Image courtesy of Flickr, Marcel Oosterwijk
Consider the answers to these 7 questions before getting a home loan to help you better assess the financial obligations, responsibilities and risks involved with a mortgage transaction.
Eliminating risks from decision making are what many of us strive for. The truth is, we can never eliminate all risks because there are too many variables beyond our control. However, we can take calculated risks using what we know in order to minimize unwanted occurrences. When you are able to answer questions about home loan transactions, you will be able to make the best decisions, while reducing the risks.
The following are 7 important questions to ask yourself before getting a home loan.
If you're planning to put less than 20% down payment to purchase a home, or refinancing an existing loan with a Loan to value Ratio (LTV) of 80% or higher, then you will need to get private mortgage insurance (PMI).
Lenders require private mortgage insurance for cases when borrowers stop making payments on their loans and go into foreclosure. Essentially the lenders are making you pay to insure them against loss. Once you're Loan to value Ratio (LTV) reaches 80% or less you can ask your lender to cancel your private mortgage insurance policy. According to Freddie Mac you can expect to pay between $30 and $70 per month for every $100,000 borrowed. Use the BeSmartee PMI Calculator to see what you can expect.
To show the lender that you can afford the home loan you're applying for, you will need to submit sets of documents including but not limited to, your pay stubs, two years of your recent tax returns, and recent bank statements in order to get a pre-approval. Lenders will also pull your credit report to view your credit scores and assess your credit worthiness. Start gathering these documents before speaking with a lender to reduce any delays in your pre-approval process.
The U.S Department of Housing and Urban Development (HUD) has information regarding various home buying programs. Look through these programs and see which ones you may qualify for.
Another agency with educational information about getting a mortgage loan and becoming a homebuyer is the Consumer Financial Protection Bureau (CFPB).
These agencies are a good resource to help you put a budget together and review your debt repayment options. You should also check with your local city, county or state agencies to see if there are any classes or additional programs available to you.
Understanding the risks involved with getting a home loan can help you become better prepared for the unexpected. For example, learning that your home loan has a pre-payment penalty and knowing what this means and how it applies to the future. Another example is when you have a variable mortgage rate. How will this impact you if interest rates were to increase?
It's important to think about how long you plan to stay in the home you're buying, what consequences will you face if you cannot afford the monthly payments, and what solutions are available to you for such a case? Remember, there are always risks to getting a loan, but being familiar with the various types of scenarios will help you to budget and plan accordingly and ensure you have a smooth decision making process.
A rate lock essentially ensures that the interest rate you have qualified for will not change during the home loan process (typically 30-60 days), given there are no major changes to your qualifications during that time. The best thing about having your rate locked is that if the market rates go up during your home loan process, your rate will not change. However, if you're rate lock expires you will have to pay additional fee's to extend it (typically a fraction of a percentage, depending on your lender).
The best time to lock in your rate on a purchase loan is when the seller has accepted your offer. This will give you and the lender plenty of time to get all the documents ready for closing. Take note that some lenders will require you to lock in your rate after certain conditions have been met, such as having an appraisal completed on the property or after showing proof that you can afford the mortgage payments.
Rate locks can be tricky, so make sure you talk to your lender and real estate agent to choose the appropriate rate lock period.
The appraisal is typically part of the approval process. However, lenders can pre-approve you before ordering an appraisal so you can avoid out of pocket appraisal fees in case you don't qualify for the home loan. Once you have been approved, you will pay your appraisal fees upfront. The lender will order the appraisal on your behalf and issue the home owners or home buyer a copy of the report when it becomes an available. Be sure to avoid scheduling and paying for appraisal fees before you are certain the lender has pre-approved you.
Property taxes, home owner's insurance premiums, home repairs, yard maintenance and typical utilities are some of the costs that you will be responsible for as homeowner. Check with your county to see what your property tax rate is. Talk with a local insurance agent and ask them how much insurance premiums will cost. Have a budget set aside for repairs on the home. Click here to see the various tax rates for multiple counties in California.
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