12/16/2022
Homeownership has become an expensive process that often requires the help of mortgage financing. That's why many first-time buyers have some doubts about how the process works.
To put those fears aside and give you that knowledge of what to expect, we made our list of frequently asked questions about mortgage loans in the United States.
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Do I need a good credit score to get a mortgage?
No, you don't, but it does help you get better terms. It is not uncommon to get government financing with a score of 500 or a conventional mortgage with just 620+.
The problem boils down to a higher interest rate the lower your score. For example, a credit gap from good to excellent can mean a savings in excess of $50,000 USD.
Are there any no down payment housing programs?
There certainly are. For this to happen, both you and the property must meet certain conditions. A lot has to do with the location of the house, your employment history, credit behavior and other relevant factors. You can check with an agent to see if this option is available.
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Some examples are FHA loans program, or USDA and VA mortgage loans, among other government backed programs.
Difference between pre-qualified and pre-approved?
Prequalified status should not be confused with pre-approved status.
The former is based on verbal information you give to the advisor or executive, so there is no verification, no documents and no written commitment on the mortgage. It is an estimate of how much you can borrow and lying about it can have negative effects.
Pre-approval, on the other hand, is an agreement with the bank or lender that requires you to submit the same paperwork as for the application (pay stubs, bank statements, etc.).
It is important because it demonstrates to the sellers your commitment to buy and you get a written guarantee of the amount they may lend you.
What documentation is required for a mortgage loan?
Although the request for documents may vary from lender to lender, it is a fairly standardized procedure. Most commonly you will be asked for the last month's pay stubs, W2 forms for the last 2 years and social security number. In addition, you will need to submit:
- Driver's license.
- Bank statements.
- Verification of source of income.
- Asset statements.
- Executed purchase contract.
- Copy of an escrow deposit (check).
What is an escrow account?
The escrow account is used to handle certain payments related to obtaining the mortgage, such as private insurance and taxes. When you get approved for a mortgage loan, you will have to deposit a lump sum into this fund and then continue to pay with each monthly payment.
What are mortgage discount points?
Mortgage points are a common option when it comes to obtaining better financing terms. There are 2 basic types: origination points and discount points.
Mortgage points are generally worth 1% of the total cost of the loan and serve to reduce the interest rate. The purchase of each point lowers your rate by up to 0.25% (maximum 5-6) and can save you a lot of money over 20 years.
What is private mortgage insurance?
PMI (Private Mortgage Insurance) is one of the most common requirements when taking out a conventional mortgage. It is applied when you do not have enough money to pay the down payment of 20% or more.
It is a policy that protects the bank in case you cannot finish paying the loan in the established time. To avoid this, you have the option of using 80/20 (2 loans), paying a higher interest rate or using a government-sponsored program.
What are closing costs?
Closing costs refer to a variety of payments you will have to make before you complete your loan. They are typically 2-5% of the appraised value of the home. They are additional charges that include legal fees, prepaid interest, documentation fees and more.
What is rate lock?
Locking the interest rate means that you reach an agreement with the bank that the interest rate will not change for a reasonable period of time, which can range from 30 to 90 days.
We recommend this option if you see that rates are going up and you don't want to expose yourself to a substantial change that would mean spending more money to process the mortgage.
Can I get a mortgage with bad credit or if I was in bankruptcy?
Yes, it is possible. If your credit is below 400, you will need to take steps to improve it. Depending on the type of bankruptcy (Chapter 7 or 13) and other factors, you may have to wait 2 to 4 years to get a mortgage loan.
If you have more questions about the details involved in a mortgage in the United States, our experts at Busconomico can clarify the most relevant issues for you.
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