Are you in the market for your very first home? If so, you may have a lot of questions! Buying a home can be a daunting process, but it doesn’t have to be. In this blog post, we’ve pulled the top FAQs for first time home buyers. We’ll cover topics such as mortgages, inspections, and closing costs. So if you’re ready to take the plunge into homeownership, read on!
How Does a Mortgage Work?
A mortgage is essentially a secured loan that is used to buy a home. Under the agreement between you and the lender, the lender has the right to seize your home if you don’t repay the money you’ve borrowed. For those who already own a home, a mortgage can also be used to borrow money against the value of that property.
What Will My Mortgage Cover?
Most loans have 4 parts:
- Principal: the repayment of the amount you actually borrowed
- Interest: payment to the lender for the money you’ve borrowed
- Homeowners Insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders, and
- Property Taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year
Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you’ll pay far more in interest than you will in principal – sometimes two or three times more! Because of the way loans are structured, in the first years you’ll be paying mostly interest in your monthly payments. In the final years, you’ll be paying mostly principal.
How Long Does It Take To Get a Mortgage?
The entire mortgage process — from preapproval to getting the actual loan — can take between three to six weeks to complete when the market is stable. During peak months when the best mortgage lenders receive a higher volume of applications, the mortgage process can take longer. The mortgage process has several parts, and the process can be slowed even further if the lender uncovers any financial issues during its review.
What Is a Good Mortgage Rate?
Currently, interest rates for a 30-year fixed-rate mortgage are up 1.25 points from March 2021 at 4.42% (as of March 24, 2022). The 15-year fixed-rate mortgage and the 5/1-year adjustable-rate mortgage are also rising, at 3.63% and 3.36% (as of March 24, 2022), respectively. Mortgage rates are constantly changing. Yet with the recent Fed hike in the prime rate (March 2022), they are currently trending upward. If you want an idea as to whether current mortgage rates are considered good, visit Freddie Mac to compare current and past rates.
Although mortgage rates are at relatively low levels compared to previous decades, these aren’t the exact interest rates you would receive as a borrower. Although mortgage rates loosely track the benchmark 10-year Treasury note, lenders also consider credit risk and prepayment risk in their loan pricing decisions, as well as their expectations for future inflation and interest rates. The difference between the higher rates you receive as a borrower and the benchmark 10-year Treasury note is known as a spread.
What Do You Need to Qualify for a Mortgage Loan?
When you’re ready to apply for a mortgage, a lender will require certain information and documentation to determine whether you qualify for a loan.
The exact information required may vary from one lender to another. But according to the Department of Housing and Urban Development, you should have the following information and documentation when you visit with your lender:
- Social Security numbers for those applying for the loan
- Six months’ worth of checking and savings account statements
- Evidence of any other assets, such as stocks and bonds
- A recent pay stub for each applicant detailing your earnings
- A list of all credit card accounts and how much you owe each month
- A list of all accounts and balances due on outstanding loans, such as car loans
- Copies of income statements for the last two years
- The name and address of someone who can verify your employment
What Credit Score Will I Need to Get a Mortgage Loan?
The minimum credit score you will need in order to get a mortgage loan depends on the lender, the type of loan, and the state in which you’re purchasing the home. For example, to qualify for an FHA loan, you need a minimum credit score of 500. Your credit score will likely need to be higher to qualify for a conventional loan.
In general, the higher your credit score, the better the rates you will receive. Those with credit scores in the mid- to higher-700s will see the best rates.
What Is a Debt-To-Income Ratio?
Your debt-to-income ratio measures how much of your monthly gross income goes toward repaying your debts. This percentage is one way lenders judge your ability to repay the mortgage loan. To calculate your debt-to-income ratio, divide your total monthly debt payments by your gross monthly income.
For example, say you have a mortgage payment of $1,300 a month, a $200 car payment, and you pay another $300 a month toward credit card debt. Your monthly debt payments are $1,800.
$1,300 + $200 + $300 = $1,800
If your gross monthly income is $5,000, then your debt-to-income ratio is 36%.
$1,800 ÷ $5,000 = 36%
According to the Consumer Financial Protection Bureau (CFPB), a 43% debt-to-income ratio is typically the highest ratio a borrower can have and still get a qualified mortgage. A qualified mortgage is a type of mortgage that meets certain federal guidelines to help ensure that the borrower will be able to afford their loan.
How Do You Choose a Mortgage Lender?
To get the best financing deal, it’s important to shop around and compare lenders. There are several different types of lenders, and different lenders will quote you different prices. Shopping around and negotiating with more than one can help you get the best price on your mortgage.
You shouldn’t choose a loan before you know it’s a good deal for you. Request loan estimates from multiple lenders to see which lender is offering you the best deal. Compare these estimates, negotiate for better terms, and then choose the mortgage lender that’s offering the best deal.
What Are Mortgage Points?
Mortgage points, also known as discount points, let you make a tradeoff to lower the interest rate on your mortgage. In exchange for paying an upfront fee, your interest rate — and thus your monthly payment — is reduced. Points are paid at closing and increase your closing cost.
Each point equals 1% of the loan amount. For example, one point on a $200,000 loan would be 1% of the loan, or $2,000. Points aren’t always round numbers either. You can pay 1.25 points, 0.5 points, or even 0.125 points.
Can You Buy a House with No Money Down?
The amount of your down payment will depend on the type of loan you choose and the lender’s specific requirements. In general, most lenders offering conventional mortgages will require a down payment. Borrowers who choose a conventional loan and are unable to make a down payment of at least 20% of the home’s purchase price may be required to purchase private mortgage insurance (more on that soon).
If you’re unable to save a 20% down payment, you may want to look into home loans offered by the U.S. government, two of which I mentioned above (FHA and VA loans). These programs are more lenient and may require a smaller down payment.
What Are Closing Costs and How Expensive Are They?
Closing costs are fees and charges associated with purchasing a home. They can include:
- Appraisal fees
- Title insurance
- Government taxes
- Lender fees
- Prepaid costs, such as property taxes and homeowners insurance
Buyers typically pay the majority of closing costs. However, buyers and sellers can come to an agreement where the seller assumes some of the closing costs. Who pays what at closing also depends on state law.
How Much Cash Do You Need at Closing?
When you buy your home, you’ll need cash for a down payment (see how much you should put down) and closing costs (estimate your closing costs). The down payment typically varies from 5% to 20% or more. Putting less than 20% down will typically require you to pay for private mortgage insurance (keep reading for more on that).
Closing costs could be about 3-7% of the total loan amount and will include charges such as loan origination fees, title insurance and appraisal fees.
What Is a P&I Payment?
P&I is the principal and interest you pay your lender each month. The principal is the amount of money being borrowed. The interest is the cost of borrowing the principal. Principal and interest account for the majority of your monthly payment, which may also include escrow payments for property taxes, homeowners insurance, mortgage insurance and other costs.
What Is an Escrow Account?
An escrow account may be required by your lender to cover future payments for items such as homeowners insurance and property taxes. An escrow account is not a fee; it accumulates funds needed to properly service your loan.
How Do I Estimate My Property Taxes?
Your property taxes are a fixed percentage of your home’s value based on the tax assessor’s appraised value of your home. Property taxes are paid to township or county in which the home is located.
You will pay this tax annually, semiannually or as part of your monthly mortgage payments (the tax portion of the payment will go into your escrow account). The local tax assessor’s office can provide you with a specific property tax rate.
What Is Private Mortgage Insurance (PMI)?
Private mortgage insurance is a type of insurance you may be required to purchase if you have a conventional mortgage. Buyers who make a down payment less than 20% of the home’s purchase price are typically required to purchase PMI. PMI is meant to protect the lender, and helps them alleviate some of the risk if you stop making payments on your loan.
PMI is arranged by the lender and is provided by a private insurance company. In many cases, PMI is added to your mortgage payment, though your lender may have options to pay your PMI in one upfront premium paid at closing or a combination of upfront and monthly premiums.
Should You Get a Mortgage Preapproval?
A mortgage preapproval is a letter from a lender that says it is willing to lend to you. A mortgage preapproval letter means a loan officer reviewed your finances — income, debt, and credit history — and determined how much money you can borrow, what your monthly payments could be, and what your interest would be.
Although not a guarantee that you’ll get a loan, this letter is important when it comes to making an offer on a home, as it shows sellers you will be able to get financing to buy the property.
Who Should Pay for a Home Inspection?
As the buyer, you pay for the inspection of a potential home yourself. An inspector accountable only to you will help ensure you’re getting a complete inspection and an honest opinion of the physical condition of the property.
Ask friends or family members if they have an inspector they can recommend. If you look online, check reviews and only choose an inspector you believe will give you an honest assessment. You may be able to negotiate with the seller or cancel the sale entirely if your home inspector finds that the property needs costly repairs.
Can a Seller Refuse to Make Repairs?
Depending on the repairs and the terms of the purchase contract, a seller may or may not agree to pay for repairs. Common repairs required after a home inspection are things such as foundation and structural defects, building code violations, and other safety issues. If an inspector finds such issues, the seller will likely be responsible for making the necessary repairs. In that case, the seller can either fix these problems or give the buyer a credit so they can pay for the repairs themselves.
According to the Consumer Finance Protection Bureau, “if your purchase contract is contingent on a satisfactory inspection, you have the right to cancel the sale without penalty if you are not satisfied with the results of the inspection.”
What Happens at a Real Estate Closing?
The closing process, or settlement, is the final step in buying a home. Closing is when you and all other parties in the mortgage loan transaction — real estate agents, attorneys, your title insurance company — sign the necessary documents to close the deal. At that time, you become legally responsible for the mortgage loan. For this reason, it’s important to carefully read and understand your loan documents. Make sure the loan agreement outlines the terms and conditions you agreed upon, and don’t sign any documents that contain errors or that you don’t understand.
How Soon Can You Move In after You Buy a House?
In some cases, possession of the property passes to the buyer at closing. In other instances, you may agree to give the seller a number of days after closing to vacate the property. The exact details should be outlined in the purchase contract between buyer and seller.
What Documents Should I Keep?
Keep all legal documents from the beginning of your home buying experience through to the end. The title company is required by law to keep copies of closing documents, but it is best that you have your own set. These are your records should any lingering issues arise after the sale.
Specifically, keep the following documents:
- The buyer’s agreement you have with the real estate agent who helped you find and buy your home.
- The sales contract plus all addendums.
- The mortgage company’s appraisal, a copy of the inspection report and a copy of the seller’s disclosure of the property’s condition. The seller’s disclosure is important in the event the seller did not reveal a condition that later becomes a problem for which you can hold them legally accountable.
- The closing disclosure that the title escrow company is required to give you three business days before closing.
- The deed, the owner’s title policy and the survey.
- The home warranty, your homeowners insurance policy and any supplemental policies, such as flood insurance.
- Keep receipts for home improvements indefinitely to establish your tax basis in the house should you sell or the house passes to your heirs.
Besides keeping hard copies, scan and keep digital copies of all these records.
What Service Contracts and Warranties Do I Need?
When you buy a newly built home, the builder covers all repairs the first year. The warranty steps down to cover only major components in the second year, then fewer components through some end point, such as 10 years after purchase.
If you buy an existing home or own one for which no warranty is still in effect, you can purchase a third-party home warranty. A basic one costs $300 to $600, depending on the type of home (single family, condo, etc.) and what repairs the warranty covers. Sellers often provide a one-year home warranty that buyers can later pay to extend. Warranty claims may be denied if you or the previous owner neglected routine maintenance, or if the broken component is beyond the coverage of a basic plan.
The advantage to a home warranty is that the plan’s cost may be small compared to the cost of replacing or repairing something like an HVAC system. On the other hand, you might make years of warranty payments before something breaks, during which time you could have saved the same amount of money to pay for the repairs yourself. Additionally, you must use the warranty company’s contractor and the replacement equipment he offers when you file a claim. You’ll have little room for choices.
Do you still have questions about the home buying process? Are you looking for a trusted and knowledgeable agent to help you find your perfect home? Then contact aDoor Real Estate today!