At PRMI, we know that home buyers often have a lot of questions. Well, we have answers! We love educating families about the home financing process and helping them make decisions that are right for them. Here are some of the most common FAQs about the home buying process:
How much of a down payment will I need? Studies show that many people believe you need to have a 20 percent down payment to buy a home. Not so! Depending on the type of home loan program you qualify for, your down payment requirement could be (drumroll, please) … zero! The VA home loan program — designed for veterans and military personnel — has a no-downpayment option, but closing costs and fees may still apply. Other types of loan programs have down payments as low as 3.5 percent to 5 percent of the loan amount.
What is the difference between pre-approved and pre-qualified? When a homebuyer is pre-qualified, he or she has provided the lender with basic information to determine which loan program the homebuyer may qualify for to get an idea of how much home they can afford. When a homebuyer is pre-approved, the lender has collected, verified and presented the information needed for underwriting and approval. Many home sellers will accept offers only from pre-approved home buyers.
What is the difference between interest rate and APR? Your interest rate is the monthly cost of the unpaid balance of your home loan. An Annual Percentage Rate (APR) includes both your interest rate and any additional costs or prepaid finance charges such as the origination fee, points, private mortgage insurance, underwriting and processing fees (your actual fees may not include all of these items). While your interest rate is the rate at which you will make your monthly mortgage payments, the APR is a universal measurement that can assist you in comparing the cost of mortgage loans offered by different lenders.
What are closing costs? Closing costs include an assortment of costs, such as appraisal fees, title insurance fees, attorney fees, pre-paid interest and documentation fees. These items are usually different for each customer due to differences in the type of mortgage, the property location and other factors. You will receive a Good Faith Estimate of your closing costs in advance of your closing date for your review.
Which amounts are included in my monthly payments? If you have a fully amortizing mortgage, portions of your monthly mortgage payment go toward loan principal and interest. If your mortgage carries mortgage insurance, a portion of your monthly mortgage payment will include this as well, unless the lender has paid your mortgage insurance or you have paid your mortgage insurance upfront. If you have set up an escrow account for your mortgage, then a portion of your monthly payment will go toward your property taxes and homeowners insurance.
What is PMI? Private Mortgage Insurance is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Studies show that generally, the lower the downpayment a homebuyer makes, the greater the risk of default. That’s why typically, PMI is required if your down payment is less than 20 percent of the value of the home you are purchasing or refinancing. The cost of PMI is customarily added to your monthly mortgage payment.