Getting a home loan isn’t simple. The complexity of the process means that there
are a lot of different things for you to consider. Out of this, many questions
arise. The following are some of the most common questions, along with a brief
answer for each. For more details on these subjects, please look at the rest of
our
Home
Loan Guides.
What are the Advantages of Purchasing a Home?
Beyond just securing a
place to call your own, purchasing a home can actually be a very good
investment.
Renting
an apartment or condo is like paying for a service that stops when you stop
paying. When you put money toward a home, though, you’re investing in a
commodity that is yours to do with it as you please. If you raise the value of
the place or there’s an upswing in the seller’s market, you could sell your home
for a very good profit.
If you decide to stay in the home and pay off the
mortgage, you can (eventually) say good-bye to monthly payments forever
(something that will never happen if you continue to rent).
Owning
a home can have great benefits for the very long term; imagine being able to
leave your home to your children, making it so they don’t have to put up with a
mortgage. Some places remain in a family’s possession for generations. These are
just a few of the benefits of home ownership.
What are Prequalification and Preapproval?
Prequalification and
preapproval are both processes in which you contact a lender to get an idea of
how much money you will be eligible to
borrow
for a home loan. Prequalification is very informal and can usually be done with
a phone call. The problem is that, while the estimate can certainly be accurate,
it’s also very possible that it won’t be at all.
Preapproval requires
much more paperwork, as it is a formal process. You’ll know exactly what you can
get from a specific lender. That way, you can go find a house for that amount or
less and be sure that you can get a loan. Some sellers may even require
preapproval from you.
What are the Costs Attached to a Mortgage?
Unfortunately, a
mortgage requires more than just a simple fee. It’s a legal process involving
several parties, so things are a little more complicated. Here are some of the
more common things you may end up paying for:
- Underwriting charges
- Processing charges
- Origination fee
- Appraisal fee
- Credit report
- Title insurance
- Attorney fees
Some lenders will try to inflate these fees up
front, so it’s a good idea to ask for a Good Faith Estimate (GFE), which will
list out all the costs and charges. With this estimate in hand, you can take a
closer look to make sure that everything is what it should be.
What is Involved in Applying for a Mortgage?
In addition to
filling out the actual paperwork, you’ll have to gather some information. First,
you’ll want to go through the process of preapproval (see above). Then, you’ll
need to get your credit report analyzed and the
property
appraised. Finally, you will have to fill out several documents in regard to
income, employment verification, assets, debts, and expenses. Your lender will
consider all this information along with your application when deciding whether
or not to approve you for a loan.
Are There Government-Supported Home Loans?
Yes. Departments like
the
Federal
Housing Administration (FHA),
Department of Veteran Affairs (VA), and
U.S. Department of Agriculture (USDA) actually guarantee loans
to those who meet specific eligibility requirements. If you meet these
requirements, you may be able to get a loan with relatively low interest rates
or a smaller down payment.
What are Fixed-Rate and Adjustable-Rate Mortgages?
These are the
two broad categories of available
mortgage
loans. With a fixed-rate loan, your interest rate will stay exactly the same
throughout the entire length of the loan, unless you refinance or in some other
way renegotiate the terms of the loan. With an adjustable-rate mortgage, the
interest rate is adjusted periodically to bring it in line with market rates.
Adjustable-rates are usually lower at first. This is an attempt to compensate
for the risk that the rate may go up in the future.
What is the Difference Between Interest Rate and APR (Annual
Percentage Rate)?
The interest rate is the
annual interest you are charged over your principal amount. So, if the principal
of the loan is $100,000 and the interest rate is 10%, your total interest paid
for the year will be $10,000.
The
annual
percentage rate (APR) includes the interest rate as well as any other lender
fees that are required to finance the loan. These fees could include pre-paid
interest, closing fees, mortgage insurance, and others. Simply put, APR is the
total cost of loan per year, not counting the actual principal of the loan.
What is a Credit Score?
Your credit score is a statistical
analysis of your credit files. It represents your creditworthiness. Your credit
score takes into account all of your past credit and can include almost anything
(car loans, home loans, personal loans, and much more). Lenders use your
credit
score to help determine whether or not they will give you a loan. If you
have a long credit history and have had no problems making payments, you
shouldn’t have much trouble securing a favorable loan. On the other hand, you’ll
have a little more trouble if you have a bad track record or no credit history.
What is Private Mortgage Insurance?
Private
mortgage insurance (PMI) is often required by lenders if you want a loan but
can’t afford a typical down payment (usually somewhere between 10% and 20% of
the cost of the home).
Putting down a lower down payment (as little as
0-5% with a PMI) is risky for the lender, so they secure a PMI policy for you,
for which you pay a fee along with your
monthly
loan payment. Say you make a 5% down payment at closing: If you were to
default on the loan, the lender would receive (from the PMI company) the
difference between an ideal down payment of 20% and what you actually put down,
in this case, 15%.
PMI can be cancelled after you’ve paid off some of
your home loan or if the value of your home goes up (see our guide on the
subject for more details). PMI isn’t ideal, but it can make securing a home loan
possible for low-income families.