Consider the answers to these 10 questions before getting a home loan to help you better assess the financial obligations, responsibilities, and risks involved with a mortgage transaction.
Eliminating risks from decision making are what many of us strive for. The truth is, we can never eliminate all risks because there are too many variables beyond our control. However, we can take calculated risks using what we know to minimize unwanted occurrences. When you can answer questions about home loan transactions, you will be able to make the best decisions while reducing the risks.
The following are 10 important questions to ask yourself before getting a home loan.
1. Do I need Private Mortgage Insurance?
2. How Do I Show the Lender How Much Home I Can Afford?
3. Can I Get Help Buying a Home?
4. Are There Any Risks With Getting a Mortgage?
5. What Does Having a "Rate Lock" Mean?
6. Do I Pay For An Appraisal Before Getting a Loan Approval?
7. What Other Expenses Come with Home ownership?
If you’re planning to put less than 20% down payment to purchase a home, or refinancing an existing loan with a Loan to Value Ratio (LTV) of 80% or higher, then you will need to get private mortgage insurance (PMI). Lenders require private mortgage insurance for cases when borrowers stop making payments on their loans and go into foreclosure. Essentially the lenders are making you pay to insure them against loss. Once your Loan to Value Ratio (LTV) reaches 80% or less, you can ask your lender to cancel your private mortgage insurance policy. According to Freddie Mac, you can expect to pay between $30 and $70 per month for every $100,000 borrowed.
To show the lender that you can afford the home loan you’re applying for, you will need to submit sets of documents including but not limited to your pay stubs, two years of your recent tax returns, and recent bank statements in order to get a pre-approval. Lenders will also pull your credit report to view your credit scores and assess your creditworthiness. Start gathering these documents before speaking with a lender to reduce any delays in your pre-approval process.
The U.S Department of Housing and Urban Development (HUD) has information regarding various home buying programs. Look through these programs and see which ones you may qualify for. Another agency with educational information about getting a mortgage loan and becoming a homebuyer is the Consumer Financial Protection Bureau (CFPB).
These agencies are a good resource to help you put a budget together and review your debt repayment options. You should also check with your local city, county, or state agencies to see if there are any classes or additional programs available to you.
Understanding the risks involved with getting a home loan can help you become better prepared for the unexpected. For example, learning that your home loan has a pre-payment penalty and knowing what this means and how it applies to the future. Another example is when you have a variable mortgage rate. How will this impact you if interest rates were to increase?
Think about how long you plan to stay in the home you’re buying, what consequences you will face if you cannot afford the monthly payments, and what solutions are available to you for such a case. Remember, there are always risks to getting a loan, but being familiar with the various scenarios will help you to budget and plan accordingly and ensure you have a smooth decision-making process.
A rate lock ensures that the interest rate you have qualified for will not change during the home loan process (typically 30-60 days), given there are no significant changes to your qualifications during that time. The best thing about having your rate locked is that if the market rates go up during your home loan process, your rate will not change. However, if your rate lock expires, you will have to pay additional fees to extend it (typically a fraction of a percentage, depending on your lender).
The best time to lock in your rate on a purchase loan is when the seller has accepted your offer. Having your offer accepted by the seller, you and the lender will have plenty of time to get all the documents ready for closing. Some lenders will require you to lock in your rate after certain conditions have been met, such as having an appraisal completed on the property or showing proof that you can afford the mortgage payments. Rate locks can be tricky; this is why you must talk to your lender and real estate agent to choose the appropriate rate lock period.
The appraisal is typically part of the approval process. However, lenders can pre-approve you before ordering an appraisal. This is a good practice so that you can avoid out-of-pocket appraisal fees in case you don’t qualify for the home loan. Once you have been approved, you will pay your appraisal fees upfront. The lender will order the appraisal on your behalf and issue the homeowners or home buyer a copy of the report when it becomes available. Be sure to avoid scheduling and paying for appraisal fees before you are certain the lender has pre-approved you.
Property taxes, homeowners insurance premiums, home repairs, yard maintenance, and typical utilities are some of the costs that you will be responsible for as a homeowner.
Let’s go over those expenses.
Check with your county to see what your property tax rate is. Please talk with a local insurance agent and ask them how much insurance premiums will cost. Have a budget set aside for repairs on the home.
The pre-approval is based on your financial profile, including your income, how much money you have in the bank and investment accounts, and your debts. The lender performs a hard credit inquiry as part of the pre-approval process, as well. With this information, the lender can make an informed estimate about how much house you can afford and, if you qualify, can pre-approve you for a certain loan amount.
In today’s housing market, it will be difficult to get a seller to consider your offer unless you have a mortgage pre-approval (unless you intend to pay all cash). There are simply too many buyers for sellers to be willing to take a chance on one who hasn’t at least talked to a lender about getting a mortgage.
Buying a property in a community with a homeowners association (HOA) can be a mixed blessing. The houses are uniform, and you can assume your neighbors value the same aesthetics and maintenance standards as you. But you also agree to a strict set of rules for how you’ll use your house – and breaking those rules can be expensive.
Once you have weighed the pros and cons of buying into an HOA community, do your homework. There’s a lot you can learn about the development before you close on the home, and you don’t want to be caught by surprise once you’ve become an official resident
It’s important to know all of the HOA pros and cons before you choose where you’ll live for the next several years to know that the HOA contract is something you can live with long term or short term.
Imagine applying for a home loan with what you think is a solid credit score to find that not only is the lender using a score that’s 60 points lower, but you no longer qualify for a mortgage.
This may sound like a nightmare scenario, but this tends to happen often for homebuyers and even for homeowners looking to refinance. That’s because many of the big-name credit monitoring sites offer free VantageScore® credit scores, which are often higher than the FICO® credit scores used by most lenders. FICO® requires a minimum of six months of credit history to have a score. VantageScore® simply needs one line of credit to create a score, regardless of age. FICO® score is used by almost every mortgage lender, so knowing this score is important.
