If you don’t have a 20% down payment, you will be asked to carry private mortgage insurance (PMI). This insurance covers the lender in the event that you aren’t able to make your loan payments. You are required to carry this insurance until you’ve paid 20% of the purchase price of your home. PMI rates vary based on lender, your credit score, and other factors, but they’re typically 0.3–1.5% of your loan amount, broken down into 12 monthly payments per year. The lower your down payment amount, the higher the rate of your PMI. You’ll pay your PMI in your monthly mortgage payment.
Veterans who receive home loans through the VA will not have to pay PMI.
Your escrow account is a separate account meant for paying yearly taxes and insurance that is opened after you close on your house. When using an escrow account, you pay 1/12 of your annual taxes and insurance costs each month—when you make your monthly payment, principal and interest get paid while the additional amount funds your escrow account. The bank will manage your escrow account and make the necessary tax and insurance payments for you when the time comes. An escrow account ensures that you have everything you need to make your yearly payments and keeps you from having to pay thousands of dollars at once when insurance and tax payments come due. Since taxes and premiums can change on a yearly basis, someone from the bank will review all the costs with you once a year to make sure your escrow account is on track.
The pre-approval stage is where a lender will formally check your income, expenses, and credit history to determine if you’re qualified for a home loan. You’ll also find out the maximum amount you might be able to borrow during this process. A pre-approval will show as an inquiry on your credit score and is only valid for 90 days, so you shouldn’t apply for pre-approval until you’re sure you want to buy within that 90-day window. Pre-approval is also attractive to sellers, showing that you’re a vetted buyer with the support of a lender.
A pre-approval loan amount isn’t set in stone, however. Numbers could still change during the official mortgage application process, so it’s a good idea to choose a home that’s priced under your maximum pre-approval amount. It’s also recommended that you avoid opening new lines of credit during this time period. New credit lines might cause your credit status to change for your official mortgage application, potentially leading to surprises in your numbers.
Documents Checklist For Pre-Approval
You’ll need to have these documents ready for the pre-approval process. If you have a co-buyer, their documents are needed as well.
- The last two years of residential address(es)
- Name(s) and address(es) for your landlord(s) for the last two years
- Recent bank account statements for all of you and co-buyer’s checking and savings accounts
- Statements for previous two months on other assets, like IRAs, stocks, bonds, CDs, securities, etc.
- Any current real estate holdings, like property address, market value of property, mortgage lender’s name and address, loan account number, balance, monthly payment
Employment and Income Verification
- Pay stubs for last 30 days that includes YTD earnings
- W-2s or I-9s for last two years
- Any debt that doesn’t appear on your credit report, ie, recent student loans, car loans, new credit cards, etc. You’ll need to provide the creditor’s name, address, account number, minimum monthly payment amount, and each account’s outstanding balance
Making An Offer
Once you’ve found the house you’re looking for, it’s time to make an offer! The negotiations process on home buying is formal and involves written proposals between your real estate agent and the seller’s agent. Your real estate agent will provide research on the market value of the house you’re interested in and the surrounding area that will help you come to an offer number. You can of course offer list price, but the seller will often have a little wiggle room you can use to negotiate a lower price—your real estate agent will be able to advise you on which approach they think is best.
Many negotiations involve a few back and forths, so don’t get discouraged if your first offer isn’t accepted.
Making Yourself An Attractive Buyer
There are several ways to put your best foot forward when making an offer. Being pre-approved for a loan is one of the best ways—it shows the seller you’re serious and a lender can financially back up your offer. Putting forward earnest money will further show your commitment to buying the house, and it might make you look better than another bidder who doesn’t offer money up front. You can also make things easy on the seller by scheduling your inspections quickly—remember that sellers are regular, busy members of the community just like you!
Sometimes a seller may make “concessions” in the negotiations process to come to an agreement more quickly. For example, a seller might agree to give some money towards a buyer’s closing costs, give extra money towards upgrades like carpet replacement, agree to leave appliances in the house, etc. Sellers are under no obligation to make concessions—talk to your real estate agent about when it’s appropriate to ask for one during negotiations.