Taking out a mortgage can be an exhilarating experience a first-time homebuyer. While it is exciting to be finally getting approval for the home of your dreams, understanding all the accompanying terms and conditions can seem daunting at first. Moreover, the process from the initial application to closing can be long and confusing. Therefore, here are some answers to frequently asked questions on mortgages to help the first-time homeowner:
How much would the down payment be on an average?
This varies depending on the source of the mortgage. A conventional mortgage loan requires a down payment of around 3%, an FHA requires around 3.5%, and VA mortgages require no down payment. Do note that if the down payment made by you is less than 20% of the property value, you will have to pay private mortgage insurance.
Should I opt for a fixed or an adjustable rate?
A fixed rate mortgage makes sense if the standard mortgage rates are low. The fixed rate is good for those seeking long-term finance as it offers the stability of steady payments of the loan.
On the other hand, an adjustable rate works well for those who are looking at short-term financing plans. An adjustable mortgage allows the borrower to benefit from the usually low initial rates of interest and may even offer lower rates of interest if they drop with market fluctuations. This is an individual decision that can be made with the help of a loan officer.
How important is a good credit score?
A good credit score helps push your mortgage through with ease in many ways. Good credit makes smooth the process of application and lets you benefit from low-interest rates. The preferred credit score for mortgage approval averages around 680. However, with a score above 700, you can get low-interest rates. An excellent credit score can see you save up to $86,000 in interest for a 30-year mortgage.
While higher credit scores get preference, lower scores around 600 may also get approved but with much higher interest rates.
What is the difference between pre-qualification and pre-approval?
A pre-qualification is an estimate of how much of mortgage you can get approved for based on your credit rating and other financial information. In a pre-qualification, the information that you provide is not verified and the mortgage is not guaranteed.
A pre-approval is a much more serious process that involves checking financial information and pre-approving or guaranteeing the mortgage before buying a home. Here, the lender has verified all the information provided and is ready to disburse funds once you settle on a property.
What are the documents usually required?
The documents that are usually a common requirement across lenders include:
- Income documents (including pay stubs and two years of tax return proof)
- Social security number
- Driver’s license
- Bank statements to prove the availability of funds for down payment and fees
Each lender may have additional documents that they require. So, do check thoroughly and have all your paperwork ready.