Buying a home can be an exciting time. Unfortunately, it can also be stressful and financially overwhelming if you are not prepared. From searching through the different real estate listings and hiring a real estate agent to negotiating with sellers, the process of buying a home can be challenging. Thankfully, your lender can help.
This guide will help you understand a few key terms so that you can secure an efficient and affordable mortgage to buy your new home.
If you have ever applied for a credit card or loan, you may have heard the term FICO score. This score is a representation or grade of your credit history. FICO scores range anywhere from 300 to well over 800. The higher the FICO score, the better your credit is.
Good credit is key if you want to secure a mortgage, and credit scores over 760 are best if you want to secure the best interest rate possible. Having a low-interest rate is beneficial for a few reasons.
For one thing, mortgages with a lower interest rate will have lower monthly payments. In addition, a lower interest rate means you pay less toward the total balance of the loan.
You may be surprised to learn that your credit does not have to be perfect to secure a mortgage. There are many loan programs, such as FHA or VA loans, that approve mortgages even if you have a lower credit score.
Closing costs are also important to understand when you apply for and close on a mortgage. Most buyers confuse closing costs with their down payment, but they are two entirely different things.
The down payment is an amount you pay toward the home’s sale price. If you pay 20 percent down on a $200,000 home, then you will pay $40,000 down and finance the remaining $160,000. Closing costs are additional fees that you must pay on the mortgage at the time of closing.
Closing costs may include fees for the appraisal, inspector, and attorney. Closing costs will also include lender fees, loan application fees, and underwriting fees. In most cases, initial, prorated premiums for your homeowner’s insurance; property taxes; and HOA fees will be included in your closing costs.
Not only will you need to budget for your down payment, but you will also need to budget for your closing costs. Although different for each case, most closing costs end up totaling 2 to 5 percent of the total loan amount.
A preapproval can be one of the most important terms to know when buying a home. Unfortunately, a preapproval is often confused with a prequalification.
To complete a prequalification, lenders will ask for a quick overview of your finances, including your credit, income, and debt. A prequalification is a great first step because it helps determine if you qualify for a mortgage and how much of a mortgage you qualify for. Knowing this information will help you start the process of searching for a home within your means.
A preapproval is much more involved since lenders will conduct a detailed look into your credit, debt, income, thus beginning the complete application process. Once you have a preapproval letter in hand, you can use it as a negotiating tool. The preapproval will show sellers and their agents that not only are you interested in buying the home, but you’re also financially ready to buy the home.
Help is available if you are ready to buy a home. To learn about your options or to get started with the prequalification or preapproval process, contact New Horizons Credit Union today.