One of the most important parts to buying a home is securing financing, aka obtaining a mortgage. A mortgage is a loan that a bank or lender gives a potential buyer to help purchase a new home. Going into the process with an understanding of the most frequently asked questions regarding mortgages can greatly reduce the confusion that comes with obtaining a mortgage.
1. How do I start the process?
The first step to getting a mortgage is to find a mortgage lender or bank. You can do that by doing some research online & asking friends or family for recommendations. It's suggested that when you are looking for a lender, you discuss options with more than one, just so you can ensure you're comfortable with your decision.
Here at Starr Real Estate, we recommend our friends at Ruoff Home Mortgage as a great starting place. They have tons of useful information on their website and we've had a lot of buyers satisfied with the service they've received through Ruoff.
2. What documentation is required?
Although the documentation required to get a mortgage will vary from buyer to buyer, the most common documentation you will need is: ss card, drivers license, pay stubs, past two years w-2's, bank statements, and asset statements (ie: savings acct, CD's, 401(k)s & IRAs). Your mortgage lender will advise you on the exact documents you will need.
3. What is the difference between a pre-qualification & a pre-approval?
Many buyers believe that a pre-qualification is the same as a pre-approval and that is actually the furthest from the truth. To prequalify you for a mortgage, a lender runs a quick check of your income and assets. Many real estate brokers and home sellers will require you to have this done before showing you a home or considering your offer.
A pre-qualification doesn't necessarily mean the bank is ready to hand over a loan to you, but it is a great start. Following the pre-qualification, will be the mortgage pre-approval. Getting pre-approved is a lengthier process, where the lender take a deep dive into your financial and credit history. The lender will also want to take a look at your debt and see how timely you are at making payments. If you have a lot of debt, or have not been sending in your payments regularly, you may want to improve those situations before you go mortgage hunting- this will improve your credit score & help you secure a loan rate & terms.
Pre-approval is better than a mortgage pre-qualification for these important reasons: it helps beat out competition in multiple offer scenario & gives "peace of mind" to a seller when submitting an offer that the mortgage has already been pre-approved for.
4. Which type of mortgage is best for me?
There are many different types of mortgages that are available for prospective home buyers and it's important to understand which type of mortgage is best for you prior to signing on the dotted line. Here are 3 of the most popular mortgages that are available for home buyers:
FHA allows a buyer to purchase a home with a minimal 3.5% down payment, and the requirements are fairly lenient. It's not uncommon for borrowers with a credit score of 600-620 (and sometimes as low as 580) to get approved for an FHA mortgage. If your credit score falls between 500 and 579, you can still get an FHA loan provided you can make a 10% down payment.
One of the biggest perks to obtaining a conventional mortgage is the ability to remove mortgage insurance*, which cannot be removed with FHA for the entire life of the loan. Another advantage is sellers will traditionally see pre-approved conventional buyers as stronger than those with FHA or VA pre-approvals; mainly because of the guidelines for conventional being more strict.
*If your down payment is less than 20% of the home value, you'll need to pay mortgage insurance on top of your monthly mortgage payments. Once you've paid the mortgage balance down so that you have at least 20% equity in your home, you may request cancelling mortgage insurance (unless u have an FHA loan) and by law, your lender must remove the mortgage insurance when the balance falls to 78% of the home's appraised value when you bought it.
One of the primary reasons why a Veteran buyer obtains a VA loan is because the buyer is able to finance 100% of the homes appraised value (meaning $0 down payment required). VA loans allow a buyer to receive seller concessions to help cover the costs associated with buying a home.
5. Are there mortgages or programs available for a First Time Home Buyer?
There are actually many lenders who offer some great programs for first time home buyers. Your lender can let you know of any programs or mortgages available since they can vary from City to City. Here in Indiana, first time home buyers can seek help from the IHCDA (Indiana Housing and Community Development Authority) who offers mortgage programs for qualified first time home buyers. PS. You're considered a first time buyer if you have not owned your primary residence in the last 3 years!
Check out this article for TONS of information about Indiana's First-Time Home Buyer Programs (as of 2019): https://www.nerdwallet.com/blog/mortgages/indiana-first-time-home-buyer-programs/
6. How much money do I need to buy a home?
The best answer is, it depends. The amount needed for a down payment will vary from one mortgage product to another. In addition to the down payment, you also need to consider costs for appraisal, home inspections, and other costs such as; mortgage process fee, real estate attorney fee, underwriting fee, bank attorney fee. Your mortgage lender should provide you a breakdown of the lender costs and if you are using a real estate professional, he or she can give you a general idea on how much you can expect to spend on the miscellaneous fees.
7. How long does it take to get a mortgage?
The amount of time it takes for a mortgage to get approved and financed will vary from lender to lender, so it's important to keep this in mind when you're shopping around for mortgages. A top mortgage lender should be able to get a mortgage financed within 30-45 days from application.
It's important to stay in constant contact with the lender to ensure you are getting requested documentation to them ASAP. If a buyer doesn't cooperate in getting the required doc's in a timely manner, it could end up being the reason a closing is delayed, or even worse, cancelled.
8. What's the difference between a fixed-rate and an adjustable-rate mortgage?
With a fixed-rate mortgage, you agree to make payments at a set interest rate for the life of the loan. With an adjustable-rate mortgage, as the name suggests, the rate fluctuates. Usually, you pay a low introductory rate for five or seven years, and after that, the rate, pegged to an index like the prime rate, can rise (or dip) every year.
Lenders offer both rates on loans that are 15- or 30-year terms. Compared to the traditional 30-year mortgage, a 15-year home loan has higher monthly payments, but you’ll end up paying less in interest over the life of the loan. If you’re not planning to be in the home for a very long, it’s probably not worth the higher monthly payments for a 15-year term. But if you’re planning on staying in the home for a long time, a 15-year mortgage could be a better option if you can afford the bigger payments.
9. What is a bank appraisal?
A bank appraisal can easily be defined as an unbiased professional opinion of a homes value. Anytime a buyer is obtaining a mortgage to purchase a home, the lender is going to require a bank appraisal be completed. This is not to be confused with a home inspection, which is a very detailed inspection of a property.
The most common bank appraisal method is using the comparable property approach. This is when an appraiser will look for at least a minimum of 3 recent sales of comparable properties that have sold in the past 12 months. The appraiser will make adjustments to attempt to make the subject property as close to the comparable properties as they can. Another appraisal method that an appraiser will sometimes use is the cost per square foot approach.
It’s important to understand that there can be problems with a bank appraisal which can stop a home purchase. There are many appraisal issues that are common, such as a home value coming in lower than the sale price or the bank appraiser requiring repairs to be completed prior to the financing being approved.
Check out this article to read the whole list of common issues that result from bank appraisals: https://www.rochesterrealestateblog.com/common-issues-with-a-bank-appraisal-in-real-estate/
10. How much home can I afford?
Bank actuaries take into account a number of factors, including your debt-to-income ratio and monthly debt payments. But one thing that may not figure as prominently in their calculations as it should is your actual cash flow. So even if you qualify for a hefty enough loan to buy your dream home, you may not truly be able to afford it. And biting off more than you can chew can lead to foreclosure, of course, and seriously harm to your financial future.
Check out this calculator to help you figure out how much home you can actually afford: https://smartasset.com/mortgage/how-much-house-can-i-afford