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6 Mortgage Questions A FirstTime Home Buyer May Be Embarrassed To Ask
Dated: November 30 2018
Mortgage questions abound when you're a first-time home buyer. Compounding the challenge is the embarrassment over interrupting the conversation with a would-be lender or seller to ask, "'Scuse me, what is a credit score? How much money do I need as a down payment?" Everyone knows this stuff, right?
No, they don't all know—so you should ask these questions. Or, at the very least, study up a bit so you know the basics. To help get you up to speed, here's a crash course on the most common mortgage questions and answers you need to know. Take five to read on, and wonder no more.
1. 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 ways to verify your past payments on utility bills, cellphone, and rent," notes Michael E. Matthews, senior vice president of PrimeLending. "Get a credit card, pay it back carefully. Your car and college loans—those things help you establish credit and help you get a mortgage."
2. If you have bad credit, how do you improve it?
Matthews talks to a lot of borrowers who come to him with this mortgage question. They think they have bad credit but are doing better than they think.
His first tip: Check your credit report. It's free to download one copy each year, and you may be pleasantly surprised by what you find. And if the news is bad, there's still hope.
"If you’ve got bad credit, a lot of times there’s aged activity on there—an old collection, a medical bill, something you didn’t know about," Matthews says. And these "errors" can often be fixed, boosting your credit score fairly quickly.
If you do have a bunch of bad marks and late payments, however, start paying on time and your score will gradually improve. Here are some ways to raise your credit score.
3. What’s the difference between a mortgage pre-approval and a pre-qualification?
"Pre-qualification is not going to hold the same weight as a pre-approval," says Matthews. "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. Here's more on the difference between mortgage pre-approval vs. pre-qualification.
4. How much down payment do you need for a mortgage?
The gold standard down payment for a mortgage is 20%—so if the home's price is $200,000, you'd ideally have to pony up $40,000 of your own money to get the loan.
If you don't have that much, all is not lost. You can put down less, but that means you'll have to pay PMI, or private mortgage insurance. It's an extra fee of about $50 to $100 a month that lenders will require to mitigate the risk that you might default on your loan due to your lack of funds.
"There’s risk there that literally has to be accounted for, and that ends up being insurance that adds to your mortgage payment," says economist Jonathan Smoke. "When you put less down, the trade-off is you actually have to spend more on a monthly basis."
That said, there are some exceptions that allow a buyer to avoid PMI even with a small down payment. Buyers who are in the military, veterans, and family members of veterans may be able to avoid PMI with a Veterans Affairs loan. And once your equity in your home rises above 20%, you can stop paying PMI.
5. What kind of down payment assistance is available?
If you're looking for help with a down payment, Smoke says, the "bank of Mom and Dad" may be a smart start—if your parents have the means to pitch in. Gifted money can help many people qualify for a loan, he says, although you absolutely must tell your lender that the money was a gift—fibbing on this front will raise red flags.
If private assistance isn't an option, or isn't enough, never fear—there are over 2,000 down payment assistance programs across the country that can help, as long as you meet eligibility requirements in terms of income and credit.
Check with your real estate agent or lender, as they may be able to tell you about programs in your area that will help you become a homeowner.
6. What types of home loans are available?
Loan types vary widely, but Barbara A. Carrollo-Loeffler, director of consumer and residential lending at Provident Bank in Jersey City, NJ, says loans typically fall into two camps. The first includes loans with an adjustable rate, meaning the interest rate could change after a period of time. The second includes loans that are "fixed" or "term," meaning the rate will stay the same for the length of the borrowing period. Generally term or fixed-rate loans are more common and considered the safer option, but it all depends on your circumstances, including how long you plan to stay in the home.
Here's more info on the pros and cons of various types of home loans, and which one is right for you.
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