Obtaining a Home Mortgage
After you've had a chance to view some real estate listings online to get a feel for what's currently on the market, it's time to get down to business and meet with your real estate professional to seriously start the home viewing process. At this point in time you should have already obtained a mortgage loan pre-approval from your preferred lender. If you don't have a lender your agent can certainly provide you with some lender suggestions where you can quickly obtain a mortgage loan pre-approval. A mortgage, by definition, is the loan you will need to borrow from a mortgage lender to purchase a home.
It's important to note that your monthly mortgage payment is more than just repayment of your loan with interest. In that monthly payment, there may also be property taxes and insurance, and PMI (private mortgage insurance), which is required by loan institutions if you are borrowing more than 80% of a home's appraised value. In other words, if your down payment is less than 20% of the home's value, then you would need to purchase PMI. When figuring out your loan qualification, a financial institution will estimate the cost of these extras and factor that into the equation in order to arrive at the maximum mortgage loan amount you qualify for.
Applying for a Mortgage: What You Will Need
- W2 forms from past two years
- Pay stubs for past 3 months
- Your tax returns for past two years
- If you are self-employed, business and personal tax returns for past two years, year-to-date profit and loss statement and balance sheet
Names, balances, and account numbers for all credit cards, store lines of credit, student loans, auto loans, and any other debt with monthly payments, including alimony payments and child support payments (You may need to bring a copy of your divorce decree and the documentation for any court-ordered amounts that you pay.)
Proof of your down payment
- Bank statements from the previous two months showing account balances
Investments and assets
- Two months of statements of any stocks, bonds, or other investment accounts
- Retirement account statements (401K and IRA)
Residence history for previous two years
- If you rent, the name(s) and phone number(s) of your landlord(s)
- Proof of current mortgage(s) or documentation of payments and status
A loan Pre-approval entails a very detailed and thorough financial process that's completed by your bank, mortgage company or broker. Your lender will provide you with a letter that states that they have reviewed your finances and are willing to loan you a specific amount of money to purchase a home of your choice.
Benefits of Pre-approval:
- You'll have the loan information you need to limit your search to homes that fall within your budget so you don't waste valuable time viewing homes beyond your affordability.
- It's generally to your advantage to submit an offer accompanied by a pre-approval since sellers will likely take your offer more seriously.
- For any bank-owned property (Real Estate Owned or REO, which are foreclosures for sale), buyers need to be pre-approved in order to make an offer
In order to start the process, you'll need to contact a mortgage lender or broker of your choice, or if you prefer you can obtain suggestions from your agent as well. If you decide to shop for the best deal you'll need to review loan rates and chat with each lender in order to determine which one best suits your needs and expectations. Keep in mind, the lowest rate is quite appealing, however, in making your decision you should also feel your lender is knowledgable and will help reduce the stress associated with the loan process through good communicate and efficient service.
Mortgage Types: An Overview
Once you've chosen your mortgage provider, it's time to chat with your lender about the specifics pertaining to the various financing programs and the benefits or drawbacks that are associated with each type of loan. This information will provide you with the knowledge you'll need in order to make an informed decision regarding the type of loan that meets your needs. Here are some common types of loans:
Fixed-rate mortgages: A mortgage in which the interest rate does not change during the entire term of the loan.
Fixed-rate mortgages are the most popular type of loan, offering you the peace of mind that your interest rate will remain the same for as long as you have your loan. If you expect to live in your home for many years, having the same interest rate may be your key concern. If you decide that you like the stable and predictable payments of a fixed-rate loan, you have the option of choosing from a variety of repayment terms; 15, 20, and 30 years are the most common. Typically, the longer the term of the mortgage, the more interest you pay over the life of your loan. However, stretching out your repayment term means your monthly mortgage payments will be less than they would be with a comparable shorter-term mortgage. Lenders offer a wide array of fixed-rate mortgages:
- Monthly Mortgages
- Biweekly Mortgages
- Balloon Mortgages
- Adjustable rate mortgages (ARMs): permits the lender to adjust the loan interest rate periodically on the basis of changes in a specified index.
- Conventional mortgage: not insured or guaranteed by the federal government, therefore, the lender assumes the full risk if a borrower defaults unless the loan is covered by PMI (private mortgage insurance) which is required by lenders if a down payment is less than 20%.
Government-backed loan: insured by the government. In other words, the government is not the lender, but it does guarantee to pay back some or all of the lender's money if a borrower defaults. This reduces the risk for lenders when a foreclosure becomes necessary. These types of loans may be a good option for anyone who may not qualify for a conventional loan. Government-backed loans tend to have a lower down payment requirement and less-stringent credit score requirements, however they may carry a higher interest rate. Examples of government-backed loans include:
FHA loans: insured by the Federal Housing Administration (FHA). They are popular especially among first time home buyers because they allow down payments of 3.5% for credit scores of 580+. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
Borrowers can qualify for an FHA loan with a down payment as little as 3.5% and a credit score of 580 or higher. The borrower’s credit score can be between 500 – 579 if a 10% down payment is made. It’s important to remember, the lower the credit score, the higher the mortgage loan interest rate.
The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s; to provide mortgage lenders with adequate insurance; and to help stimulate the housing market by making loans accessible and affordable for people with less than stellar credit or a low down payment. Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments. Simply click on FHA Mortgage Programs to access additional details.
VA loans: backed by the Department of Veterans Affairs (VA) for those who have served or are presently serving in the U.S. military. While the VA does not lend money for VA loans, it backs loans made by private lenders (banks, savings and loans, or mortgage companies) to veterans, active military personnel, and military spouses who qualify.
There are three types of VA loans: purchase loans, interest rate reduction refinance loans (or IRRRL, also referred to as a VA streamline refinance loan), and cash-out refinance loans. There are many benefits to a VA loan, but one of biggest benefits is that no down payment is needed to purchase a home. This can make home ownership a reality for active military or veterans who might otherwise not be able to afford it. For additional information simply click on VA Housing Assistance.
USDA Rural Development Loans: a special type of a zero down payment mortgage loan that eligible homebuyers in rural and suburban areas can obtain through the USDA Loan Program, which is backed by the United States Department of Agriculture (USDA).
The USDA backs a variety of loans to help low- to moderate-income people purchase, repair or renovate a home in a rural area. For eligible buyers, they feature great benefits such as 100% financing with no down payment and below-market mortgage rates.
There are several types of USDA home loans: single family direct homeownership loan, single family guaranteed homeownership loan, rural repair and rehabilitation loan or grant and the mutual self-help loan. This guide will help you figure out what these loans are and whether you qualify.
Though the terms and details of these loans differ, all of these USDA loans offer very low effective interest rates (some are as low as 1 percent) and don’t require a cash down payment. To qualify, you need to have a decent credit history. Not all properties qualify for USDA home loans, therefore, simply click on USDA Loans in order to access complete home loan program details.
- FHA loans: insured by the Federal Housing Administration (FHA). They are popular especially among first time home buyers because they allow down payments of 3.5% for credit scores of 580+. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
With a pre-approval in hand, your real estate agent can assist you in identifying properties and arranging viewing appointments for homes that are within your budget. One of the primary tools utilized in this process are automatic listing updates via email. Your agent can promptly set you up to receive this service through their regional MLS provider, which is undoubtedly the preferred method, since the listing data is derived directly from the MLS and instantly emailed out to registered recipients the moment a property is posted on the system. If you prefer, you do have the option of signing up for the listing update service on your own through this website by clicking on Register Form.