Are you looking to buy a new house? Before you do, you need to apply for a home loan first. When you apply for a home loan, there are questions you need to ask.
This 2019, mortgage rates dropped to 4% from 4.6%. That means shoppers pay a lower monthly payment compared to last year. It looks like a small difference but 0.6% can be a big deal to first time home buyers.
Most first-time buyers don’t know about the basic home mortgage information. But don’t fret, we’ve got you covered.
Below, we’ve got a list of 10 important questions for people who are looking to apply for a home loan:
1. What Type of Loan Are You Getting?
Research about the types of mortgage loans. There are four types of institutional mortgage loans. These are:
- VA loans
- FHA loans
- Conventional loans
- Jumbo mortgages
- Property bridging loan
The VA loan is available to qualified veterans only. The Department of Veterans Affairs guarantees VA mortgages. If you apply for this loan, you could put down little or no down payment.
The Federal Housing Administration backs FHA loans. This is helpful for people with little or no cash reserves since the down could be as little as 3.5%. The drawback in paying a down payment under 20% is that you need to pay private mortgage insurance (PMI).
For conventional loans, you need to put down 20% or more. You don’t need to pay for the PMI for this loan. This kind of loan is the best for people with enough savings to cover the down and associated closing costs.
If you want a luxury home but don’t have the money for it, get a jumbo loan. The value of a jumbo mortgage varies by state and the conforming loan limit changes. If you are getting a jumbo mortgage, expect special restrictions and credit requirements.
A bridging loan is short term finance borrowed to bridge the gap between one’s cash flow needs and completing a property deal.
2. Ask About Fees When You Apply for a Home Loan
When you go mortgage shopping, you’ll likely come across different fees. These are all known as closing costs. Although they have that name, you don’t pay all these at closing.
A mortgage broker might charge fees upfront. These are often the application and property appraisal fees. Some of these fees or closing costs are negotiable. Other extra fees, like state transfer taxes, are non-negotiable.
Look for a loan officer. Ask about which fees are government-regulated and which fees the lender prices. Information about these fees will help you haggle with loan brokers.
3. Get to Know Your Repayment Terms
One thing you should know before you get a home loan is how often you will pay the loan. With these terms, you discuss how much you pay monthly till you pay the loan in full. You can also make an agreement on how many years you will be paying for the loan.
There are two different repayment terms for home loans. The first one is the fixed-rate mortgage or fixed interest rate. This is great for people who plan on staying for a long time in the home.
The common choice for repayment term is 30 years. You can shorten the term to 15 to 25 years. When you choose to do that, you must be ready to pay for a higher monthly payment.
The benefit of paying for a shorter term is you end up paying less. That means you save money in the long run. Not all shorter-term mortgages cost less, especially if the interest rate is higher.
The second kind of repayment term is the adjustable rate mortgage or ARM. This is for anybody who doesn’t plan on staying in a house for a long time. This works for people who get assigned to a different city for a temporary time because of the nature of their job.
The way this works is that you have a lower interest rate for the first 5 to 7 years. The interest rate will then adjust every year after those initial years. If you still live in the home after those initial years, your mortgage payment rises fast with a high-interest rate.
4. Get Information on Points
We’re not talking about credit points here. In housing loans, a point is a prepaid interest. One mortgage point is equal to one percent of the home loan amount.
You can ask lenders about how many points you will have to pay to get a specific interest rate. The more mortgage points you pay, the lower your loan’s interest rate. Get a local paper and you could find information about points in the real estate section.
If you are unsure about buying points, you can ask your lender about it.
5. Check Their Interest Rates
Dealing with student loans isn’t easy. If you are still paying for your student loans but also planning to get a house soon, you’d better look into getting low-interest rates. Shop around and look for lenders with the lowest interest rates.
In basic terms, the interest is the service fee lenders charge you. The lower your rate, the less money you pay them back. The average mortgage interest rate is at 4.62%
Make sure to look for interest rates you qualify for. Higher credit scores can get you lower interest rates. Also, first-time buyers can get lower interest rates through the FHA.
6. Learn Your Annual Percentage Rate (APR)
Now, let’s talk about the annual percentage rate. The APH is more specific than the mortgage interest rate. The interest rate is only one part of the APR.
The APR reflects the mortgage interest rate plus other charges like points and fees. The APR is a broader measure of the costs. Because of this, your APR is often higher than your interest rate.
7. What Are the Down Payment Requirements?
When you shop for mortgage loans, you’ll find that each lender has different down payment requirements. Find out which you are most qualified. The down payment requirements depend on what type of home loan you are getting, as we discussed above.
Regular loans will take 5% for the down payment. Other lenders might ask for 10% or more. The FHA loan needs a down payment as little as 3.5% while the VA loans don’t ask for down payments.
8. Can I Get a Mortgage Pre-approval?
Having a mortgage pre-approval letter will give you an edge when you bid against other buyers. Before you get a start looking for your dream house, get one. It will also save time on getting any needed information for processing later.
The letter will show the seller that you are a serious buyer with a loan likely to close. It shows that you have your finances figured out. It shows you know how much you can afford to borrow and how well you can afford the house.
To get preapproved, lenders may ask for the following financial information:
- Social security numbers
- Bank, savings, checking, and investment account information
- Outstanding debt obligations
- Two years of tax returns
- Salary and employer information
- How much down payment you could put down
- Where the money for the down is coming from
If you can, get pre-approval from more than one lender. This way, you can compare who offers the best mortgage rates and terms.
9. Inquire About the Needed Documents
During the days of the housing boom, you could get a loan with a few documents only. Now, you need a decent amount of paperwork. These are to verify and for underwriting purposes.
This also will make the application process faster and easier for you. That way, you have everything ready when the lender asks for them the next time you speak. The lender will often ask for financial documents like:
- Pay stubs
- Employer letter
- Bank account numbers and balances
- Tax documents for the past couple of years (W-2)
- Documentation of financial assets like investments
- Gift letters for the down payment
Note that the W-2 should come from the IRS. Before, lenders were okay with photocopies. Now, you need to sign the IRS Form 4506 to give the IRS permission to send a copy of your tax returns to the lender.
This list is only partial. More requests will come as you near the underwriting process. They won’t get you discounts on buying property but you may get a lucky find while you are processing your documents.
10. Lock in Your Rate
After you discuss the terms and come to an agreement, lock in your rate. Mortgage rates change every day. The quote you got from the lender a week ago may not be the same when you apply for the loan.
Most first-time buyers lock in too early or before they check other lenders’ rates. Do this when you are ready to move forward with the loan process. When you lock in, your mortgage rate will not change between the time of application and closing day.
You can also wait a few days for a change. This is a gamble that could put you at an advantage or disadvantage. If the rates drop, it’s all good for you but if the rates go up, you could regret not locking up earlier.
Apply for a Home Loan Now!
And those are the things you need to ask about when you apply for a home loan. Remember that it’s always smart to check with more than one lender. That way, you know which mortgage lender offers a home loan that will benefit you the most.
We hope you enjoyed our list of questions and mortgage shopping tips. If you found this read informative and helpful, you may want to take a look at our other blog posts.
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