The word “Mortgage” does exert fear in some, but it is a straightforward concept. If you are a buyers who cannot afford to purchase a home for cash you will need financing, this is where mortgage lenders come in, they lend buyers an amount in relation to the appraised value of a home then charge interest on the loan and use the home as collateral for the debt. It’s that simple.
So, what do you do to obtain a Mortgage for the purchase of a property (or a refinance of an existing property)?
1. Get Pre-qualified – As mentioned in the places on the eNexGen site getting pre-qualified for a loan is of vital importance. A buyer who is not pre-qualified for a loan won’t be taken as seriously by a seller as one who is. Getting pre-qualified will let you realistically know how much home you can afford. As a general rule when you approach a lender or mortgage brokerage you will be asked to provide certain financial information to the loan officer so that they can aid you in completing a mortgage application to be submitted to an underwriter for consideration. Typically the following will be required:
- W-2 forms for the past 2 years
- Tax returns if you are self employed
- Information on/Proof of downpayment
- Information & Current balances of long term debts.
- Explanations for any late payments/issues on credit reports.
This means that during the application process, the mortgage lender will order a report on your credit and will inform you of what programs you are eligible for. Remember lenders have legal limits on how much money they can lend you. They generally try to keep the amount of the loan low enough so your monthly housing costs do not exceed 28% of your monthly gross income. They also look at your other long term debts and add these monthly costs to your monthly housing cost, and compare the total against your gross monthly income. These two kinds of costs taken together should not exceed 36% of your gross monthly income. Also, remember the amount a lender can lend for a mortgage depends on how much you earn and how much you spend each month. Lenders look at the total amount you pay for housing each month, add costs like property tax, insurance premiums, and any homeowners’ association fee and compare it to your monthly gross income. A mortgage calculator is available to help you
2. Credit Report – That’s right, they will pull your credit report! So, spend time correcting errors on your credit report and looking after your credit score. This is so important during the home buying or refinance process so avoid large purchases on credit (e.g. cars, big ticket electronics etc.) as these generally will have an impact on your score during this crucial period. Here is a helpful tip for everyone: Even in a layoff/unemployment situation, look after your credit report as it effects so many aspects of life, from getting a job through to insurance rates for your home and car.
3. Mortgage Products – You have a choice of products to choose from, different types of loans are available these days, but after the collapse of the mortgage market in 2008, most of the more obscure products have gone away and lenders have reverted to more traditional products that have withstood the test of time. Those like the traditional (so called “conventional”) 30 year amortization fixed rate loan. This is the most common product currently available, which is a loan spread across 30 years with a fixed rate of interest. Typically these loans are made for 80% of the value of a home, this is the “Loan to Value” ratio. Which means that you will have to put down 20% of the homes value as a downpayment, or have at least 20% equity in your home for a refinance. There are other conventional loan options such as 15 year or 20 year loans as well as interest only mortgages.
4. FHA, VA, USDA…what? – The acronyms you may have heard in the media lately can be confusing. But they needn’t be, as they stand for different products available beyond the Conventional 30 year mortgage. These are government backed loans for different purposes that in short, have certain strings attached to them. Depending on your own circumstances and those of the transaction they can be beneficial if used correctly. For instance, FHA loans are incredibly popular at the moment as they allow a minimum downpayment of just 3.5%. However, as with most downpayments of less than 20%, you will have to pay for Mortgage Insurance for the privilege of a lower downpayment. The idea is that the Bank is able to offer a more favorable mortgage and loan conditions based on the idea that should you default on the loan, they are protected by an insurance scheme by the Federal Housing Administration. VA loans are similar but are designed just for those who served in the military. The VA Loan became known in 1944 through the original Servicemen’s Readjustment Act also known as the GI Bill of Rights and is one of the reasons for a rise in homeownership after the Second World War. USDA loans are loans backed by the US Department of Agriculture and are generally for properties in rural areas with special conditions. As with all things, requirements and conditions are always changing. Ask your Loan Officer for the latest rules and your eligibility on these programs.
5. Taxes, Insurances and Closing Costs – Most people know that owning property means that you generally have to pay taxes on that property and have insurance on your home. These are taken into account during the qualification process and are generally paid (with few exceptions) by your lender on your behalf if you have a mortgage. The money is typically held in an escrow account which is paid into by the borrower when they pay their mortgage payment and when they are due, the lender pays it to the insurance company and property tax authority where the property is located. Also, part of the mortgage and homebuying process are closing costs. Closing costs are fees charged to the buyer and seller of a property and are for services rendered during the transaction, from title searches through to mortgage origination fees. These fees for Texas typically average around just under $5000 for a loan of around $200,000 on a transaction putting 20% down at the moment.
Of course this mortgage section is detailed but definitely discuss current loan options and closing costs with you loan officer and Real Estate agent.