Purchasing a home is most likely the largest financial decision you'll make in your lifetime. The process can be overwhelming at times. Doing your homework and being prepared with as much knowledge as possible will go a long way to helping you avoid common pitfalls and making the most of your financial future. Don't be afraid to ask questions. If there is some aspect to the loan process you don't understand, or a term that was used that you're not sure about the meaning of, ask us about it. We're happy to help you get a clearer understanding of the loan process and home buying in general.
We've compiled some of the more commonly asked questions here for you to review and get familiar with the terms and processes that you'll be encountering in your home buying journey.
How do I qualify for a mortgage?
You've already taken the first step! By visiting VIP Mortgage Group, you're on your way to getting help securing a mortgage. Call or email us today to get started. Your VIP Mortgage Group representative will take the time to get to know you and find out what your home buying goals are. We'll ask you some basic questions about your current financial situation, your job, your outstanding debts, and how much you are planning to put down as a down payment on a home. Based on your answers, we'll use our mortgage expertise to prequalify you for a certain loan amount and advise you of all the different loan options and programs available to you to make your home buying easier and more accessible.
What's the difference between prequalified and preapproved?
While the sound similar, they are in fact 2 distinct steps in the process of securing financing for your home. Prequalification is an introductory step that you take with your lender to see how much of a loan you can expect to qualify for. Your credit worthiness is based solely on information that you provide without any verification or credit checks being done. You can then use this information to begin your search for a home based on your specific price range.
A preapproval is a more in-depth review of your financial situation, beginning with an application, a credit check, and review of your financial documents like pay stubs, bank statements, tax returns, etc. The information you provide in the application is checked and verified, allowing lenders to get a clearer financial picture and arrive at a more accurate loan qualification amount. If you find a home and enter into negotiations with a seller, a preapproval, based on verified information, will give you an advantage over a prequalification.
How much can I afford to borrow?
Many factors go into determining your mortgage qualification. Your income, credit score, outstanding debt, etc. all play an important role in assessing how much mortgage your budget can handle. Using a mortgage payment calculator, you can enter your down payment and an estimated interest rate to determine the total amount that you should aim to borrow. With that being said, it is prudent to avoid maxing out your budget. Just because you can afford a certain mortgage amount, doesn't mean you have to spend it. Leave yourself some wiggle room in your monthly budget to be able to have some flexibility to save some money, or be prepared for possible financial hardships.
Are there things to avoid while getting prequalified?
Yes. Don't make any major financial moves during the loan process. Lenders will pull your credit report before closing to check for any new activity. Even something as seemingly positive as paying off a large portion of your other debts could raise a red flag and delay your loan approval. Here are some things to avoid:
Don't apply for a car loan, new credit card or other types of credit
Don't co-sign a loan for some else
Don't change jobs or quit your job, or decide to become self-employed
Don't miss a payment on other credit accounts, loans or utilities
Don't make large credit card purchases
If you find yourself in the position of having to initiate one of these items during your loan process, talk to your VIP Mortgage Group representative to discuss the best way to handle the situation in order to minimize the impact on your loan approval.
Can I get a mortgage if I have bad credit?
A good credit score is beneficial in getting a better mortgage interest rate and quicker approval, but if you have a lower credit score, or there is a bankruptcy or other negative mark on your credit history, it can more difficult to get approved, but don't give up. There are programs and provisions that make it possible to get approved for a mortgage. Talk you your VIP Mortgage Group mortgage specialist to see how we can help you with your situation. In addition, there are also steps you can take to improve your credit status on your own.
Check your credit report regularly. Did you know you are entitled to a free annual credit report from each of the three (3) major credit bureaus? Experian, Equifax and TransUnion will provide a free credit report to you once you've created a profile on their websites. They will try to upsell you to purchase various programs and protection packages, but all you really need to do is pull your report and carefully review it, focusing on the negative marks and working to clear them. A good method is to set an alert on your calendar for January 1 to pull your credit report from Experian, Equifax on May 1 and TransUnion on September 1 of every year.
Understand how certain financial activities/habits affect your credit score. Excessive credit checks from opening multiple charge cards can adversely affect your score. Limit the amount of credit cards you keep open. Pay your bills on time. Late payments can negatively affect your score. Don't max out your credit limits. Try to keep the amount of any credit card or line of credit to under 30% of the maximum limit.
Let VIP Mortgage Group help you get back on the road to good credit. We are experts in our field and possess the knowledge to help you restore your good credit and achieve your financial goals.
What are income and debt ratios?
Income and debt ratios are simple index numbers that help lenders determine your ability to pay your mortgage.
Income Ratio: Total Monthly Housing Expense DIVIDED BY Gross Monthly Income
Debt Ratio: Total Monthly Housing Expense PLUS Recurring Debts (Car Payments, Minimum Credit Card Payments, Other Loan Payments, etc.) DIVIDED BY Gross Monthly Income
How much of a down payment should I put down?
Simply put, the bigger your down payment, the better. Saving up a large down payment takes time, patience and hard work. Ideally, a 20% down payment should be your goal as it is the minimum needed on a conventional loan to avoid having to pay mortgage insurance (a monthly fee to the lender to insure against the borrower defaulting on the loan with little to no equity in the house). This large amount may not be attainable for many home buyers, in which case federal mortgage programs can help. FHA Loans allow buyers to only put 3.5% down and VA Loans allow for no money down.
When you meet with VIP Mortgage Group for your prequalification, we'll discuss your down payment and mortgage program options with you to make the best decision for your individual situation.
What is included in my monthly mortgage payment?
Your mortgage payment actually goes towards a lot more than just paying down the principal balance of your loan. As your mortgage statement clearly shows, a portion of your payment is applied to interest charges. When you're just getting started on a 30 year mortgage, that amount can be quite startling! You might wonder if you'll even pay off your loan, but rest assured – slow and steady wins the race. Your interest amount will steadily decline over the course of your loan term as your principal portion grows.
Your mortgage provider also pays your property taxes and homeowners insurance premium as well. They set up an "escrow account" that allocates a certain amount of your monthly loan payment to be held for a certain amount of time until the taxes or insurance premiums are due.
If your down payment was less than 20% and your loan program did not provide an exemption, a portion of your monthly payment will go towards a mortgage insurance payment. You'll be required to pay this insurance until such time when the amount you owe on your mortgage is 80% or less of the value of your home.
What is an escrow account?
As a service and a safeguard against exposing themselves to the risk of a homeowner not paying property taxes, lenders will typically set up an Escrow Account to collect a portion of the monthly mortgage payment until there is enough to pay the quarterly taxes or annual insurance premiums.
What is mortgage insurance?
Mortgage insurance provides protection to the lender against the risk of a borrower with little-to-no equity in the home defaulting on the loan, leaving the lender exposed to excessive loss. The borrower agrees to pay the Private Mortgage Insurance (PMI) premium as part of the monthly loan payment when it is determined that they will not be able to put down a deposit of at least 20% of the price of the home.
PMI can be removed from the loan when the borrower achieves 20% equity in the home by paying off 20% of the loan amount OR if the value of the home rises before that threshold is reached, a new home appraisal can be submitted to the lender to show that the outstanding amount remaining on the mortgage is less than 80% of the new appraised home value.
What are points?
Sometimes referred to as Mortgage Points or Discount Points, they are a way for the borrower to prepay interest in order to get a lower APR interest rate on the mortgage. Each point is equal to 1% of the home's price. So, on a $200,000 home, a point will cost $2,000 upon closing, but will lower the interest rate by 1/8 to ¼ of a percent. If you plan to stay in your home long term, the lower interest rate could offer significant savings over the life of the loan. However, if you are not certain of your long term plans, it would be better to apply the money you would spend on points towards the down payment in order to pay off the mortgage quicker.
What is a rate lock?
Interest rates can change from one day to the next, adding uncertainty to your loan process. By locking in your interest rate with your lender, you can have a fixed percentage to calculate your loan expenses on. Typically a Rate Lock will last 30-60 days and some lenders even provide downward mobility if rates decrease during your lock period.
What are closing costs?
Closing costs are extra expenses due at the end of the loan process that cover attorney fees, insurance fees, documentation fees, any prepaid interest, and more. They typically range anywhere from 2% to 5% of the home's price and are payable by both the seller and the buyer. They are detailed in the Closing Disclosure statement that is provided by the lender three (3) days prior to the closing.
Buyer's Closing Costs
Half of Title and Escrow Fees
Any additional costs (title insurance, inspection fees, earnest money, real estate broker fees, credit report fees)
Seller's Closing Costs
Half of Title and Escrow Fees
Real Estate Commission
Any additional costs (prorated property taxes, prorated HOA fees, real estate broker fees, septic inspection fees)
VIP Mortgage Group is here to help you through the closing process and put your mind at ease. We'll answer all your questions and make sure you are completely prepared to close on your new home.
When is a good time to refinance?
Refinancing your long-term mortgage can be an excellent way to reduce your expenses. When considering refinancing your mortgage, remember that there are significant closing costs involved, just like when you are buying a home. Inspections, appraisals, title searches, etc all have to be done. The savings that you can realize from a lower interest rate or shorter loan term must be greater than the cost of closing in order for the refinancing to be profitable.
The amount of time you plan on remaining in your home will factor into your decision as well. The less time you plan on staying the shorter amount of time you have to realize the benefits of the refinance.
If you are currently in an Adjustable Rate Mortgage, switching to a Fixed Rate Mortgage can protect you from possible interest rate increases and future economic uncertainty.
If you have high interest credit card debt, refinancing your mortgage to consolidate your debt into a low interest rate loan is an excellent way to reduce interest expenses and pay down your debts.
How long does it take to close on a house?
While every home purchase is different, you can expect your closing duration to be approximately forty (40) days. Many factors affect this process such as the type of loan program you've chosen, your current financial situation, stipulations and conditions of your tendered offer, and unforeseen circumstances arising. The best advice is stay loose and trust VIP Mortgage Group to walk with you through the entire loan process.