Are you looking to buy your first home? If so, you're probably excited.
However, you're probably a little confused as well. With mortgages and taxes and inspections and so on, the home buying process can be complex.
Do you need help navigating through the process? Looking for answers to some common questions? Here are 10 first-time homebuyer questions and their answers.
1. From Whom Do I Obtain a Mortgage?
When looking to obtain a mortgage, there are, in general, two types of entities you can turn to. One of these entities is a mortgage broker. The other is a bank.
Both entities have their upsides and their downsides as well. While a bank might offer a more familiar-to-you experience, a mortgage broker might be able to find you better mortgage terms, rates as well as laxed underwriting guidelines.
Mortgage brokers have an advantage over banks in that they generally have access to more lenders. As such, they can help you find specialized mortgages that wouldn't be found by working through a bank.
Interested in utilizing the services of a mortgage broker? We can help you!
2. What Kind of Mortgages Are Available?
There are all types of mortgages available for budding homeowners to pursue, each of which provides something a little different in the way of interest rates, qualifiers, and terms. By taking each into consideration, you put yourself in the position to get the best mortgage possible.
The most common is the conventional fixed-rate mortgage. This mortgage lasts 15 or 30 years and maintains the same interest rate throughout. It generally requires a credit score of over 620.
Another option is the adjustable-rate mortgage. This mortgage carries an interest rate which fluctuates over time, making it riskier than the fixed-rate mortgage, but potentially more cost-effective as well.
If you're buying an exceedingly expensive house, you can take advantage of a jumbo mortgage. These mortgages are specifically designed for expensive home purchases.
There are also a number of government-insured mortgages available, including FHA loans, USDA loans, and VA loans, to name a few.
3. Do I Have to Get Pre-Approved?
While you don't technically need to be pre-approved in order to purchase a home, you'll find that purchasing a home without pre-approval is a trying process. In fact, some realtors refuse to show homes to buyers who aren't pre-approved, as they don't consider them to be serious about buying.
So, in essence, if you're serious about buying a home, you need to obtain a pre-approval letter. To do so, you'll need to speak with a lender and fill out an application.
Note, however, the lender that creates the pre-approval doesn't necessarily need to be the one you end up borrowing from. Once you've put an offer down on your prospective house, you can get a mortgage from whichever lender you prefer.
4. What Do I Need to Get a Mortgage?
To obtain a mortgage, there are a few different things that you'll need. Most of these things are needed in order for your lender to assess your financial situation. However, others are needed in order to assess your reliability.
As far as financial information goes, you'll need to provide copies of your tax returns, copies of your paystubs or W-2s, and copies of your bank statements. Generally, two years worth of these documents will suffice (bank statements typically only require two months).
In addition to these documents, you'll also need to supply a photo ID, proof of employment, and a statement of your rental history over the past two years. Generally, credit history is assessed by the lender. However, in some cases, buyers will need to submit it themselves.
5. How Big Does My Down Payment Need to Be?
Essentially, every mortgage in existence will require you to make a down payment of some kind. However, the size of your required downpayment will vary based on the type of mortgage that you're obtaining.
Conventional mortgage loans often come with down payment minimums of 5%. So, if the house costs $750,000, you'll have to pay $40,000 upfront.
Make note, however, that some mortgages come with down payment minimums as low as 3.5%. FHA loans, for instance, can be obtained with a minimum of a 3.5% down payment.
Generally speaking, you should expect to pay 5%. However, if you can find something lower, you should consider going for it.
6. What Does My Credit Score Need to Be?
The minimum credit score needed in order to obtain a mortgage varies based on the type of mortgage you're looking to obtain. It's important to note, though, that the higher your credit score, the better mortgage terms you'll be privy to.
Conventional mortgages generally carry credit minimums of 640. However, FHA loans can be obtained with credit scores as low as 500.
If your credit score is low, you're advised to build it as much as possible before attempting to take out a mortgage. The higher your score, the more loans you'll have available to you, and the greater the terms you'll be able to benefit from.
7. Are There Any Buying Programs I Can Take Advantage Of?
There are a number of different home buying programs that individuals can take advantage of, some of which are national programs and some of which exist on local levels.
For instance, FHA loans are technically buyer assistance loans designed to help lower-income individuals purchase their first homes. These, along with USDA loans, are the best example of federal buying assistance.
Local buying assistance programs vary wildly from municipality to municipality. Whereas some are offered by counties, others are offered by towns or cities. In the majority of cases, the programs help with down payments, in particular.
8. What Fees are Included in a Home Purchase?
When buying a home, you're not just buying a home. You're paying a variety of other fees as well.
Generally included in a mortgage payment are homeowner’s insurance, property taxes, and—in some cases—mortgage insurance. If you buy a condo then you’ll have Homeowners' Association fees that need to be paid as well. Altogether, these expenses add up to several thousands of dollars every year and a portion of them are collected at closing.
There are also the one-time payments that you must make during the initial transaction. These include appraisal fees and closing fees and an inspection fee (this is optional).
9. What is Private Mortgage Insurance?
Private mortgage insurance or PMI is insurance levied against all mortgage holders who haven't made at least a 20% down payment. This insurance is used to protect the lender in the event that you stop making payments on your home.
It costs between 0.125% and 1% of the entire loan and must be paid on an annual basis. So, if your loan is for $700,000, and your down payment was less than 20% of the total purchase price, you would be required to pay an additional $875 to $7,000 every year.
Note, however, that PMI drops off after you own 20% equity in your home. So, while paying less than 20% upfront will hurt you, it won't obliterate your efforts.
10. How Much House Can I Afford?
The amount of house you can afford is based on a number of factors. Not only does your income come into play, but the amount of debt you carry as well.
Your credit score can also make a difference, as it directly affects the interest rate that you'll receive on your mortgage. The higher the interest rate, the higher your monthly payments.
All of that being said, as a general rule, it's recommended that you spend no more than 45% of your pre-tax income on housing. So, for example, if you make $120,000 a year, you should spend no more than $54,000 a year on mortgage payments. This comes out to around $4,500 a month and includes both property taxes and insurance as well.
Of course, everyone has a different budget, so this rule isn't realistic for every individual. Some will spend well below 45% of their income on housing, while others will spend well over it.
Ultimately, the goal is to purchase adequate housing without constricting other aspects of your life. You still need to pay for food, loans, utilities, insurance, emergencies, taxes, and transportation, after all. Plus, you'll want to save some of your money for retirement.
The key is to sit down and create a detailed budget. This will give you a clearer picture of your financial situation and will help you establish a spending limit on housing.
Note, the mortgage maximum given to you by your lender is not the figure you want to live by. This figure is typically far greater than what is recommended, sometimes by as much as $150,000. In the end, it's your responsibility to make a sound financial decision.
We Have the Answers to All Your First-time Home Buyer Questions
There is no shortage of first-time home buyer questions to be asked. The questions above comprise only a portion of them. If you would like to read more of our frequently asked mortgage questions, take a look here.
Have other pressing questions to ask? If so, we here at Seattle Mortgage Brokers can answer them. Discuss the home buying process or obtain a low-payment mortgage by contacting us today!