Questions about the mortgage process abound when you are a first-time homebuyer. A challenge faced by many “first timers” is the embarrassment they feel thinking they should already know the answers to these questions. We say don’t be afraid to interrupt and ask a lender what you need to know. A home purchase is one of the biggest financial transactions most people will ever make, and you should be comfortable enough with your mortgage loan officer to ask any question!
To help get you up to speed here is a list of some common mortgage questions and answers. You don’t need to rely on Google when you have a great loan officer.
1. What is a mortgage?
In the simplest terms, a mortgage is a loan from a bank or financial institution that enables you to cover the cost of buying a home. It is a legal agreement with the lender saying that you will pay the loan back (with interest) over a specified number of years (term). So, unless you have a pile of cash and you want to purchase a home you will need a mortgage!
2. What do you need to get a mortgage?
Before loaning you money, lenders want to see proof that you’ve proven reliable paying off past debts, so you’ll need to start establishing credit. There are simple things you can do to establish credit for example get a credit card and pay it back carefully on time every month. Make sure if you have a car loan or student loans you pay them on time every month.
3. If you have bad credit how do you improve it?
A lot of borrowers think they have bad credit but are doing better than they think. First tip: Check your credit report annually. You are entitled to one free download per year. If there are late payments or inaccurate items on your report, start working with credit bureaus before you apply for a mortgage to get these removed. Fixing these errors can boost your credit score quickly.
4. What is the difference between a mortgage pre-approval and a pre-qualification?
A Pre-qualification is not going to hold the same weight as a pre-approval. You can go online and get somebody to print you out a pre-qual letter. And you’ll find that if you’re negotiating with an agent and they’re looking at a pre-qual letter, it’s probably not worth much to them.
A pre-approval letter—involving lenders fully checking your finances in a verifiable way—takes more time and effort, which is exactly why it carries much more weight. If you’re serious about buying a home, get pre-approved to show you mean business.
5. How much do you need for a down payment?
Most people think that you need a 20% down payment of your own money to get a mortgage. However, all is not lost if you don’t have that much. You can put less down but it means you will have to pay PMI or private mortgage insurance. PMI is an extra fee that lenders will require to lessen the risk that you might default on your loan due to your lack of funds. This additional fee is added to your mortgage and raises the monthly payment slightly. When you put less down, the trade-off is you must spend more every month. A lower down payment may also mean a slightly higher rate but doesn’t mean you won’t get a great mortgage!
6. If I don’t have a lot of money for a down payment where can I get that money?
You can use gifted money for your down payment. If your parents or someone else can give you the money this can help you qualify for a loan. Be sure to tell your loan officer right away if the down payment is a gift or it could raise reds flags with underwriting.
If private assistance is not an option or is not enough you can take advantage of many down payment assistance programs available that can help as long as you meet the eligibility requirements regarding income and credit.