When it comes to buying a home, picking out your perfect home is only part of the equation. Getting a loan from a mortgage lender and figuring out how much you can really afford can be a source of confusion for many. In fact, we find that the most commonly asked questions generally center around money – and understandably so.
We recently sat down with one of our go-to lending partners, Kristin O’Neil from Home Loan Zone for an in-depth Q&A to answer all of your questions.
Q: Why do I need to get pre-approved for a loan and how do I do that?
A: It’s important to get pre-qualified before you start home shopping for a very simple reason – you don’t want to fall in love with a house that you don’t qualify for or that is outside of your financial comfort zone. Often times, the purchase price that you qualify for is higher than what you may would feel comfortable paying per month. Pre-qualifications can help you break down your monthly expenses to figure out how much you can afford and is a critical first step to starting your home search.
Q: How does the loan process work?
A: Once you’re pre-qualified, that’s when the fun starts because you get to start house hunting! Many buyers elect to run their payments to start the loan process at this time. I abide by “The Rule of Two”: you will need to submit your two most recent paystubs, your last two years of W-2’s, and your two most recent bank statements. If you are self-employed, your loan officer can give you specifics, but we will typically need two full years of tax returns with all schedules. From there, we submit the documents to underwriting who are licensed professionals who will review documentation in detail to ensure nothing is missing.
Then, we get an appraisal done on the property. Not to be confused with the inspection, whose purpose is to make sure there are no defects in the home, an appraisal is where a licensed appraiser will compare your home to similar properties in the area to ensure that you aren’t overpaying.
Finally, we will work with your attorney or title company to get final numbers ready and draft the closing papers for signing.
Q: What are the different types of loans?
A: The good news is there are so many different loan types to choose from depending on your short and long-term financial goals. While there are many options available the programs you will hear of most frequently are conventional, FHA, VA and USDA. You can work directly with your loan officer to determine which program is best for you depending on your credit score, down payment, and property type.
Q: How is my interest rate determined?
A: I can give you a very long-winded and boring financial answer, but in short it will be determined by your credit score and loan-to-value. The loan-to-value is calculated based on the amount you are borrowing vs. the purchase price of the home. Right now, rates are at historical lows so it’s a great time to buy a home.
One quick tip for home owners: a good way to cut down on the interest you will pay over the term of your loan is to pay a little more each month – even $5 to $10 makes a difference over time.
Q: What are ALL the costs that go into buying a home? What are the commonly missed ones?
There are a few costs you will pay upfront such as the inspection and the appraisal costs which will be separate from your down payment. The closing costs will also include your attorney or title fees, transfer taxes, as well as your initial escrow deposit for taxes and homeowner’s insurance. I always suggest getting a closing cost quote from your lender prior to making an offer on a home, which will be specific to the property and your loan type. This will allow you to be as prepared as possible for any items that can vary such as HOA setup fees, property taxes, etc.
Q: How long does it take to fund a loan?
A: This will really be determined by your time frame. We have had clients close as soon as two-weeks but the average is about 4-weeks. The majority of contracts will be for 30-45 days to allow all parties time to coordinate their move.
Q: What is mortgage insurance?
A: Mortgage insurance is sometimes confused with homeowner’s insurance. Private mortgage insurance (PMI) protects the bank’s investment and is required on most loan programs if you aren’t putting down less than 20%. You will want to discuss the steps for having your PMI removed with your loan officer so you can determine which loan program may work best for you. With most programs the PMI can be removed when your loan-to-value reaches 80%.
Q: What are common myths or misconceptions?
A: One of the biggest misconceptions that many first-time homebuyers have is that you must put down a minimum of 20% which is not the case and is actually a rarity. There are so many great programs that require minimum down payments; some with $0 down. In addition to low down payment programs there are a lot of great grant programs available as well.
Another myth is that you should not buy a home if you are new to a career or have recently been a student. In fact, in most instances you would only need to be on your job for 30 days prior to closing. We work with many recent graduates who are new to their field but can see the value in real estate investment. The idea that you need to have a 5-year working history is completely false so no need to worry!
Finally, I hear so frequently, “I don’t have a perfect credit score, I will never be approved for a home loan.” This just isn’t true. Many of the things holding people back are very minimal and can be fixed very quickly with the help of an expert.
If you have questions about mortgage loans, contact us at 804-928-1620 or visit our website to get started.