Frequently asked questions
With significant changes to mortgage regulations over the last few years, your options are wider than ever. Small differences in the way you structure your mortgage, and even subtle changes in the way you approach mortgage shopping, can impact the outcome for you, either costing or saving you literally thousands of dollars and years of expense.
For most people, getting top dollar is number one on the list of goals when selling their home, but most feel ill-equipped to achieve this goal. Since market factors can cause large swings, pricing a home is an imperfect science to begin with, and the skill of the person responsible for negotiating can also impact the outcome.
The vast majority of Buyers put themselves at an overwhelming disadvantage. If you take a look at the process from the Seller’s perspective, the point becomes clear. If you were selling your home and were faced with multiple offers, clearly you would favor the offer which had a Certificate showing Financing Approval over other offers which were Conditional on Financing.
Not necessarily, but it will certainly help. It is possible to get a conventional mortgage with a FICO credit score as low as 620, and you can obtain a higher-cost FHA mortgage with a score in the 500s. However, be aware that the lower your score, the higher your interest rate will be. You can find a current list of mortgage rates broken down by credit score here. On a $250,000 mortgage, the difference between a 620 credit score and an “excellent” 760 adds up to more than $86,000 in interest savings over the life of a 30-year loan.
The short answer is that you can get a conventional mortgage with as little as 3% down, an FHA loan with 3.5% down, and a VA or USDA loan with no money down at all. However, with a conventional or FHA loan, you’ll have to pay private mortgage insurance, aka PMI, if your down payment is less than 20% of the home’s sale price. (Those payments won’t be a permanent fixture in your monthly payments, however. Once the loan-to-value ratio on your mortgage falls to 80%, you can ask your lender to drop them. And even without your request, lenders are required to cancel PMI when the loan-to-value ratio drops to 78%.)
The term “closing costs” refer to all of the charges you’ll need to pay before your loan is completed. This can include origination fees, title insurance, prepaid escrows, and more. Closing costs can vary significantly, but generally, expect to pay around 2% to 3% of the home’s price in closing costs.
When interest rates are historically low, like they are now, a fixed-rate mortgage makes good financial sense. Not surprisingly, the vast majority of mortgages originated today are fixed-rate. In fact, only about 3% of buyers are choosing adjustable-rate loans.
That said, while a fixed-rate mortgage is the best choice for the majority of homebuyers, there are some circumstances where an ARM may be better. For example, if you expect to sell the house before the fixed-interest period ends and the rate starts to float, an ARM could end up saving you thousands of dollars. Or, during periods of falling interest rates, an ARM can allow you to get a low initial rate, and will save you money later if rates drop further.
Your lender may ask for many different items, but in general, be prepared to show all of the following:
- Income verification (Last two years’ tax returns, W-2s, 1099s, and your last few pay stubs)
- Drivers’ license and Social Security card (or alternative ID)
- Bank statements
- Proof of funds to close (and an explanation of where they came from, if it’s not obvious)
- If some or all of your down payment is coming from a gift, you will need gift letter from the source of the funds that confirm they are gift, not a loan.
A pre-qualification is a basic review of your finances to determine if you would qualify for a mortgage. In general, a pre-qualification is based on unverified information you provide and does not include a credit check or any documentation, and is therefore not a firm guarantee of a loan.
Unlike a pre-qualification, a pre-approval can be a highly useful tool in the homebuying process. It’s essentially the same thing as applying for a mortgage, just without a specific home attached to it. As part of a pre-approval, a lender will check your credit, verify your income and employment, and commit to lending a certain amount of money. A pre-approval can show sellers that you’re serious about buying a home, and that you’re likely to be able to follow through on a bid, and close on their property.
When you obtain a mortgage, you’ll probably be asked to put money into an escrow account to guarantee the lender that the ongoing expenses of owning the property will be handled — specifically taxes and insurance. You’ll pay a lump sum into the escrow account at closing (also known as your “prepaids”), and add to it further with each of your monthly mortgage payments.
Mortgages tend to take at least 30 days to originate, and many first-timers don’t expect this much of a waiting period. The short answer is that a lot of things need to happen between you submitting your mortgage application and you taking ownership of your home.
Just to name a few: You’ll need to gather documentation for your lender (and they’ll always come back and ask for more, believe me); you’ll want to schedule and complete a home inspection; the seller may need time to complete repairs; and the loan needs to make its way through underwriting. It’s a lengthy process. I’ve bought three homes in my life, and I can tell you firsthand that it’s a lot to get done, even within a 30-day window.
Depending on your situation, there are typically three or four parts of your mortgage payment:
- Principal: Repayment of your outstanding balance.
- Interest: Payment of the interest charged on the outstanding balance.
- Taxes: See question 12. One-twelfth of your expected annual property taxes will be included in your mortgage payment, and deposited into your escrow account.
- Insurance: This includes homeowner’s insurance, as well as any other hazard insurances you’re required to have, such as flood or windstorm. If you put less than 20% down on your loan, this can also include private mortgage insurance.
Based on these four items, your mortgage payments are sometimes referred to as PITI.
Probably. Even with a fixed-rate loan, your payment is likely to change over time. The reason? Your property taxes and insurance expenses, upon which the escrow portion of your payment is based, tend to fluctuate. If they rise, it may be necessary for your lender to ask for a higher escrow payment.