So much is changing with the housing market, and understandably, many of our customers have questions about the mortgage approval process, interest rates, down payments, and building timelines. You may fear you’ll miss out on the home of your dreams because interest rates have gone up by the time something is available. Or maybe you’re wondering if you should hold out a bit longer in case rates dip again. To help alleviate your uncertainties and shed some light on the mortgage process, we asked our preferred lender, Sam Stowers with Jet HomeLoans, the top questions we get most often from our customers. Below he shares his (very insightful!) answers:
What will determine if I’m approved for a mortgage, and for how much?
When you complete a mortgage application, you’ll share key personal financial details that a lender will analyze to determine your loan eligibility. Some of this data includes:
- Income and liabilities: How much money comes in and how much goes out? Here your income will be weighed against all your debts. This information helps the bank determine how much cash is available to make a monthly mortgage payment.
- Assets: Do you have savings, an inheritance, a gift or retirement funds that will help with a down payment on a home? (A down payment is an initial home payment not included in your loan.)
- Credit history: Do you know your credit score? Your past and current ability to pay your bills pulls tremendous weight with lenders considering extending you a loan. Even minor blips in your credit history, such as a missed payment here or there, can cost you a preferable interest rate or even a loan. If you have blemishes, start polishing them up today.
What is mortgage pre-approval, and why do I want it?
This is the process by which your lender looks at all the factors listed above and determines the maximum loan you qualify for. It’s important to receive your pre-approval before looking at new construction homes so you have a realistic price range to consider. Having a prequalification letter in hand is important in letting the builder know you’ve done your due diligence.
How much should I save for a down payment?
This is a personal preference, and there are no wrong answers. For conventional financing, the minimum down payment is 5% of the sales price, but you may choose to put more down to lower payments or to avoid mortgage insurance, which is required with anything less than 20% down.
FHA financing will allow as little as 3.5% down payment. And if you’re a veteran, a VA loan can be used to finance 100% of the purchase price.
How do I know which home mortgage option is right for me?
Most mortgages these days are 30 or 15-year fixed rate mortgages, but you can also choose 10, 20 and 25-year terms. With fixed interest rates being as low as they have been, the adjustable-rate options have not been as attractive.
The most common mortgage loan types are:
- Fixed-Rate Conventional Loan
- Adjustable-Rate Mortgage (ARM)
- Federal Housing Administration (FHA) Loan
- Department of Veterans Affairs (VA) Loan
How do I lock the interest rate?
In most cases, you will lock your interest rate once a firm target closing date has been set, usually between 30 and 60 days out. Because mortgage interest rates can change day-to-day, locking your rate is an important part of the mortgage process.
What are mortgage points?
Mortgage points, or discount points, are a way to buy down to a lower interest rate on your mortgage. Each mortgage point equals 1% of your home’s value. That means if you’re getting a $250,000 loan and have two discount points, you’ll pay $5,000. In most cases, a point can reduce your interest rate by one-eighth to one-quarter of a percent.
There is a break-even point, and we can show you the monthly savings vs. cost to determine if it is worthwhile to pay points.
What does my mortgage payment include?
Here’s what the typical monthly mortgage payment includes:
- Homeowners insurance
- Property taxes
- Private mortgage insurance (PMI), if you put down less than 20% on your home
If you want to pay more on your mortgage, be sure to specify that you want any extra money to go toward the principal only, not an advance payment that prepays interest.
What is an escrow account, and how does it work?
Each month, your mortgage payment will include 1/12th of your property taxes and your homeowners insurance. That money is held in an escrow account that is managed by a third party to make sure those costs are paid on time.
How long does it take to close on a house?
For a new construction home, you will have a target closing of 5-6 months from your contract date. Depending on factors such as weather and suppliers, that time may be slightly shorter or longer. We will collect documents in the beginning to get your loan “conditionally approved” and within 60 days of closing, we will get everything in order in time to close (order appraisal, update documents, lock loan).
What is the difference between the interest rate and the annual percentage rate (APR)?
The APR incorporates all of the embedded fees of the loan. It includes the interest rate, mortgage insurance, closing costs, discount points (if there are any) – it is intended to show the true “cost” of the mortgage, and is usually just slightly higher than the interest rate alone.
If you were comparing two quotes for the same interest rate, but one has a higher APR, that is an indication that something is costing more with that quote.
Will I have to pay mortgage insurance?
If you put down less than 20%, the answer will probably be “Yes.” There are options to avoid monthly mortgage insurance, but they involve either an upfront payment (added to the closing costs) or a higher interest rate.
What other costs will I pay at closing?
Fees charged by third parties, such as for an appraisal, a title search, property taxes and other closing costs, are paid at the loan signing. These costs will be detailed in your official Loan Estimate document and your almost-time-to-sign Closing Disclosure.
If you have any other questions about the mortgage process, or you’re ready to get started, please contact Sam directly at email@example.com. Tell him Dream Finders Homes sent you!