Homebuyers, especially those who are hunting for their first home, have a lot of questions that need answers...and one of the biggest topics is the mortgage. What's required? How long should my term be? Is my credit good enough? What about a down payment? Even existing homeowners who are about to enter the buyer's market again will probably find that the lending landscape has changed a lot, since they funded their first mortgage loan.
Never be afraid to ask...don't allow yourself to be intimidated by this process (because it can be intimidating). In this blog, I'm going to discuss basic answers to some of the questions you might have about mortgages. If you need more specific information, I have lenders that I work closely with who are the best in the business, and would happily entrust any of my clients to their care. Again...just ask!
What is required in order to get a mortgage loan?
Before they will lend you any money, most financial institutions require evidence that you've got a track record of meeting your financial obligations and paying down debt. If you haven't established a track record of responsible credit usage, that is the most critical part of getting approved for a home loan. There are a variety of ways to establish and build credit, such as secured lines of credit or auto loans, but they all require that you be very deliberate and intentional about how you manage the debt and pay it off.
What if I have bad/no credit?
In this day and age, it's really not unusual for your FICO score to be a touch low...but it may not be nearly as bad as you think. Get a free credit report and see what the credit reporting agencies are saying about your payment history and credit utilization. If there's anything inaccurate on your credit report, dispute it and get it removed. Make sure that all of the accounts are actually yours, too! People have been known to discover that they've been the victim of identity theft, only after they finally checked their credit reports. Disputing inaccuracies can raise your score a huge amount, by itself...but dedicating yourself to paying on time, and keeping the utilization of your available credit low (below 50%) will also have a major impact on your creditworthiness. A good lender (like the ones I recommend) will have a lot of suggestions for rehabilitating your credit rating, so let them help!
What is the difference between pre-approval and pre-qualification?
Pre-approval is a much stronger endorsement of your creditworthiness than pre-qualification. Pre-qualification letters can be had very easily and don't require much vetting of the borrower; consequently, you may find that although you "pre-qualified" for a loan at a certain amount, you will not be able to get approved for that loan, when the time comes. Pre-approval, on the other hand, requires a little more legwork on the part of the lender (and more information from you)...but it more strongly establishes you as a qualified buyer, when presenting an offer to a seller. There is a much higher degree of certainty that you'll be approved for the amount stated in the letter...as long as you don't do anything to substantially impact your credit rating or debt-to-income ratio, before the day of closing! The short version, though, is that a pre-approval letter will make your offer much stronger than a pre-qualification letter will.
How much cash will I need to put down?
Most people believe that, in order to secure a home loan, they need to have saved up at least 20% of the purchase price, for their down payment. In a perfect world, this is true...but the world is far from perfect! There are a lot of financing options that don't require 20% down, but the lenders will require Private Mortgage Insurance (PMI) to protect them, in the event that the borrower defaults on their loan. PMI will be tacked onto your monthly payment, although some lenders are offering loans in which they absorb the cost of the PMI, in exchange for a higher interest rate on the loan. If you have served in the US military, you may qualify for a Veterans Affairs (VA) loan, which cannot charge PMI, regardless of your down payment. Talk to a lender about what options are available to you, because every buyer's situation is different!
Can I get any financial assistance with my down payment?
What other avenues can you explore, to gather a down payment? Newlyweds may be better served asking for financial contributions, instead of gifts. Parents are often happy to help with the purchase of a first home, when their kids are a little short on the down payment. If you have a 401k, there are ways to withdraw money early from those without incurring a penalty, when purchasing your first home...and there are literally thousands of other payment assistance programs for helping buyers come up with a down payment, as long as they meet the eligibility requirements. Once again, a good lender is going to know exactly what options there are and which ones will work best for your unique situation.
Which home loan should I choose?
There are so many to choose from, it can make anyone's head spin! There are two basic types: Fixed rate and adjustable. As the name indicates, fixed rate mortgages will never change throughout the life of the loan. Adjustable rate mortgages can (and will) change, over the years that buyers are paying down their loans. In general, fixed-rate mortgages are considered the safest choice...but many buyers don't intend to carry the loan long-term (fixing and flipping, for instance) and can get away with an adjustable rate mortgage with a lower rate, because they won't be paying it for very long.
If you are preparing to enter the market and need to know what options are best for you, or what you are likely to be approved for by a lender (thereby dictating the types of properties you can make offers on), let me put you in touch with a great lender who will equip you with the knowledge you need to make the right decision, on one of the biggest purchases in your life!