5 Things You Need to Know About Mortgages When Buying a Home
The home buying process can be stressful, especially when it comes to mortgages. Being prepared, understanding the basics of mortgages, and knowing more about your finances will help make the process feel much more manageable.
If you’re thinking about buying a home in the near future or have already started the process, here are five things you need to know about mortgages.
You Don’t Need Perfect Credit
While a lot of rates that are advertised by lenders do require a good credit score and a sizable down payment, that doesn’t mean you won’t have access to good rates if your credit score isn’t perfect. In fact, there are a lot of mortgage programs that are designed for and made available to first-time home buyers. These mortgages are great for those that are younger, have a small income, and have a lower credit score.
The Federal Housing Administration (FHA) insures mortgages for borrowers with scores as low as 500 and in some cases, even insures some borrowers with no credit score whatsoever. Frannie Mae and Freddie Mac also accept FICO scores as low as 620, in addition to options from both the Department of Veteran Affairs and the U.S. Department of Agriculture, that offer similar options.
You Don’t Have to Put 20% Down
While putting 20% down will get you a much lower mortgage rate, there are plenty of options for those putting down between 0% and 20%. There are piggyback mortgage options for buyers that put down 10%, and Frannie Mae and Freddie Mac also have a slew of 3% down programs, such as HomeReady.
The Seller Can Pay the Closing Costs
There are several fees that are part of the home buying process, such as lender costs, escrow fees, home appraisal, and home inspection services, and title insurance fees. While these costs are small compared to the overall cost of a home, they still add up.
When putting an offer in on a home, you can always request that the home seller pays the closing fees, and it will be outlined in the contract, should the seller accept.
If the seller does not accept to pay the closing costs, your lender can agree to cover the costs, as it will result in a higher mortgage rate. This is considered to be a zero-closing mortgage loan and will increase your mortgage by an average of 0.25%.
Understand the Difference Between Pre-Qualification and Pre-Approval
When going through the home buying process, you’ll most likely hear the words “pre-qualification” and “pre-approval” often, and unless you know exactly what they mean, it’s easy to get them mixed up.
Pre-Qualification - An estimate of how much someone can spend on a home.
Pre-Approval - The buyer’s credit has been checked and the necessary documentation has been verified by the lender to approve a specific loan amount.
Being pre-approved can be very valuable to the buyer and can set them apart from other offers that a seller receives.
There are Multiple Fees Included in Your Mortgage Payment
When you have a mortgage loan, there are several fees due at closing or that may be wrapped up in your monthly mortgage payment. . Below, we break down exactly the costs associated with your mortgage loan:
Principal Payment - The amount of money you borrowed from a lender. When you first start making payments on your mortgage, a small percentage of your monthly payment will go towards the principal balance, but over time, this percentage will increase.
Interest Payment - This is the percentage the lender is charging for lending you the money. This payment will be a large portion of the monthly payment you make for the first 10-15 years.
Property Taxes - Oftentimes, your property taxes are included in your monthly mortgage payment and placed in an escrow account that your lender will make the tax payment for you when it’s due.
Mortgage Insurance - All conventional loans with a loan-to-value ratio higher than 80% are required to have private mortgage insurance (PMI) on the actual loan, so in the event a borrower defaults on the loan, the insurance company will reimburse the lender. If you have an FHA loan, you will be required to have mortgage insurance no matter how much money you put down.
Closing Costs - These costs are charged by the mortgage company for funding and processing the loan. These costs will vary from lender to lender, so always read your loan documents and closing cost estimates closely to ensure you’re going with the best option. Many of these forms are standardized so they are easy to compare.
The Bottom Line
Mortgages can be overwhelming, but they don’t have to be. When shopping around for a lender, always get at least three different estimates and ask every question possible.
If you’re ready to start the home buying process, contact our team at RESOURCE360 today at 203-594-0360 or fill out our contact form!