As a service to first-time homebuyers, we’ve addressed several of the most often asked questions.
Purchasing a home is a huge life event for many people. Homeownership may help you generate long-term wealth, in addition to providing a sense of accomplishment. A favorable time to buy a house may also be now, given the historically low loan rates.
If you’re purchasing your first house, it’s a good idea to get to know the process beforehand. Avoiding severe setbacks is much easier when you’re well-versed in the subject matter. And if you encounter any difficulties, you’ll at least know what to do next. As you begin the process of looking for a first home, you may have a number of questions on your mind. Here are the answers to 23 frequently asked questions from first-time homebuyers.
Twenty-three questions for first-time homebuyers
First-time homebuyers learn a lot during the process of purchasing their first residence. As you begin your search for, purchase, and move into a new home, these answers, including how to secure a loan, will help you prepare for what lies ahead.
1. What is the process of obtaining a mortgage?
Lending money in exchange for an asset, such as a house, is what mortgages are all about. If you don’t pay back the money you borrowed from the lender, the lender has the authority to foreclose on your house. A mortgage can be used to borrow money against the value of a home that you already own.
2. What is the typical time frame for obtaining a mortgage?
It can take three to six weeks to complete the full mortgage procedure, from preapproval to receiving the actual loan. It may take longer to complete a loan application during peak months when the most reputable mortgage lenders get a large number of applications. There are multiple steps in the mortgage procedure, and if the lender finds any financial concerns, the process might be prolonged even more.
3. What is the difference between a fixed-rate and an adjustable-rate mortgage?
Fixed-rate and adjustable-rate mortgages are available.
A mortgage with a fixed rate
The interest rate on a fixed-rate mortgage, as the name indicates, remains constant throughout the life of the loan. By doing so, you may ensure that your interest rate will not rise in line with market rates. Even if the market interest rate may fall, your interest rate will not be affected.
Most fixed-rate mortgages are for 15 or 30 years, but there are other options for shorter or longer maturities. 94% of homebuyers in 2021 will choose a fixed-rate mortgage, according to data from the National Association of Realtors.
A mortgage with an adjustable-rate
The interest rate on an adjustable-rate mortgage might fluctuate in response to changes in the market. This implies that your monthly payment may fluctuate. After an initial period of time — which might be months, a year, or many years — during which the interest rate is set, the loan’s rate is adjusted yearly. The new rate is determined by the current market rate and the terms of the mortgage contract.
4. What is a reasonable rate of interest for a mortgage?
The current interest rate on a 30-year fixed-rate mortgage is 4.42 percent, which is 1.25 percentage points more than it was in March 2021. (as of March 24, 2022). Both the 15-year fixed-rate mortgage and the 5/1-year ARM (as of March 24, 2022) will see their rates rise to 3.63 percent and 3.36 percent, respectively. The cost of a home loan fluctuates on a daily basis. In spite of this, the prime rate has just been raised by the Federal Reserve (in March 2022). If you want to know if current mortgage rates are good, you may check out Freddie Mac’s current and historical rates.
Even though mortgage rates are at historically low levels, these aren’t the actual interest rates you’d receive as a borrower. They are, however, a good starting point. The benchmark 10-year Treasury note is used as a reference point for mortgage rates, but lenders also include credit risk and prepayment risk, as well as their forecasts for future inflation and interest rate increases, when determining loan pricing. As a borrower, you are charged a greater interest rate than the benchmark 10-year Treasury note.
5. How can I apply for a first-time homebuyer loan?
All around the country, grants, and loans for first-time homeowners are available at the state and municipal levels. Homeownership is made more accessible by lowering the necessary down payment, lowering the closing fees, and simplifying the credit qualification process.
As an example, consider the Federal Housing Administration loan from the Department of Housing and Urban Development. Lenders can offer you a lower rate since the FHA insures the loans. Private lenders make these loans available to you. Reduced credit score and closing fees allow for a down payment of as little as 3.5% of the purchase price instead of the 20% required by many traditional loans.
The Veterans Affairs home loan program is another popular option for service members and veterans looking to purchase a property. A VA loan, like an FHA loan, is backed by the Veterans Administration. Eligible members of the military and veterans can benefit from reduced interest rates, lower down payments, or no private mortgage insurance by taking advantage of these programs.
6. What are the requirements for home loan qualification?
An application for a mortgage will necessitate the submission of specific documents and information by the borrower. Some lenders may request more information than others. To meet with your lender, according to the Department of Housing and Urban Development, you should bring the following:
- Applicants’ personal identification numbers (SSNs)
- Checking and savings account statements over the past six months.
- Additional assets, such as stock and bond holdings, should be disclosed.
- Each applicant’s most recent payslip shows your wages.
- A list of all your credit card bills, including the monthly balances.
- List of all accounts and loan sums, such as a vehicle loan, that is still owed
copies of your most recent two years’ worth of tax returns
- Identification of a third-party witness to your employment
7. What credit score do I need to qualify for a mortgage?
Depending on the lender, kind of loan, and state in which you’re purchasing the property, your minimum credit score will vary. For example, a credit score of 500 is required to be eligible for an FHA loan. To get a traditional loan, your credit score would most likely have to be higher. In general, the lower your interest rates are, the better your credit score is. The greatest rates are available to those with credit scores in the mid-to-upper-700s.
8. What is a debt-to-earnings ratio, and how does it differ from a credit score?
This ratio is based on how much of your monthly income goes toward debt repayment. For example, lenders use this % as a gauge of your capacity to repay the mortgage. Your debt-to-income ratio can be calculated by dividing your monthly debt payments by your gross monthly income.
Mortgage payment: $1,300; car payment: $200; credit card payments: $300; and other monthly expenses: $500. There are $1,800 in monthly debt payments for you. $1,300 is equal to the sum of $200 and $300. Your debt-to-income ratio is 36 percent if your gross monthly income is $5,000. 36 percent of $5,000 is $1,800
According to the Consumer Financial Protection Bureau, a debt-to-income ratio of more than 43% will disqualify you from receiving a mortgage (CFPB). The federal government has created strict conditions for qualified mortgages in order to evaluate the borrower’s ability to repay the loan.
9. How do you select a lender for your mortgage?
To obtain the greatest price on loans, you need to shop around and compare lenders. Depending on the lender, you’ll be quoted different pricing for the same loan amount. Mortgage rates can be reduced by shopping around and negotiating with many lenders. Do your homework before signing up for any kind of loan.
Find out which lender is providing you with the best deal by requesting loan quotes from several lenders. Compare these estimates, negotiate for better conditions, and then select the mortgage provider that is giving the best price.
10. The term “mortgage points” refers to the value of a mortgage.
Saving money on your mortgage may be achieved through the use of mortgage points, which are also known as discount points. Your interest rate and, by extension, your monthly payment are decreased in return for an up-front payment. Adding points to your loan increases your closing costs at the time of purchase.
One percentage point is equivalent to one percent of the total debt. In the case of a $200,000 loan, one point equals 1% of the loan, or $2,000. The same is true for points, which aren’t usually represented by round numbers. It’s possible to pay 1.25 points, half a point, or even a quarter-point.
11. Is it possible to purchase a home without a down payment?
How much you need to put down on a house is determined by the type of loan you apply for as well as the specific criteria of the lender. A down payment is often required by the vast majority of lenders that offer traditional mortgages. Private mortgage insurance (PMI) may be needed for borrowers who take out a traditional loan but do not have enough money for a 20% down payment (more on that soon).
For those who cannot save a 20% down payment, you may want to check into government-sponsored house loans, such as the two I listed above (FHA and VA loans). These plans are more forgiving, and lesser down payment may be required.
12. What methods do you use to save for a down payment?
If you start saving for a house as soon as possible, the better. Many conventional mortgages need a down payment of at least 20 percent of the home’s purchase price to avoid private mortgage insurance, which is often required for conventional mortgages. Depending on the price of the home, this may be a lot. As an example, 20% of a $200,000 property would cost $40,000.
Creating a budget might help you save fast and effectively. A down payment fund may be set up by tracking your monthly expenditure, identifying areas where money is being wasted, and setting a budget.
In order to save for a house, you’ll need to select how far into the future you want to buy. It’s worth looking into a high-yield savings account or certificate of deposit (CD) if you’re planning to buy a home within the next five years or less.
13. What are the closing charges and how much do they cost?
Closing expenses are the fees and charges that come with buying a house. They can include, among other things:
- Fees associated with appraisals
- Insurance on the title to a property
- Taxes levied by the government
- Fees imposed by the lending institution
- Amounts already paid, such as taxes and insurance for your home.
For the most part, the buyer is responsible for the bulk of closing fees. However, buyers and sellers might work out a deal in which the seller assumes some of the closing fees for the transaction. Additionally, state law dictates who pays what at the closing.
14. What is private mortgage insurance (PMI) and how does it work?
Having a typical mortgage may need purchasing private mortgage insurance. Purchasers who put down less than 20% of the home’s buying price are often forced to buy PMI. In the event that you default on your loan, PMI is designed to safeguard the lender by helping to reduce the risk.
The lender arranges the PMI and the insurance company provides it. Your lender may have alternatives to pay your PMI in one upfront premium paid at closing or in a combination of upfront and monthly payments, but in most circumstances, it is added to your mortgage payment.
15. Should you obtain pre-approval for a mortgage?
Preapproval for a mortgage is a letter from a lender saying that they are willing to lend money to you in the future. It implies that a loan officer has examined your financial situation and decided how much you may borrow, how much you will owe each month, and how much your interest rate will be.
Although this letter is not a guarantee that you will receive a loan, it is crucial when making an offer on a home since it tells sellers that you will be able to secure finance to buy the property.
16. What is a buyer’s agent’s role?
Realtors with a legal obligation to represent the interests of the buyer in a real estate transaction are known as “buyer’s agents.” The term “listing agent” refers to a realtor who has a duty of care to the house seller. For example, they can help you identify a house that fits your needs, negotiate a deal, and connect you with additional specialists like real estate attorneys, home inspectors, and even moving companies. Buyer’s agents are there to guide you through the process of purchasing a house.
17. Is there a fee for real estate agents?
When it comes to real estate, commissions are rarely paid on an hourly basis. An average proportion of the home’s selling price is used for this. Fees range from 5 to 6 percent of the total house sale price, but this is the most common range.
A 5% commission on a $200,000 house sale, for instance, would equate to $10,000 in fees for a real estate agent. A real estate agent’s commission is not usually required when purchasing a house. In most cases, the seller is responsible for paying the full commission to both the listing and the buying agents.
18. Who should be responsible for the cost of a house inspection?
Buying a property means that you’ll have to pay the bill for a pre-purchase examination. An inspector who is only answerable to you will ensure that you receive a thorough examination and an honest assessment of the property’s physical condition.
See if anyone you know, whether close or far, knows of an inspector you can trust. Make sure to read internet reviews and only choose an inspector that you can trust to offer you an honest opinion. It’s possible to get out of the deal if your home inspector discovers that the property needs expensive repairs.
19. Is it possible for a vendor to refuse to repair an item?
A seller may or may not agree to pay for repairs, depending on the scope of the work required and the conditions of the purchase agreement at hand. When a house is inspected, it’s common to find problems with the foundation or structure, code violations, or other safety concerns that necessitate repairs. This means that the seller is likely to be held accountable for any repairs that are required if an inspection reveals these flaws. Sellers have two options in this situation: either correct the issues or give the customer a credit to use toward future repairs.
In the words of the Consumer Financial Protection Bureau (CFPB), “if your purchase contract is based on a good inspection, you have the right to terminate the transaction without penalty.”
20. What is the procedure for concluding a real estate transaction?
The final stage in the process of purchasing a property is the closing or settlement. Closing occurs when all parties involved in the mortgage loan transaction — real estate agents, attorneys, and your title insurance company — sign the required paperwork to complete the transaction. When you sign the mortgage papers, you become legally obligated to repay the debt. The importance of reading and understanding your loan agreements cannot be overstated. Get a copy of your contract before signing it; if there are any mistakes or misunderstandings, don’t sign anything!
21. How quickly can you move in after purchasing a home?
At the end of the transaction, in certain situations, the buyer is given full ownership of the property. In other cases, you may agree to let the seller a certain number of days to depart the property following the closing. Sellers and buyers should have a written agreement outlining all the specifics of the transaction.
22. What are your next steps once you’ve moved in?
When you move into a new house, there are a number of things you should do. Above all else, you need to make sure your house is safe. Changing the locks and passwords on all security systems is required. In the event of a break-in, you don’t want the prior owner to have access.
You should also do the following when you move in:
- Look over the previous owner’s house warranty, or consider purchasing a new one to cover any key systems or appliances in your property.
- Connect the utilities, such as water, gas, and electricity.
- Locate the circuit breaker panel and the emergency shutoffs.
- Do a thorough scrubbing.
- Make sure your smoke and carbon monoxide detectors are working correctly before you leave the house.
- Make a list of things that need to be done to keep your home in good working order.
- Re-decorate your property to make it your own
23. Is it necessary to get
life insurance while taking out a mortgage?
As one of your most valuable possessions, your house is also one of the most significant financial obligations that you have to meet on a monthly basis. Look into
Most of the finest
Many people’s lives are changed forever when they purchase their first house. It’s thrilling, but it may be difficult to manage the homebuying process. Make sure you’re well-versed in the home-buying process before you start looking. Making the proper preparations will save you time and money by allowing you to avoid costly blunders.