You’re ready to buy a new construction home — at least you’re feeling ready. Financially, however, you’re just not sure. After all, you just looked at your bank statements, and everything you have doesn’t quite add up to the price of your dream home. Not even close.
No sweat. That’s why we have home mortgages. And if this is your first time considering one, then rest assured it’s an easier nut to crack than some folks make it out to be. Plus, we’re about to make it a whole lot easier by answering the top five most commonly asked questions about home mortgages.
1. What is a mortgage?
Quite simply, a mortgage is a home loan. You might have one for your car or college education, and the same concept is at work here. The thinking is that most people don’t have hundreds of thousands of dollars saved up or hidden under the mattress, so they need a third party — a bank or lender — to cover the cost of the home upfront. The homebuyer then pays back the loan, comprising principle and interest. The principle is the amount you’re borrowing and the interest is the extra amount you’re being charged for the ability to borrow that principle. Makes sense, right?
2. What will determine if I’m approved — and for how much?
When you complete a mortgage application, you’ll share key personal financial details that a bank will analyze to determine your loan eligibility. Some of this data includes:
- Income and expenditures: How much money comes in and how much goes out? Here your income will be weighed against all your expenditures, from bills to clothes and food purchases. This information helps the bank determine how much cash is available to make a monthly mortgage payment.
- Assets: Do you have savings, an inheritance, or valuables that will help with a down payment on a home? (A down payment is an initial home payment not included in your loan.)
- Credit history: Do you know your credit score? Your past and current ability to pay your bills pulls tremendous weight with lenders considering extending you a loan. Even minor blips in your credit history, such as a missed payment here or there, can cost you a preferable interest rate or even a loan. If you have blemishes, start polishing them up today.
3. What is pre-approval? And why do I want it?
This is the process by which your bank looks at all the factors listed above and determines the maximum loan you qualify for. It’s important to receive your pre-approval before looking at new construction homes so you have a realistic price range to consider. Having a prequalification letter in hand is like the key to your new home before the actual key. And it’s pretty exciting.
4. What are the most common types of loans?
We don’t have enough room here to list all the loans available, but we can tell you a little bit about some of the more popular options. If you’re going to be making the bulk of your house payments from your regular paycheck, then consider an FHA loan. (This is also a great idea for your first home.) If your credit is so good that your mailbox is flooded each day with AMEX offers, a conventional home loan might be the right choice. And if you are serving active duty in the military, are a veteran, or a surviving spouse, you’re eligible for a VA home loan.
5. What’s the difference between a fixed or variable mortgage rate?
Ahhh… now it’s time to get into the nitty-gritty. A loan with a fixed rate means you’ll pay the same rate for the entirety of the loan — 15, 30 or however many years you decide. (That said, you can always apply to refinance your loan down the road if you’re stuck with a higher number than the prevailing rate.) Variable rates can bounce around a bit, fluctuating with the financial markets. If the markets are doing good, you’re doing good. And paying less interest.
OK, we just shared a lot of information with you. Know that you’re not in this alone. We have a team of three preferred lenders that makes the process of buying your new home streamlined. And having a home builder and lender that work together easily, well, that just makes sense if you ask us. Learn more about our exceptional mortgage lending partners.