So you are ready to start thinking about buying a house – congratulations! This is a very exciting time, but sometimes it also feels daunting. One way to conquer these feelings of anticipation is to arrive armed with all the info you need. Here are some of the most asked questions about the mortgage process:
Buying a home will likely be the biggest purchase you’ll ever make. Take a deep breath – think of the first meeting with your mortgage lender as a get-to-know-you. They will ask you some basic questions and establish an idea of your financial health.
Then comes the exciting part – paperwork! Be prepared to provide proof of your employment, your income, your debts, your assets, and an idea of how much you are going to put down on your home.
Getting a prequalification or preapproval before meeting with a lender is a great way to gauge if you’re ready to meet and move forward.
Now that you know it will be easier to know whether to move forward by getting preapproved or prequalified, what exactly do those terms mean?
A prequalification just takes a quick conversation with your lender about income, assets, and down payment. They can then let you know if you are prequalified. However, a preapproval carries a lot more weight as it involves a little more time and paperwork. To get preapproved your lender will need to verify your financial information and submit your loan for preliminary underwriting.
Prequalifying is a good first step, but a preapproval is a green light that you are ready to jump in and start looking for a home – it also will give you a more accurate picture of what you can afford and show a seller that you’re capable of making the purchase.
You’ve been preapproved! Now what?
It is important to consider that just because you are preapproved for a certain amount doesn’t mean you can afford that much house. Buying too high can turn your purchase into a liability instead of an asset. You need to determine this before you begin to meet with your real estate agent.
Keep your monthly mortgage payment expectation realistic and conservative, that way you will have room to cover the additional unexpected costs of homeownership, like repairs and maintenance. Not to mention you can save up for other financial goals such as vehicles and retirement.
So, you’ve decided you’re ready and are ready to start looking for a house. You have determined a budget and gotten a prequalification/preapproval – now you need to decide how much you will be providing as down payment on your new home.
A traditional goal for most homebuyers is to put down 20% of the purchase price on your new home. You can put less down, but your monthly payments will increase as a result. Additionally a lesser payment could results in the need to pay extra insurance on your mortgage known as private mortgage insurance (PMI).
If you choose to put down less than 20% on your mortgage, then the answer will probably be yes. Basically, you want to be at or below 80% loan-to-value (LTV) to avoid mortgage insurance entirely – at least when you’re being financed through Fannie Mae or Freddie Mac. This is another reason it’s beneficial to bring as much to the table for a down payment as possible.
However, with an FHA loan mortgage insurance is unavoidable, regardless of down payment.
Believe it or not, this is one of the most asked mortgage questions. If you have paid off all your debts, it is possible that you may not have a credit score when you meet with your lender.
However, if you do apply for a mortgage without a credit score, you will need to go through a process called manual underwriting. This simply means that you’ll be asked to provide more paperwork for the underwriter to personally review. The loan process may take a bit longer in this case but buying a home without the extra debt is worth it! The trick is to find somewhere that will offer manual underwriter – do a little research before diving in.
Lets just knock both these related questions out at once.
An appraisal is done to determine the true value of the home, which oftentimes is not the same as the asking price. These valuations need to be done by licensed, professional, and experienced experts.
Sometimes you have no choice but to have an appraisal done; lenders want to know that the house is actually worth the amount that you are asking to borrow, as the property will be collateral for the loan.
This is a tricky one – several factors need to be considered when determining this. You’ll need to look at current interest rates, what your new mortgage payment would be, how long you’re planning on staying in your current home, and closing costs.
Some common reasons and justifications for refinancing could be taking advantage or lower interest rates, cashing out on home equity, or converting between a fixed-rate and adjustable-rate mortgages. Be sure to speak with your lender before making any decisions.
There are several areas being covered with your one mortgage payment, areas like mortgage insurance, money towards your principal and interest, taxes, property taxes, and insurance. More money will go to certain areas of course, and depending on how much you own in each area, everyone’s payments will be different.
Congratulations! You’ve made it to the closing table! So… what should you expect?
When you close, that means that the new house (and mortgage) are officially yours. You will sit with those involved in your real estate transaction and sign all the legal documents necessary to give you ownership.
You also will need to be prepared to pay your closing costs and any other payments needed to close the deal. You should receive a Closing Disclosure (CD) that lists out all your expenses and what will be due so there won’t be any surprises.
Be sure to bring your ID and transfer the money needed for the transaction. Keep your lines of communication open with your loan officer in case any questions arise – but you’ve finally made it to the finish line. Welcome home!
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