9 answers to your burning mortgage questions – Forbes Advisor
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It’s easier than ever to apply for and get approved for a mortgage, especially for qualified borrowers, and in some cases you can almost complete the the whole process online.
But the mortgage process is still much more complex than getting an auto or personal loan due to the size of the transaction and the close scrutiny of your financial records.
Here are nine of the most frequently asked questions by potential home buyers about the mortgage process, along with answers that will help you navigate the biggest purchase you are likely to ever make.
1. When should I start the approval process?
When you start the process depends on when you want to buy a home.
If you are ready to buy a home now then you will want to get pre-approved for a mortgage at least one lender. This will give you an accurate picture of what you can afford and show the seller that you are able to make the purchase.
But if you’re months or weeks away from serious home shopping, get your credit report from all three credit bureaus first, which is free via annualcreditreport.com– and make sure the information is correct. Also check your credit score (available from many financial institutions) and see if it can be improved before you apply.
It is easier to get pre-qualification for a mortgage, but it doesn’t help you as much as a pre-approval. Prequalification is a quick determination by the lender that you should be able to qualify for a loan based on a discussion with the lender and a check of your credit score.
With the pre-approval, the lender will review your financial details, such as your credit report, income, assets, and tax returns. Once you are pre-approved for a loan, the lender can send you a letter confirming it. This letter is vital in the home buying process because it shows the seller that you can actually follow through on the offer you made on the home.
2. What type of mortgage should I get?
There are several types of mortgage—From 30-year fixed-rate conventional loans to government-guaranteed loans — and it’s important to find the one that’s right for you.
Most buyers get a conventional loan with a fixed interest rate, usually for 15 or 30 years. There are conventional loans that allow you to provide a small down payment – 3% or less – but you will have to pay private mortgage insurance (PMI) if you put less than 20%.
If you buy a house worth $ 500,000 or more, your loan could fall into the jumbo loan Category. These loans often require a larger down payment, more assets, and higher income.
Also consider government guaranteed loans, which can make it easier to buy a home if you don’t have a high credit score and / or a lot for a down payment, including:
- VA loans. Veterans probably don’t have to make a down payment or pay the PMI.
- FHA loans. This type of loan is ideal if you have a low credit score and cannot make a large down payment; you will have to pay FHA mortgage insurance.
- USDA loans. These are the best if you have a low credit score and want to buy a house in a rural area.
3. Can you pay a deposit less than 20% of the purchase price?
Although a 20% advance payment on your mortgage is a traditional goal for home buyers, you can deposit a smaller amount, but you will likely be required to pay an additional payment each month.
Most conventional loans will allow a down payment of less than 20% but will charge mortgage insurance, which could be around 1% of the value of your loan. You can take the PMI out of your monthly payment once you have 20% equity in your home, but it can take years to get there.
The benefits of a 20% down payment are not limited to avoiding PMI. It also allows you to lower your total monthly payment, making it easier pay off your mortgage faster.
4. Why is a credit score important?
A credit score is an overview of your credit history that can determine if you qualify for the best interest rate or any mortgage, for that matter.
A credit score is a top-notch analysis of your credit history, which includes how much you owe, whether you are making payments on time, and any bankruptcy or collection actions you have had in the past.
You will find out how important your credit score is during the pre-approval process, as you might be disappointed that your offered rate is higher than the “preferred rate” you saw online. If you have a credit score of 680, for example, you probably won’t get the same rate as someone with a 780 score, which is considered one of the best credit scores. This difference in interest rates, even if it’s only a quarter of a point of interest, can accumulate over time.
Also remember that there is no single credit score. Mortgage lenders rely on a version of the FICO score that is likely different from what you see through free online services or your credit card companies. These scores can be newer versions of FICO or come from another scoring service, such as VantageScore.
5. How can I get the lowest interest rate?
The best way to guarantee the lowest mortgage rate is to have a high credit rating. As long as you have a score of 760 or higher, you can usually get the best rate available.
But you’ll also want to compare rates with lenders like:
- Conventional banks. You might want to start at a bank you have a relationship with, such as a checking account or savings account. However, there is no guarantee that their rates will be better than those of a lender who does not know you.
- Credit unions. You may be able to join a credit union and get its membership rates, as many of them have expanded their membership requirements in recent years and have increased their online presence.
- Online lenders. Some of the largest mortgage lenders in the country are online only and actively research lending business offering lower rates.
- Mortgage brokers. Mortgage brokers will review offers from multiple lenders and provide you with what they consider to be the best deal for you.
Once you’ve chosen a lender, make sure lock in your rate and give yourself plenty of time to complete the purchase before the rate lock-in expires.
6. How can I limit my mortgage costs?
If the interest rates are basically the same with two or more lenders, take a look at the application fees, underwriting fees, and other fees that might be charged. By comparing the fees, see if you can negotiate between the lenders. For example, you can try to match the lender with the best interest rate and the lowest total fees. A quick way to compare lenders this way is to look at their interest rate versus annual percentage rate (APR).
7. Do I have to pay points on my mortgage?
Mortgage points are an additional cost on your shutdown that might be worth it if you stay in your home long enough.
There are two types of points: points of call and points of origin.
Discount points are optional and earn a lower interest rate. For example, you might be able to reduce your mortgage rate by a quarter of a percentage point if you pay about 1% of your total interest up front. It may take several years to offset the initial cost, but the lower interest rate could be worth it in the long run.
Points of origin are required by the lender for you to complete the loan, but the cost can be built into the loan and paid off over time. This cost can be negotiated when you compare closing costs between potential lenders.
8. Could my mortgage fail?
Just because you’ve been pre-approved doesn’t mean your mortgage is secured at closing. Several situations can complicate your loan process, some beyond your control, others self-inflicted:
- Lower income. If you lose your job, are put on leave, or your pay is reduced, your loan could be in jeopardy. You will need to notify your lender as it is very likely that you will be asked to sign documents just before or at the close verifying the income you indicated at the time of application.
- Lower credit score. If you file for bankruptcy, have an account in collection, or even miss credit card payments, your credit rating could drop enough to affect your interest rate and overall creditworthiness.
- Change in debt level. It is not a good idea to take out a loan, such as a car loan or personal loan, during the mortgage process, as it will affect your debt to income ratio and make it less likely that you will be able to pay off your mortgage.
- Problem of appreciation. If the Evaluation for the home you want to buy is less than the offered purchase price, your lender might withdraw the mortgage because the value of the home will not cover the loan amount.
9. How does a fence work?
The closing is the culmination of the mortgage loan process. In the end, you will become the owner of your home. Closure requirements vary by state. As a buyer, you will likely need to:
- Bring identification, such as a driver’s license
- Be prepared to sign a stack of documents, as a notary or your lawyer will explain to you what each document means
- Transfer the money needed for the transaction, such as your down payment
Preparing as much as possible, comparing rates and fees, and keeping strong lines of communication open with your lender are all steps that can make your mortgage process as smooth as possible.