Understanding the answers to these questions can make the mortgage application process much less complicated. Most first-time homebuyers will need to secure a mortgage, which may be a frightening procedure.
Nevertheless, armed with a bit of knowledge about what you’ll need and what to expect from the mortgage application process to the closing table, you may put those anxieties to rest. With this in mind, we’ve answered 15 of the most often-asked mortgage questions.
1. Do I have to have perfect credit to receive a mortgage?
Not required, but it will undoubtedly assist. A typical mortgage can be obtained with a FICO credit score as low as 620, while a higher-cost FHA mortgage can be obtained with a score in the 500s. However, keep in mind that the worse your credit score, the higher your interest rate.
A current list of mortgage rates broken down by credit score can be found here. The difference between a 620 credit score and an “excellent” 760 credit score on a $250,000 mortgage adds up to more than $86,000 in interest savings over the life of a 30-year loan.
2. How much money do I need for a down payment?
The quick answer is that a standard mortgage can be obtained with as little as 3% down, an FHA loan with 3.5% down, and a VA or USDA loan with no money down at all. If your down payment is less than 20% of the home’s sale price, you’ll have to pay private mortgage insurance, or PMI, with a conventional or FHA loan.
But those payments will not be a permanent fixture in your monthly payments. You can ask your lender to drop them whenever your loan-to-value ratio falls below 80%. Even if you do not request it, lenders are required to terminate PMI when the loan-to-value ratio falls below 78%.)
3. What are closing fees, and how much should I budget for them?
The term “closing costs” refers to all of the fees you must pay before your loan is finalized. Origination fees, title insurance, prepayment escrows, and other costs may be included. Closing expenses can vary greatly, but on average, anticipate paying 2% to 3% of the home’s purchase price in closing charges.
4. Should I choose a fixed-rate mortgage or an adjustable-rate mortgage?
A fixed-rate mortgage makes good financial sense when interest rates are historically low, as they are now. Not surprisingly, the great majority of new mortgages are fixed-rate. Adjustable-rate loans are chosen by just approximately 3% of buyers.
While a fixed-rate mortgage is the best option for the vast majority of homebuyers, an ARM may be preferable in some cases. For example, if you plan to sell your home before the fixed interest period ends and the interest rate begins to fluctuate, an ARM might save you thousands of dollars. Alternatively, during periods of dropping interest rates, an ARM might provide you with a cheap initial rate while saving you money later if rates fall more.
