you need to understand your previous and projected mortgage payments. We break your Statement into three sections to make it easy to keep up with your mortgage.

Making Payments

Having the flexibility to make your monthly payments on your terms is important. That’s why we offer a variety of payment options to consider. It’s easy to get started – check out our Payment Options page.

Glossary:

Escrow Account – An account held by the lender to which the borrower pays monthly installments as part of the monthly mortgage payment, to cover annual expenses such as taxes and/or homeowners insurance. The lender then disburses escrow account funds on behalf of the borrower when they become due. Also describes a transaction where a third-party acts as the agent for seller and buyer, or for borrower and lender, in handling legal documents and disbursement of funds.

Escrow Analysis – The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.

Escrow Overage or Shortage – The difference, determined by an escrow analysis, between escrow funds on deposit and escrow funds required to make a payment when it becomes due.

Escrow Payment – That portion of a mortgagor's monthly payments held by a lender or servicer to pay taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also called impounds or reserves in some states.

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Need more information?

Our Home Lending Education Center can help give you a complete picture of your home loan.

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