Finding the perfect new home can be hard work, but now you also have to navigate the mortgage financing process. There are many questions that arise when it comes to financing a new home. Below we’re answering four questions about financing a new home that homebuyers commonly ask.
1. Should I Be Pre-Qualified or Pre-Approved?
The correct answer is both! Some homebuyers confuse the pre-qualification and pre-approval steps of buying a new home. You can get pre-qualified by a lender by filling out a simple online form and providing basic information on your income, debt, and assets. A pre-qualification letter essentially outlines a general mortgage amount you could qualify for. It’s a helpful tool in narrowing down which houses, in which price range, you can feel comfortable purchasing.
A pre-qualification doesn’t mean that you are guaranteed to get a mortgage loan. It’s different than the mortgage pre-approval process where your finances will be looked over more thoroughly. During the pre-approval process, you’ll submit a formal mortgage application and your lender will review your financial documentation and credit history. At this point, you’ll receive a letter with a specific mortgage amount, along with interest rates and terms. Having a pre-approval in hand when you make an offer on a home can you an advantage over other potential buyers.
2. Will I Need to Pay Mortgage Insurance?
Whether you’re buying your first home, upgrading to your forever home, or down-sizing due to an empty nest, it’s customary to have a down payment of 20% of the final purchase price of your home. But when 20% is not do-able, there is a way you can still get the home of your dreams. You will, however, need to carry mortgage insurance to cover the smaller down payment. Mortgage insurance is necessary when your down payment is less than 20%. This protects your mortgage lender if you default, or are unable to repay the mortgage.
Normally, you pay mortgage insurance until you have built up 20% equity in your home and the loan-to-value (LTV) of your mortgage loan equals 80%. The LTV is simply the amount of money you borrow divided by the cost of the property you bought. For example, if your mortgage is $152,000 and the current value of your home is $189,000, your LTV is 80%.
How to Avoid Mortgage Insurance
Mortgage insurance can easily tack an extra $30-$70 for every $100,000 borrowed to your mortgage payment each month. The cost of mortgage insurance varies and is dependent on several factors, including the amount of your down payment and your credit score. Generally, the lower your down payment and the lower your credit score, the higher your mortgage insurance premium will be.
A sure-fire way to avoid mortgage insurance is to make a 20% down payment when purchasing your new home.
3. Closing Costs: What Is Included?
Oftentimes house hunters are diligent about saving a large down payment for their future home only to be charged for closing costs they weren’t anticipating and didn’t save for. Closing costs is a catch-all term for all the various fees you pay to your lender and other parties involved with the closing of your new home.
What do closing costs include?
On average closing costs will represent 2-5% of the purchase price of your new home. They include an interest payment, insurance costs, various lender fees, title and attorney fees, and an escrow account payment.
Your lender is required by law to provide you with a Good Faith Estimate (GFE) of what your closing costs will be within three days of you applying for a loan. But understand that many of these fees can change as much as 10% between the time you apply for a loan and close on your home.
Within one day of your new home closing, your lender will provide you with a final outline of your closing costs. Compare this to your original GFE and question any charges that have increased dramatically. You always have the option of walking away from your loan if you feel the closing costs presented to you are too high.
Can closing costs be negotiated?
Closing costs are typically paid by the homebuyer. However, buyers can try to negotiate with the sellers to pay all or a portion of the closing costs when they put in an offer on a potential home.
While it may be a tough sell, getting the sellers to absorb the closing costs (after all, it’s seen as a loss for them), there are a few things you can do to encourage them to take on the additional expense.
- Pay the Full Asking Price – In most cases, sellers don’t expect to get the full asking price so they may be willing to put those extra dollars toward closing costs if it means a quick sale.
- Make Closing Costs Your Only Request – Don’t pad your offer with other demands and requests. Unless there are issues with the home that do not pass inspection, do not ask for numerous repairs or upgrades. Those can be done over time.
- A Little Goes A Long Way – It’s more than likely that the seller needs the proceeds from the sale for down payment on a new home. They may not have funds available to put towards your closing costs. But even if they agree to pay a portion of the fees, it can alleviate your immediate out-of-pocket expenses.
How can I lower my closing costs?
The easiest way to lower your closing costs is to negotiate the lowest purchase price for the home. Even saving a few thousand dollars on the price of the home can bring down your closing costs to an amount you can manage.
Additionally, you should talk to several lenders and find a mortgage with the best interest rate and the fewest fees. For example, credit unions often offer mortgage products with fewer fees which translate into a lower closing cost.
Finally, set your closing date close at the end of the month. Your closing costs will include an interest payment that covers you from the day of your closing until the first day of the next month. Closing at the end of the month means you only pay a small fraction of that interest payment.
4. Homebuyer Assistance Programs: Do I Qualify?
Purchasing a new home is a big investment. You’ve been doing your best to save for a new home, but you may still need a little help before you make the leap. Start researching any homebuyer assistance programs for which you are eligible. Here are a few programs available to new homeowners.
- Federal Housing Administration Loans – The FHA helps first-time homeowners by offering loans that allow for a lower down payment, lower closing costs, and easy credit qualifying.
- Good Neighbor Next Door Program – Through this purchasing incentive, homebuyers who are employed as law enforcement officers, teachers (pre-K through 12th grade), firefighters, or EMTs can save up to 50% on the list price of a new home, if they make the commitment to live in that home for at least 36 months.
- Veteran’s Assistance Home Loans – Veterans, active service members, and surviving spouses are eligible for the benefits of a VA home loan. With VA assistance, you can purchase a new home at competitive interest rates and often without a down payment or mortgage insurance required.
- LHOP Homebuyer Loan Program – Locally, residents of Lancaster County are able to participate in the Homebuyer Loan Program from the Lancaster Housing Opportunity Partnership. First-time homebuyers may qualify for down payment and closing cost assistance.