7 Most-Asked Home Mortgage Questions Answered
If you find the process of getting a mortgage confusing, you are not alone. Nearly a third of US homebuyers don’t understand one or more aspects of getting a home loan, such as the minimum downpayment or the APR. And, not understanding your mortgage term can cost you thousands of dollars over the lifespan of your loan!
Luckily, your mortgage lender is there to answer all of your questions and guide you along the journey of securing the best mortgage for your needs. But don’t forget to ask the ones below!
Which Types of Mortgages Are Available? And Which One Do I Qualify For?
Not all mortgages are created equal and, if you are dealing with an experienced advisor, they will be able to uncover the advantages and drawbacks of each in relation to your situation. For example, conventional 30-year mortgages might be a great option for those homeowners who can comfortably secure a 20% downpayment.
However, if you can’t, you might consider other alternatives, like government-backed VA, FHA, and USDA loans. Each has different pros and cons – and you have the right to learn about the different options available to you!
What Is The Minimum Down Payment Necessary?
For many first-time house buyers, building up a 20% down payment is a significant challenge, which often prevents them from accessing the right deal. However, while putting down 20% of the market value of the property would be ideal, it is not strictly necessary.
For example, if you have a pristine credit score, you can access your desired mortgage with as little as 3% and Private Mortgage Insurance (PMI). Some government-backed don’t require a down-payment or mortgage insurance at all. Additionally, if you already own a home, you can use your equity to secure a second or reverse mortgage.
What Is The Difference Between Interest Rates and APR?
When shopping for the best mortgage rates, you’ll start to have an understanding of the interest rate you are eligible for. These rates are mostly based on your credit score and financial history, and will determine your monthly repayments.
But, to understand how much your loan will actually cost you, you should look at the Annual Percentage Rate (APR), which incorporates all other fees of the loan. Ultimately, once you know what your interest rate will be, you will need to look for the lowest APR.
What Are The Costs Associated With Originating and Prepaying the Loan?
Mortgage lenders earn through the interest charged on your loan. However, they might also create additional profit streams, such as through origination, prepayment, and interest rate lock fees.
Make sure to ask about the costs related to the loan itself, such as closing costs, which can amount to 3-5% of your loan amount and include title search, appraisals, and property taxes.
But also, don’t forget to inquire about the fees related to the lender’s services and ask if you will be charged an extra fee for early repayments.
Your financial situation might change over the lifespan of the loan, and you should be allowed to contribute more towards repaying your loan without facing penalties.
What Documents Should I Produce? And How Does My Credit Score Matter?
The process of applying for a mortgage is highly bureaucratic, and you are likely to be asked for a range of documents, including:
- Bank and asset statements
- Pay stubs
- Verification of employment
- A copy of your earnest money deposit check
- If you are gifted money from your family, a letter specifying the terms of the monetary gift
Your lender will also run a hard credit check to determine the interest rates and loan amount you qualify for. Make sure to build your FICO score beyond the minimum required! This can set you back a few months, but it can offer substantial financial benefits over the lifespan of the loan.
What Should I Expect From The Application Process?
The mortgage application process is different for every homebuyer – and it heavily depends on your lender. Make sure to ask what the timelines for closing might be, whether you are required to sign the paperwork in person, and when you will be subjected to a hard credit check.
Remember that your mortgage can fall through if your income decreases or your credit score takes a hit!
What Does It Mean To Be Pre-Approved? (Tip: Don’t Start Looking For Your Dream Home Before Getting Pre-Approved)
The pre-approval process will tell you a lot about the interest rates you are eligible for and the amount of money you can borrow. When you are getting pre-approved, you will receive a written document that outlines the commitment a lender has made towards you. In turn, this determines how much money you can realistically spend on your future home.