Owning your own home is fantastic. It’s your castle, your place, your abode, and your shelter. And one of the greatest benefits of owning a home is that you can create wealth for yourself. Making the decision to become a homeowner can be stressful for many first-time homebuyers. The looming questions of affordability, where to purchase, and job security are all legitimate concerns that warrant serious consideration. If you’re ready to jump into the housing market, one of your first steps will be to approach a mortgage lender to get a sense of how much money you can borrow.
However, not all mortgages are identical, and not everybody can qualify for the same mortgage. There are some basic things you need to know when you go about getting a mortgage. The reality is that, there’s never a right time or the perfect circumstances to begin this journey, but ultimately, you want to treat house-hunting and the mortgage process as you would to other major life events.
Creating a timeline, educating yourself about the market, and understanding your unique financial situation and budget will make the process easier. Many people today are uninformed when it comes to the process of buying a house and how it all works. What is a mortgage? What does your credit score need to be? How do they work? And a lot more…
In this article, you will be taken by hand to break down what a mortgage is and how the process works from start to end.
What is a Mortgage?
A mortgage is a loan used to finance the purchase of a house. When you buy a home in most cases, you will be required to use a down payment, typically between 3.5% – 20% of the purchase price you will pay in cash. The remaining amount is borrowed from a mortgage lender; this loan is called a mortgage. For example, you make an offer of a $200,000 house, and it is accepted. You have 10% ($20,000) saved up; this will be your down payment. For the remaining 90% ($180,000), you will need a loan from a mortgage lender. Once the sale is completed, you now have an $180,000 mortgage loan that you will pay off monthly to the lender.
What are the Types of Mortgage?
An array of mortgage options exists; but they boil down to two basic types – fixed rate and adjustable rate. A fixed-rate loan has an unchanging interest rate, and your monthly mortgage payment doesn’t change. Right off the bat, you know how much your monthly payment will be for the length of the loan. With an adjustable-rate mortgage, or ARM, your interest rate goes up and down according to market conditions, and your monthly payment rises and falls with it. These loans also come with a low introductory rate, which resets to a market rate after a predetermined time, often one year. Don’t choose an ARM unless you’re confident you can handle higher payments down the road.
You should know below terms as related to mortgage:
A 30-year fixed-rate mortgage is generally the safest and best bet, especially, if you expect to live in your house for more than five years or more. It’s easier to understand and pick apart a fixed-rate mortgage.
There are a wide variety of mortgage options out there. You may find that some of the most creative ones (like interest-only, negative amortization, and adjustable-rate mortgages) work best for you. These mortgages might work for self-employed individuals with unpredictable (but sufficient) income, real estate investors, and buyers with a specific plan that fits these loans. However, you can also get yourself in trouble; so, it pays to learn about the risks of each type of mortgage.
A second mortgage allows you to borrow against the value of your home. You can get access to a comprehensive line of credit with an attractive rate, though there are some pitfalls.
What are the Costs associated with Mortgage Payment?
When you get a mortgage loan, there are more fees to pay besides just the principal balance on loan. There are taxes, insurance, and HOA fees to pay. Here is a breakdown of all the costs associated with a home loan.
The principal balance is the amount of money you borrowed. Each month a portion of your payment will go towards the principal balance. For the first few years, only a small amount of your mortgage payment goes to the principle, as the loan goes on, a larger percentage goes to the principal balance.
Interest is what a lender charges for lending you money. The majority of your monthly loan payment in the first 10-15 years will go towards interest.
Every state in the U.S. has property taxes that will be due each year. The county will assess the value of your home and charge you based on the county tax rate. Property taxes are usually included in your monthly payment and placed in an escrow account. The lender will make the tax payment when it becomes due.
Private mortgage insurance (PMI) is insurance on the loan itself. In the event a borrower defaults on the loan, the insurance company will reimburse the mortgage lender. PMI is required on all conventional loans with a loan-to-value ratio of over 80%. Meaning unless you put down at least 20%, you will be required to carry mortgage insurance. FHA loans require mortgage insurance regardless of how much money you put down. FHA MIP rates vary based on the amount of your down-payment. VA loans do not require the borrower to carry mortgage insurance at all.
Closing costs are fees charged by the mortgage company for funding and processing the loan. You will be charged for items such as your credit report ($20-$35), loan-application fee ($200-$400) and a loan origination fee (2%-5% of the sales price). Closing costs vary from lender to lender, so it’s a good idea to get a loan estimate from at least 3 lenders. This will ensure you’re getting a competitive interest rate and closing costs.
What do you need to get a Mortgage?
Now that you know what a mortgage is, you probably want to know what you need to qualify for a mortgage. There are several types of home loan programs that have different requirements, but here are the basics you need to be able to qualify for a loan:
You need a Steady Income
Your income needs to be sufficient to afford the loan. Lenders will accept not all types of income; income must be consistent and reliable. If you are a 1099 employee that is paid commissions or by the job, the lender will need 2 full years of tax returns. They will take the average income you have made in the last 2 years to use as your income. Your debt-to-income ratio, or DTI ratio, is the amount of your monthly income that is going towards debt. For example, if your monthly income is $5,000 per month, and you have a $200 credit card payment, $400 car payment, and your estimated mortgage payment is $1400. The total debt payments are $2,000, which is 40% of your income. Lenders like to see a maximum DTI ratio of 36% but may allow up to 45% in some cases.
Down Payment of 3% – 20%
A down payment is a percentage of the purchase price a borrower needs to pay in cash at closing. The amount you need to have will depend on the type of mortgage you get. FHA loans only require a 3.5% down payment, while a conventional loan will require between 5% – 20% down payment. There may be first-time homebuyer programs and grants that can help you with the down payment. Research more on this to find out if you can get such loan.
A Decent Credit Score
One of the biggest factors in determining your eligibility for a mortgage is your credit score. For most home loans you will need a 640 credit score. However, some lenders may be able to accept lower credit scores for an FHA loan. FHA loans require a 580 credit score with a 3.5% down payment. If you have a credit score of 500 – 579, you may qualify with a 10% down payment. However, finding a lender that will work with scores under 580 will be difficult. If your score is below 580, you should work on improving your score before applying for a mortgage.
9 Steps to Buying a House
Let’s face it; buying a house can be complicated whether you’re an experienced or first-time homebuyer, and there are many mistakes that you’ll want to avoid. These steps can help make the home buying process manageable and help you make the best decisions possible.
Step 1 – Understand the Housing Market
In a recent S&P/Case-Shiller report, home prices rose by 5.2 percent. Even with a stable labor market that supports the price increase, home prices continue to climb faster than inflation, igniting competition for fewer available homes. How does this affect first-time homebuyers?
According to Katie Miller, vice president of mortgage lending at Navy Federal Credit Union, the pricing hike “doesn’t necessarily influence the approvability for first-time buyers.” In fact, there are some 100 percent financing options available to first-time homebuyers that level the playing field and gives them a chance to participate in the market, Miller says.
Granted, when inventory is low, it does become a sellers’ market, making it tougher for buyers to compete, but working with a skilled-lender who can help facilitate the borrower through the process and is essential to getting approval.
Step 2 – Educate yourself and Shop Around
There are many moving components involved when taking on this life-changing responsibility of homeownership — and getting educated about the process is your first line of defense. Do your research to find a mortgage loan officer that understands your family goals and objectives; someone who can be a resource throughout the entire mortgage process. Consumer Affairs is a great place to start; the publication offers thousands of reviews for dozens of different lending companies. Determining your debt-to-income ratio and understanding how much of a monthly mortgage payment you can afford will keep you from overextending yourself and becoming “house poor.”
Step 3 – Know Your Personal Finances
Understanding your numbers before house hunting could save you from becoming “house poor.” Not paying your monthly credit card payment just to live lavishly isn’t a responsible buyer’s move. According to Bond, lenders consider how much liquidity you have, how much debt you owe, your monthly income, and your credit score when determining how much you can borrow and at what interest rate. For instance, your available liquid assets — those that can be quickly converted to cash define the size of your down payment.
Most banks require a minimum of 10 percent down; however, Bond suggests putting down at least 20 percent to avoid paying private mortgage insurance. Private mortgage insurance is default insurance payable to a lender, and it can add a few hundred dollars to your monthly mortgage. Additionally, recurring payments such as mortgages, credit card payments, car loans, and child support, are used to determine your debt to income ratio (DTI). For example, if your mortgage is $4,400 a month, your auto loan is $1,000 a month, and your credit cards total $600 a month, which means your monthly debt payments are $6,000. If you make $18,000 a month, your DTI would be 33 percent which falls within the range where a bank would lend.
Step 4 – Find the Right Real Estate Agent
When purchasing a home, employing a team of professionals is a major component that could determine the success or demise of your mortgage experience. A good broker will oversee the entire process and ensure that each element of the transaction goes smoothly from acquiring financing with the right lender to signing documents at the closing table with a skilled attorney, says Collin Bond, licensed associate real estate broker at Douglas Elliman Real Estate.
Bond advises that when applying for a mortgage, make sure that your taxes are filed and organized. Gather your last month of paystubs and make sure you can easily access the last two months of your bank accounts. You should also obtain a letter of employment from human resources, and check your credit history to determine if there are any discrepancies. The important thing is to remember that you have options and shopping around to compare what different companies are offering is a smart move.
Step 5 – Get Pre-approved for a Mortgage
Getting pre-approved for a mortgage is an in-depth process that generally involves the bank digging through all your financial documentation, checking your credit and giving you a conditional OK to buy a home up to a certain dollar amount at a preliminary interest rate. Clark says there is any number of places you could get pre-approved when you are ready to buy a house. But there’s one place he never wants you to understand that letter — at a big bank! As a general rule, credit unions will offer the lowest rates. But Clark is quick to remind people that “not all credit unions are created equal.”
So you’ve got to make sure you’re happy with the level of customer service at a credit union before you give them your mortgage business. Fortunately, you aren’t locked into doing a loan with the lender that pre-approves you. So, this gives you time to shop around further if you decide you don’t like the lender for any reason.
Step 6 – Start Shopping for Homes Online
Once you’ve gotten pre-approved, it’s time to start looking for the house where you’re going to live! The process of learning how to buy a house is different today because of the unprecedented online access to information about homes, neighborhoods, areas, and more. Apps like Redfin and Zillow both let you look as you’re riding around a neighborhood and explore homes for sale based on your phone’s geo-location capabilities. You can get so much info about square footage, the number of bedrooms, the number of bathrooms, the age of the home, the price per square foot and so on, right there in the palm of your hand. The more you “windshield shop” like this, the more you can target your home-buying efforts.
Step 7 – Get a Home Inspection
Typically, purchase offers are contingent on a home inspection of the property to check for signs of structural damage or things that may need fixing. Your real estate agent usually will help you arrange to have this inspection conducted within a few days of your offer being accepted by the seller. This contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage. Both you and the seller will receive a report on the home inspector’s findings. You can then decide if you want to ask the seller to fix anything on the property before closing the sale. Before the sale closes, you will have a walk-through of the house, which gives you the chance to confirm that any agreed-upon repairs have been made.
Step 8 – Work with a Mortgage Banker to Select Your Loan
Lenders have a wide range of competitively priced loan programs and a reputation for exceptional customer service. You will have many questions when you are purchasing a home, and having one of our experienced, responsive mortgage bankers assist you can make the process much easier. Every homebuyer has their own priorities when choosing a mortgage. Some are interested in keeping their monthly payments as low as possible. Others are interested in making sure that their monthly payments never increase. And still, others pick a loan based on the knowledge that they will be moving again in just a few years.
As you can imagine, there is a lot of paperwork involved in buying a house. Your lender will arrange for a title company to handle all of the paperwork and make sure that the seller is the rightful owner of the house you are buying.
Step 9 – Close the Sale and Move-In
Congratulations! You’ve reached the 9th and final step here. You get to move in! Go ahead, break out the dance moves – you’ve earned it. Because you’ve worked hard as a first time homebuyer to assess your finances and buy a house you can afford.
Top 10 Common Mortgage Scams to Avoid
Every industry has its shining stars and bad apples. The mortgage industry is no exception. For most consumers, a mortgage will be the largest single purchase they make in their lifetime. This makes picking the right mortgage lender even more important. How do you know which companies to avoid? There are some telltale signs to look out for when you are searching.
Here are some tips for ensuring you continue to stay in your home for many years to come:
Not Taking Into Account Your Ability to Pay
Your mortgage payment should be no more than 28% of your gross monthly income. It’s not the mortgage company’s job to create your household budget, but it should have a lot of questions regarding your finances. If it doesn’t, it’s probably not a company you want to deal with.
Excessive Loan Costs
Many of the loan costs are fixed, no matter how much you borrow. For a larger mortgage, expect the closing costs of your mortgage to be between 2% and 5%. If you’re borrowing less than $150,000, costs could exceed 5%. Some lenders will work costs into the loan in the form of a higher interest rate, but the lender should clearly disclose that to you. Always talk to multiple lenders about the total cost of the loan they are proposing. And if the costs are well beyond 5%, ask questions before agreeing to the loan.
Not Getting the Option to Purchase Points
A “point” or “discount point” is like prepaying your mortgage interest. Borrowers purchase points to lower the amount of interest they will pay on loan. Your lender should give you the option to lower your interest rate through the purchase of points.
“Bad Credit Doesn’t Matter.”
This is one of the common terms of fraudulent lenders – if you see this, don’t call, don’t e-mail, and don’t say yes to anything if the company approaches you. These loans are probably “predatory” in nature and will almost certainly come with terrible terms. These types of loans normally target lower-income individuals who are more likely to have damaged credit.
Lenders shouldn’t charge a penalty if you pay off your loan early. Unscrupulous lenders may charge prepayment penalties of 5% or more. These fees are now illegal in owner-occupied homes. If you see it, the loan is definitely a scam.
Brokers and Lenders who don’t Clearly Disclose how they are Paid
If you’re working with a mortgage broker, ask how he or she will be paid. Brokers are paid a percentage of the total loan and must disclose what they earn. Mortgage bankers, banks, and direct lenders can charge extra without disclosing what they are making.
Income or Home Value Inflation
A lender shouldn’t help you qualify for a loan by inflating your income or the value of the home. Firstly, it’s not ethical or legal and, secondly, you can’t afford the loan anyway. If they’re willing to lie for you, they’re willing to lie to you. Not a company you want to do business with.
No Good Faith Estimate
Within three business days of receiving your mortgage application, a lender must provide a good faith estimate. (GFE). The GFE provides you with basic information about the loan, including estimated costs of the loan. The estimate comes on a standardized HUD-GFE form that has to be used. If it comes on any other form, or you don’t receive the GFE within three days, don’t use that company.
Fees Different From the GFE
Your good faith estimate will contain an itemized list of costs associated with the mortgage with some very exact figures. Based on certain factors, it won’t necessarily remain unchanged when you receive the final mortgage paperwork to sign. Some of the fees are allowed to change by as much as 10%. Others shouldn’t change at all.
A balloon payment is a lump sum due at the end of the loan term. Sometimes the balloon payment can be as high as the amount originally financed. Balloon payments are no longer legal on owner-occupied homes but are still legal on investment properties. Carefully evaluate if a balloon payment is right for you.
Frequently Asked Questions on Mortgages
Below are some of the frequently asked questions by prospective homeowners that may want to get a mortgage:
How Tracker and Discounted Mortgages Work?
Your rate follows typically the base rate of the Bank of England when you are on a tracker mortgage. The rate deals are not constant, meaning that your rate will increase and fall with the base rate. Discounted mortgages are variable as well; they are generally offering discounts for the lenders on their standard variable rate for a specific period. For instance, if the lender’s variable rate is 4.99%, this might be discounted by 0.05% to 4.49% on a discounted deal for two years or more.
What is the Duration of Fixing?
Although some loan providers allow extension of a fix for a longer period like ten years, the duration for many fixed mortgage deals is either 2, 3, 4, or 5 years. Bear in mind that borrowing more money may come at different rates even though you will be able to move anywhere with these deals, even if it is to a different property. It is important to fix for the duration you will be spending in your current property because you will have to reapply for it again (a situation which might be logical if things have changed) when you move to another property even though you can move your mortgage.
What is the Duration of my Mortgage?
Although the overall term for most mortgages is 25 years, you are allowed to choose your repayment period, whether for a short or longer period. Bear in mind that if you choose a longer repayment period, then you will be paying higher interest even though your monthly payables will reduce than choosing a shorter repayment period.
What is the Different between Interest-Only Mortgage vs. Repayment Mortgage?
You won’t be paying any of the capital you have borrowed on interest-only mortgage, but instead will be making payment for the interest you owe monthly. You will have to convince your loan provider that you are saving enough money monthly to repay the capital when the mortgage term comes to an end. You will be paying the interest and part of the capital monthly if you choose repayment mortgage, meaning that by the time the mortgage ends, you will have balanced up the entire loan. Only a few loan providers offer interest-only mortgage, and at the same time, it is in the best interest of most people to opt for repayment mortgage because they wouldn’t be running from pillar to pole looking for a lump sum to pay everything they owe at the end of the mortgage.
Why do you need to Research Mortgage Matters?
Understanding the points in mortgage is crucial even though you will be gaining a lot from it. You will be causing a great damage to your credit score as well as waste between 3 and 7 years before you will be given the chance to purchase another home, if you opt for a mortgage that doesn’t suit your need, which may later lead to foreclosure.
How do Mortgage Brokers get paid?
Mortgage brokers receive their payments through loan providers even though there are many ways in which they can be paid. This means that their services to their clients come free of charge. Some mortgage brokers are paid by their loan providers while others charge their customers a small fee for the services they rendered. Kindly note that private brokers are working independently and as such can freely set prices for their services as well as a mode of payment of their choice. It is therefore essential to find out if the broker you plan to deal with is working independently or for an institution. Make sure you ask questions about the mode of payment and fees before you hire a mortgage broker. This is more important if you are dealing with an independent (private) broker.
What is the Duration of Loan Prequalification?
The loan pre-qualification process is not a time-wasting one. Your credit will be handled by mortgage experts and they will ask for your assets, property information, income, and employment. There you go!
How much is required for a Down Payment?
Your preferred home loan type and the type of property you are purchasing will both determine the requirements of your down payment. Usually, your expected down payment will be around three to twenty percent (3 – 20%) of the property’s purchase price. Varieties of loan programs are being offered by service provider. as well as different down payment beneficial programs.
Is Loan Application Possible before getting a Home to buy?
Yes. It is a wise move to submit a loan application before you get a new home. A pre-qualification letter will be issued to you by service provider when you apply for a loan prior to finding a home. You can then prove to real estate sellers that you have the required fund to pay for the home with this letter. You will also be able to look for the property that best suits your budget with the help of this pre-qualification process.
Why is it advisable to purchase and not to rent a Home and what are the available Loans to own a Home?
It is easier and affordable to pay the monthly mortgage for your home just as paying rent. Owning a home rather than renting is more affordable in some parts of the country. Comparisons can be made by home buyers between prices of home in their preferred location, determine the cost for a mortgage loan, and then compare that to what it will cost to rent a similar home. The advantages of earning tax and building equity are the biggest benefits of being a homeowner rather than renters. Homeowners can not only develop their wealth but also acquire more equity as time pass by. Below are the available programs to own a home:
- Federal programs to help home buyers: The VA is the right place for active and retired military personnel to look for a home loan. According to Mike Tizzano, a high loan officer in the Tizzano team at Fairway Independent Mortgage, he said these loans are best for military veterans that have been marked eligible by the program. He further states that the loans allowed qualified military personnel to finance the entire buying price of the property without having to pay for mortgage insurance each month. Your loan options can be checked with the USDA if you live or plan to live in a remote area. Philips states that there are many benefits to USDA loans. The benefits include total financing, reasonable interest rates, having to pay lesser private mortgage insurance, and easy rules for credit qualification.
- FHA Loans: These loans are issued by independent (private) mortgage loan providers but are supported by the government. FHA loan programs are purposely aimed at helping first time purchasers with little down payment, buyers who may not qualify for a mortgage due to some reasons, or those with poor credit scores like 600 and below. Those with bad credit history can also be helped to get home sooner. FHA will get those coming back from difficult credit issues like bankruptcy and foreclosure settled without taking much time according to Tizzano. Making a comparison between the cost and the benefit is very crucial before you apply for an FHA loan. Schrage states that you may be required to pay mortgage insurance and the requirements involved are many and must be met compared to the traditional loan. FHA-supported loan and mortgage insurance payment, on the other hand, maybe cheaper than paying rent on one property and the other while 20 percent is being saved as a down payment on your new property.
What is the Meaning of Pre-approval?
This means that your credit history has been checked by your loan provider (usually a financial lending institution). Your approval will be determined by whatever your credit history says about your financial history. Pre-approval will be done every three months because it is only valid for 90 days. Kindly note that every pre-approval request you submitted will have an effect on your credit score. Regardless of that, you will be able to customize your search for real estate at that particular price or less with pre-approval for a loan.
Is a Possible to lock a Loan Rate?
Yes. It is possible. It would be wise to lock your loan if you are convinced that interest rates are increasing because they are not stable as they change every day. Locking a loan rate and points are being charged at 0 to 1 point by loan providers. Ask if it is free of charge. Also, ask if the lock-in provides protection for all the loan costs and how long the rate will be locked. You can also ask if the loan lock will be given to you in writing. Paying the current rate and points on the day your loan funds is the other option you have.
Is Prepayment Penalty real?
This is an important question as it is no more allowed in some parts of the country. Prepayment penalty allows loan providers to collect an extra 6 months of interest from you for paying off your loan earlier than expected regardless of the means with which you get the fund, whether by selling the house or through refinancing. If you are purchasing a property in a state where this penalty is allowed, make sure you ask how much you will be paying for the penalty. Ask questions about the prepayment terms as some of it are only effective during the first 2-5 years of the loan. Find out if you would pay for the penalty and if your refinancing is through the same loan provider on a separate date.
What is Duration for a Refund?
The median loan processing time doesn’t exceed 21 and 41 days. The closing date is required to draft a purchase contract; this means that you will have to work with your loan provider on the date. Find out about the expected turnaround time. Also, make findings on any expected hindrances that could delay closing, and the duration it will take for the loan to fund after the final application.
Buying a home represents so many things to Americans. First and foremost, owning a home is a dream, one of the major accomplishments of a person’s life. More practically, it’s a place to live. Building equity by paying down the mortgage, and from the rising value of the house, is one of the main ways to build wealth for most people and families.