Let’s face it, buying a home is really exciting. It’s also filled full of questions, like how much home can I afford, and what is the first step in the home buying process? So, we compiled a list of the most common questions that home buyers ask to help ensure your home buying journey is smooth.
1. How much of a down payment is required?
You will need anywhere from 0% - 20% down.
At Arbor Financial, we have mortgage options that require no money down while avoiding private mortgage insurance (PMI) as well. To qualify for a no money down mortgage, your credit score must be 720 or higher. Other loan programs allow credit scores starting at 620. If your score isn’t where you would like it to be, then contact us, and we can review your credit report with you and offer suggestions to raise your score.
In addition to 0% down mortgages, you can also get into a home with as little as 3% down.
If you’re wanting to keep your monthly payments as low as possible, then bringing a 20% down payment to the table is ideal. The larger the down payment, the lower the interest rate you’ll pay on your home loan.
2. Is owning a home more affordable than renting?
Rising rent can definitely be a factor in deciding to buy a home instead of rent, but you have to make sure that the costs work for you. The largest measurable financial benefit to homeownership is home equity. Owning a home is one of the few instances where you have an appreciating asset, which means your purchase should be worth more over time.
Consider this: with even a modest monthly rent of $750, you would pay $49,000 in rental costs over the course of five years (assuming an annual 5% rental increase, which is common).
Now, consider if you had paid that same $750 on a home valued at $140,000. After five years, you would have earned approximately $11,500 in equity (assuming your home appreciated annually at 2%)!
Learn more about the pros and cons of owning at Considering Home Ownership.
4. Is it true that rates have gone up?
No, as of 2019 the interest rates on mortgages have gone down and are at very low rates!
5. What is PMI, and why do I have to pay it?
Private Mortgage Insurance, referred to as PMI, is a type of mortgage insurance used with conventional loans that would reimburse the lender if you default on payments.
Typically, if you purchase a home with less than 20% down, then it is likely your lender will minimize their loan risk by requiring you to buy Private Mortgage Insurance (PMI).
However, at Arbor Financial, we have mortgage options that will help you avoid paying PMI altogether! Whether you’re currently paying PMI, or you’re wanting to buy a home and have less than 20% for a down payment, contact our mortgage specialists to discover options to avoid paying PMI.
6. How much home can I afford?
A pre-qualification is the best way to find out what you may be able to afford. You can get an estimate of the total mortgage amount a lender would be willing to loan you by filling out a pre-qualification.
Keep in mind, the pre-qualification is a preliminary step and is an estimate of how much home you could afford and how much you can borrow. However, this is not a guarantee of loan.
A pre-approval on the other hand is a deep dive into your financial picture and requires more information than a pre-qualification. At Arbor Financial, pre-approval means you can be confident in knowing the loan amount you are approved for. With this information, you can start searching for your home that's within your budget.
We recommend starting the pre-approval process as early as possible, so you are ready to make an offer when you find the right home.
7. Can I get a mortgage if I have student loans?
You can certainly qualify for a mortgage and purchase your home while you have student loan debt. Mortgage lenders look at a number of things in order to qualify you for a loan. Your total financial picture will be considered, as lenders evaluate things like income, assets, total debt and your debt to income ratio.
The debt to income ratio is how much you owe in debt compared to how much you make. The calculation uses your gross income – that is, income before taxes. Debts, like car loans, credit cards, student loans, and mortgage payments, are also included.
Cell phone bills and other utilities are not included in the debt to income ratio.
As an example, if your gross monthly income is $4,200, and you have a $300 car payment, a $400 student loan payment, and a credit card payment of $50 per month, your current debt would be $750.
Lenders then add your future mortgage payment to that debt to predict your ratio after you purchase a home. If the payment on your new home is $1,000, then your total debt is $1,750. Dividing your monthly debt of $1,750 by your monthly gross income of $4,200 means your debt to income ratio is at 42%, and you could qualify for a mortgage.
With good credit, borrowers are often approved for loans with debt ratios of 45% and higher.
8. When should I get pre-approved?
Really, the first step of the home buying process is getting a mortgage pre-approval. You can get pre-approved at any time during the house hunting process, however, we recommend you do it as early in the process as possible. If you do a pre-approval prior to finding a home, then your completed application can be processed quicker.
The pre-approval is good for 120 days. If you’re unable to find a home within 120 days, don’t worry, we’ll just get updated information from you.
It’s also important to note that once you are pre-approved, you will want to avoid making any large purchases, like buying a new car, putting furniture on a credit card, opening a new credit card, etc., as these actions could affect your credit, and therefore, your pre-approval. Changing jobs can affect your pre-approval, so keep that in mind while house hunting.
9. What is a good credit score?
Your credit score determines a lot of things, and owning a home is no exception. The better your score, the lower your annual percentage rate will be. And while you definitely don’t need perfect credit to own a home, all loan products do require a minimum score.
To qualify for a home loan at Arbor Financial, your credit score needs to be at least 620 .
Learn more about what a good credit score is, what impacts your credit score, and how to protect it.
10. What is escrow?
An escrow is an optional way to help save for your annual home insurance and property taxes. Your mortgage lender can set up an escrow account, so that you pay both your monthly mortgage payment, along with your estimated property tax and homeowner insurance in one monthly payment. Then, the lender will make your property and insurance payment for you using the funds from your escrow. It’s a simple way to make sure you have the funds when these expenses come due.
Without an escrow account, you will be personally responsible to save for and pay your home insurance and property taxes.
11. What is the benefit of a shorter-term mortgage?
The biggest benefit to having a shorter-term mortgage is paying it off faster at a much lower cost (paying less in interest). If you can afford the higher monthly payments, then reviewing your options for mortgage terms is wise.
12. What documents are needed to qualify for a mortgage?
• Residential history, including an address from the last two years, and if applicable, any landlord names and addresses
• Paycheck stubs from last 30-days showing year to date income
• W-2 for past two years
• Last two years of federal tax returns (if you're self-employed)
• Bank account statements for two months
• Other investment statements, such as IRA, stocks, bonds, CDs or other assets you intend to use for a down payment
• Monthly debts that are not listed on your credit report
13. How much are closing costs?
The last step to home ownership is the closing. This is where the buyer, seller, and their respective agents, along with a representative from the title company which manages the paperwork, will meet to sign all necessary paperwork and hand off the keys.
Who pays closing costs? A buyer can expect to pay closing costs, which typically range from 2-4% of the total purchase price. However, it is not uncommon for all or part of the closing cost to be negotiated and paid for by the seller.
What is your next step?
Many home buyers want to jump right in and start looking for homes on the market. However, your first step should be to talk to an Arbor Financial mortgage specialist. By doing so, you can understand what your lending options are and establish a budget. There are so many mortgage products and options that you may not be aware of, like our low and no down payment mortgage, or our ability to eliminate PMI payments. It makes sense to talk to our team, so we can offer personalized mortgage options for you.
Then, assuming you’re ready, it's time to get pre-approved! Most real estate agents won’t start showing you homes until you have a pre-approval letter, which lets them know that you can afford the home, and you are a serious buyer.
With your pre-approval letter in hand, now it’s time to work with your local real estate agent to shop for the perfect home!
Our mortgage team is happy to answer any questions you have – contact them here.