Obtaining a loan for a home purchase is a necessity for the majority of buyers, especially first-time home buyers. Understanding the steps of getting approved and knowing the paperwork you’ll have to produce ahead of time will help the process move quickly and hopefully reduce the amount of stress involved.
Amy Ivy, a loan originator with Cherry Creek Mortgage, answers some common questions about homeownership, down payments, getting pre-approved, credit scores, types of loans and private mortgage insurance.
Q: How much money are people usually putting down as a down payment? Is a 20 percent down payment still required to get the best mortgage rate?
Amy’s Answer: The amount of money that homebuyers choose to put down on a purchase is highly dependent on specific circumstances and goals for each individual and can vary greatly. Certain loan products such as VA loans will allow 0% down while conventional loans will allow for as little as 3% down if you are a first-time homebuyer (or haven’t owned a home in 3+ years) or 5% otherwise. FHA loans allow a minimum down payment of 3.5%.
Shockingly, in some of these cases, there actually may be some financial benefit for putting less than 20% down. This may come in the form of a lower interest rate or a higher credit towards closing costs/fees. While low down payment loans are available, in the current market, showing a larger down payment in an offer tends to provide a competitive edge in multiple offer situations. Most of the buyers I am working with aim to show as large of a down payment as possible, sometimes exceeding 20%. This helps to demonstrate financial strength to Sellers and their agents and hopefully secures a contract faster. How Rising Mortgages Impact Home Affordability
Given the options and nuances of home financing, working with a knowledgeable agent and lender is imperative! Your real estate team will come alongside you to assure that you’re educated on your choices and will help you to assure that you position yourself competitively and strategically in this market.
The amount of money that homebuyers choose to put down on a purchase is highly dependent on specific circumstances and goals for each individual and can vary greatly.
Q: What “extras” do I have to pay if I don’t have a 20 percent down payment? How long would I have to carry those costs?
Amy’s Answer: If you choose to put down less than 20%, you will have to carry private mortgage insurance (PMI). The monthly PMI amount is influenced by many of the same factors like your mortgage interest rate including loan size and credit score. The exact amount is specific to each borrower/loan and can range anywhere between $30 and $400 a month or more.
Mortgage Insurance companies have specific guidelines around when the policy can be canceled and PMI can drop off a buyers’ monthly payments. For primary and second residences, the date when you can make a cancellation request is the earlier of (1) the date the mortgage balance is first scheduled to reach 80% of the original value; or (2) the day the mortgage balance actually reaches 80% of the original value. The second option here is especially interesting for many recent home buyers. With the market appreciation we have been experiencing here in Denver over the past few years, many of my borrowers have been able to drop their PMI within a year or two by obtaining a new appraisal showing that the value of their home has increased enough to meet this benchmark. It is always recommended that you be in close contact with your loan servicer to let them know you would like this to be removed when you get to this point.
If you choose to put down less than 20%, you will have to carry private mortgage insurance. The exact amount is specific to each borrower/loan and can range anywhere between $30 and $400 a month or more.
Q: Explain the difference between pre-approval and pre-qualification
Amy’s Answer: In the world of home buying, a pre-approval is much stronger than a pre-qualification.
Pre-qualification is typically a more casual conversation that a buyer has with a lender when they begin initial discussions around their ability to purchase a home. This helps a buyer to get a general idea of what they may be able to afford and often, is based on stated information from the borrower and typically not formally verified by the lender.
Pre-approval is a much more formal process. For pre-approval, a buyer completes a loan application, and credit is pulled to verify debt obligations. Additionally, assets are verified, as well as income by reviewing pay stubs and/or verification of employment. A pre-approval gives a strong indication of a buyer’s credit worthiness and ability to borrow and allows for a specific approval up to a certain amount. Most sellers and their agents will require that a buyer be fully pre-approved prior to accepting an offer from them.
Most sellers and their agents will require that a buyer be fully pre-approved prior to accepting an offer from them.
Q: Outline some of the necessary documentation necessary to get a loan
Amy’s Answer: Whenever I start a home loan, I let my borrowers know that while there may be a lot of documentation required. They must remember that we are lending out large sums of money and are confined to specific documentation rules set forth by investors (primarily government entities). That being said, we generally work with the “Rule of Two” in the mortgage industry, which means we need two of almost everything! As a general rule, we must document two years of residence history, two years of employment history, two years of income history with W2s (or tax returns, if self-employed), obtain two of the borrowers’ most current pay stubs, and two months of recent bank statements to verify liquid funds. Additionally, we will need to pull credit to verify debt obligations for each borrower. From here, depending on the specifics of the deal and the borrowers, we could very possibly need additional documentation to support nuances that may come up.
As a general rule, we must document two years of residence history, two years of employment history, two years of income history with W2s (or tax returns, if self-employed), obtain two of the borrowers’ most current pay stubs, and two months of recent bank statements to verify liquid funds
Q: What do I need to know about my credit score before applying for a loan? If I need to improve my credit score, how long will it take?
Amy’s Answer: First, know that you don’t have to have a super high credit score to get a good loan, but generally speaking, the higher your credit score, the better.
Mortgage lenders are bound by specific rules which determine what credit scores you need to buy a house, and those rules vary by your loan type. Conventional loans are the most common loan type. On the credit score scale, which ranges from 350-850, conventional loans require a credit score of at least 620. Other loan types allow for lower credit score minimums, and some mortgage programs have no credit score requirement whatsoever (although this is very uncommon).
If you need to improve your score, you should work with your lender to create a specific plan to achieve improvement. Depending on the specifics of your credit, you could see improvement quickly. However, for some items, the main thing that will result in change is merely letting time pass. A good lender will be able to guide you through this process and help navigate the timing and strategy for seeing improvement that will help you increase your credit score and put you in a better lending position.
If you need to improve your score, you should work with your lender to create a specific plan to achieve improvement.
Q: What factors impact the mortgage rates I receive?
Amy’s Answer: Mortgage rates are based on risk and are impacted by numerous factors. The primary vehicle that drives mortgage rates for all lenders is US Treasuries. From here, you can see a variety of rates as a borrower. Factors that impact risk, and therefore rates, include loan-to-value ratios, credit scores, loan amount, property type and type of loan. You also always have the option to buy down your rate if you prefer. In the end, no two deals or borrowers are exactly the same, so be sure to get an overall picture of rate and other costs involved in your transaction, especially if you are comparing rates between lenders.
The primary vehicle that drives mortgage rates for all lenders is US Treasuries. From here, you can see a variety of rates as a borrower.
Q: What are some of the costs of closing on my home?
Amy’s Answer: Each lender structures home loans differently, so you’ll want to get a good idea of costs and rates to understand the full picture of what you should budget for. Some fees that may vary greatly between lenders,and should inquire about origination, processing and underwriting fees, and rate discount points. Additional fees that a buyer will typically incur for each transaction are credit reports, tax service, HOA documents, title insurance, escrow closing and recording fees. These can range from around $2,200 and upward. As a buyer, you should request an official loan estimate when trying to compare rates/fees.
In addition to fees, you should be prepared for some initial prepaid costs. These are items you have to pay for up-front when you close a loan and they include one year of homeowner’s insurance premiums, any property taxes due, prepaid interest on the loan you are taking out, and the initial setup of the escrow account for taxes and insurance which allows the lender to incorporate these fees into your monthly mortgage payment.
You should expect closing costs and prepaid items to start around $6,000 but as you can see tell from above, they can and do vary widely.
Q: Any final thoughts on how a first-time home buyer can improve their chances of getting a loan?
Amy’s Answer: First I would encourage first-time buyers to not be afraid to get out there and start the process! I have helped many people buy their first home ranging from recent college graduates to folks a little later in life, so it is never too early or too late to accomplish this goal! A few things that will help the process:
- Create a budget, so you have a good idea of what you feel comfortable with for a housing payment
- Start saving money as diligently as possible. It will help with the home buying process and is important to have some funds set aside after closing as well.
- Get preapproved before you fall in love with homes so you know what you can afford
- Make sure you have a good team on your side. It takes teamwork and you will want to make sure you feel comfortable with those helping you as that they have your best interests in mind!
- YOU CAN DO IT!!