Q: What Are Typical Down Payment Requirements?
A: Down payments can vary widely between loan types, but the range is generally from 0% to 20%. Keep in mind that putting more down (on any loan type) can reduce your monthly payment and help you avoid private mortgage insurance (PMI) and/or other costs:
- 3% to 5% for conventional loans, but 20% will avoid (PMI).
- FHA loans could be as low as 3.5% for borrowers with better credit, but could be closer to 10% for buyers with lower credit.
- 0% for VA and USDA loans, but strict eligibility requirements apply.
Q: Aside from the Down Payment, What Are Some Other Costs to Expect at Closing?
A: Some other common expenses that are a part of the mortgage process are:
- Loan origination fees – a one-time fee paid to the lender for the cost of processing the loan application. Usually, this fee amounts to 0.5% to 1% of the loan amount.
- Appraisal Fees – the cost varies based on home size, location, complexity, and type of loan. It’s usually a flat amount between $300 and $500.
- Inspection Fees – Another flat fee typically in the range of $200 to $500, which is based on where you live and the size of the home.
- Title insurance – Varies by state, but lender’s title insurance protects the bank from claims on the property title. The cost is typically a one-time fee of between 0.5% and 1% of the loan amount. Owner’s title insurance protects the owner from the same, and is usually a lower cost of $200 to $600.
- Prepaid taxes and insurance – Depending on your closing date, you may have to pay a pro-rated amount of property tax and mortgage interest. The amounts vary widely and are based on your property value, state tax rates, and mortgage interest rate. Also, homeowner’s insurance may need to be paid up-front as well.
Be aware that these costs can add up to 2% to 5% of the home’s purchase price!
Q: What Factors Affect Mortgage Rates?
Mortgage interest rates are influenced by a number of external conditions, including both factors relating to the borrower as well as the economy.
- Federal Reserve policy – monetary policy, including the federal funds rate.
- Bond markets – US Treasury bond yields, such as the 10-year bond.
- Inflation – higher or rising inflation can lead to higher mortgage rates at banks.
- Your credit score – possibly the most important factor (the higher the better).
- Loan type – For example, adjustable-rate vs. fixed-rate mortgages will have different rates.
- Loan term – A 30-year term loan will have a higher interest rate than a shorter (15-year) term loan.
- Property type and location – Primary residence loans will have lower rates than investment property loans.
Q: What Documents Do First-Time Buyers Need to Prepare for a Mortgage Application?
A: In most cases, applicants need to provide proof of income, assets, liabilities, and ongoing debt service payments. The more organized you are, the quicker the approval process can move. Be ready to provide:
- Pay stubs, W-2s, 1099s, business profit & loss statements, and/or any other form of formal documentation for income sources.
- Bank statements, investment account statements, retirement account statements.
- Tax returns (typically last 2 years).
- List of debts and liabilities with payment info is needed to assess a buyer’s debt to income ratio.
- Government issued ID or passport.
- Social security number is needed for credit checks.
- Employment verification.
Q: How Is Income from Independent Contract Work Factored In?
A: Are you self-employed or freelance? When income from independent contractor work is factored into the mortgage process, a lender will typically focus on a borrower’s business net income (or net profit). Simply stated, that is gross income less business expenses. You’ll need two years of tax returns showing stable or growing income. Banks will average your net income – not gross sales or revenue – to assess what you can afford. Lenders may also request business bank statements or a CPA letter to verify income consistency, especially if your business is only a few years old.
Q: What Common Mistakes Do First-time Buyers Make When Applying for a Mortgage?
A: Mortgage bankers can tell horror stories for days about the unintended mistakes that inexperienced borrowers make. A good rule of thumb is to stay financially stable during the mortgage process. That means don’t open new credit cards or finance a car right before you close, for example. Here are some of the most frequent errors:
- Not getting pre-approved early, or at all. Without pre-approval, you are disadvantaged in the market from the start!
- Not checking (and improving) credit scores. It’s the single biggest mortgage factor.
- Underestimating total costs. There are various costs beyond the down payment, as we’ve outlined in the article. Have an emergency fund.
- Making large purchases before closing, especially if you are financing them.
- Changing jobs mid-process. Stability is key, and a change in employment will turn away lenders quickly.
- Not comparing loan options. Not all loans are created equal, and there may also be homebuyer assistance programs that could be available.
Now You’re Ready!
Buying your first home is one of life’s major milestones, and working with the right kinds of experienced financial professionals is critical to landing that house you love in today’s market. These professionals include – but are not limited to – a mortgage banker, a financial advisor, and a tax professional such as a CPA. Working with the right people can help ensure your first homebuying experience is a positive (and successful) one.
Do your homework and ask questions. The more prepared you are, the more confident you’ll feel unlocking the door to your new home. At HighPoint Advisors, LLC, our advisors have been helping our clients for many years prepare for, and navigate through, both the home buying and mortgage acquisition process. Every client is different, every house is different, and every financial journey to homeownership is different. Our experience and knowledge will help you gain the confidence you need to start your next life chapter in your new home.
Contact us today so we can help you assemble your team and buy your dream home.