When buying a home, particularly if you're a first-time buyer, the home loan process can seem daunting. There are many things to consider, and if you haven't got previous experience, it could get confusing.
We help you answer some of the most common mortgage questions.
How Much Down Payment Will You Need?
While it was traditionally a requirement to have a 20% down payment, that is no longer the case. In fact, if you qualify for the VA loans or USDA loans programs, you could buy a house with zero down. It is a good idea to save money for a downpayment regardless of how much you are putting down.
FHA mortgage loans allow you to buy with only a 3.5% down payment, and even some conventional loans have a minimum of 3% down. However, there are some advantages to finding a larger down payment, like lower interest rates and no requirement for mortgage insurance.
You can use your 401K as a downpayment. Be sure to consult your tax advisor about using it to understand any tax ramifications.
Do You Need Good Credit to Get a Mortgage?
There are benefits to having a better credit score when applying for a mortgage. But even if your number isn't as high as you would like, there are still options.
If your credit score is under 600, you can still get a mortgage, but you'll have more options and better terms if your score is over 620. The higher your credit score is, the less interest you are likely to pay on the loan. This could be a difference of many tens of thousands of dollars over the loan term.
Before you begin the mortgage process, you should try to do everything you can to increase your credit score. There are ways a buyer will inadvertently lower their credit score such as missing loan payments and consolidating debt.
How Much Will Closing Costs Be?
Closing costs are made up of the various fees involved in buying the home. Buyers can anticipate buyer costs when buying a home that includes loan origination fees, title insurance, and escrow fees.
You'll typically expect to pay between 2% and 3% of the home purchase price in closing costs. Buyers need to factor in the expense of closing costs. This will need to be paid on the closing date, normally by either bank transfer or cashier’s check.
Should You Choose a Fixed-Rate or Adjustable-Rate Home Loan?
A fixed-rate mortgage will ensure your interest rate stays the same throughout the loan term. An adjustable-rate mortgage can be a better idea if you don't expect to own the home for too long, or if you expect interest rates to go down in the future.
If you expect to own the home for a long time, a fixed-rate mortgage will normally be a safer option.
Should You Choose a 15-Year or 30-Year Mortgage?
If you are paying back your home loan over a shorter period, it will mean you end up paying less interest overall. This will save you many thousands of dollars, but it does mean your monthly payments will be a lot higher.
If you can't afford the monthly payments on a 15-year mortgage, you might find a lender that offers 20 or 25-year terms. This will make the monthly payments more affordable while helping keep interest payments to the minimum.
Is a Mortgage Preapproval and a Prequalification the Same Thing?
While these terms can be easily confused, there is quite a difference between them. Prequalification for a mortgage is a very basic and quick review of your finances. It doesn't guarantee that you will get the mortgage you need to buy the home.
Mortgage preapproval is a more thorough look at your finances and is closer to what will happen when you finally apply for the home loan. You can still be denied a loan even when you are preapproved if your situation changes, however. You also need a preapproval letter to show that you are a serious potential buyer.
How Long Does it Take to Get a Mortgage?
Typically it takes between 4 and 5 weeks to have your mortgage approved. However, this can take longer if there is more demand, and there are many things that can slow down the process as well.
Do I Need an Appraisal?
You will likely need an appraisal of the property that you are purchasing. A home appraisal is done to determine the value of the home. The home appraiser will measure the home to calculate the square footage. They consider the features of the home that affects value. Appraisals will also look at comparable sales to ensure the home will appraise at the sales price on the contract.
What Information Does the Lender Require?
You will need to provide information about earnings, like pay stubs and tax returns. They will also check how much debt you have and check your credit history.
What is Included in Your Monthly Mortgage Payment?
Your mortgage payments will include paying down the balance you owe and paying interest. Also included are annual property taxes and insurance payments, these will normally go into escrow to be paid when they are due each year. You do not have to have the taxes and insurance impounded, this is a topic to be discussed with your lender.
Do You Need an Escrow Account?
There are annual costs when owning a home, like property taxes and insurance. Your lender will pay these on your behalf, and they will need you to pay into an escrow account so that the money is available when these are due. Some lenders will let you take care of this yourself, but often an escrow account will be required.
Buying a home can be a complicated process and you may have even more real estate questions during the home buying process. Getting a loan is only part of the equation of buying a house. Being prepared with having your down payment saved up and ensuring that you maintain your credit score will go a long way in being able to obtain a loan.
About the Author
Top Newport Beach Realtor Sharon Paxson has written the real estate article “Top 11 Mortgage Questions to Ask Before Buying a Home”. With experience since 2005 representing sellers, buyers, and landlords with their real estate transactions, we welcome the opportunity to share our knowledge and expertise and guide you through the home buying or selling process.