Many people have a dream house but only a handful step up to make this a reality. Those that do often resort to applying for a loan to be able to acquire the property that they want to have. Loans designed for property acquisition are usually referred to as a mortgage. This article lists down some essential things that you should know in getting a mortgage.
One of the primary things that you should figure out before you get a mortgage is your budget. In this case, you need to be able to determine the amount of money that you qualify for versus the amount that you can afford. When you seek the advice of a lender, he or she will most likely say that you will qualify for as much as 43% of your debt to income ratio. This simply means that the sum of all of your debt payments, including the mortgage that you will have to pay, later on, should only be 43% of your gross income.
However, you need to reflect on whether you need to borrow that big sum because you may end up with no savings after you settle all of the expenses you have to pay with the significant amount of money you borrowed. In this case, make sure to carefully calculate repayment costs that you need to settle monthly and factor that into your budget. In this way, you will be able to assess whether you will still be able to live comfortably even after making mortgage payments for the amount of money that you have borrowed. As much as possible, your housing cost should only be below 30% of your gross income as a general rule of thumb.
In addition to the amount you need to shell out initially for the acquisition of your property, you should also factor in other expenses that come with being a homeowner. For instance, you may need to have emergency savings for a new roof or a new HVAC unit as necessary. You may also need to spend on renovations, as well as exterior and interior paintings from time to time to maintain your property. Make sure to think about all of these things and factor them into your budget before you consider getting a mortgage.
Assets and Savings
Another thing that you should consider in getting a mortgage is your assets, including your savings. Like with your budget, you need to have your assets organized. The reason behind this is that you may have a lower income but you have a large number of assets and savings that you can use in making a down payment. In this case, you may even have enough to pay off your mortgage anytime or you have more disposable income to spend on housing than what is reflected in your net income. When your assets and savings are organized, then this information will be more apparent to you.
What you can do is then have a strategy for getting organized. After all, you will have to prove to the lender that you are generating sufficient income to pay off the loan eventually. Thus, you may need to gather proof of income and tax forms, as well as a multitude of other banking and personal information readily available. In this way, anytime that you will be asked for documentation, you will have no problem producing the documentation of your assets and savings.
Keep in mind that it is one thing that you have all the assets and savings that will allow you to qualify for a mortgage, another is documenting them. Thus, apart from the proof of income that you can produce, you also need to organize your bank statements. A couple of months before applying for a mortgage, make sure that you have already deposited all the necessary funds in a specific account. In this way, the money that you have in that account will be seasoned, which will eliminate the need for any explanation letters indicating the reasons why money is constantly going in and out of your account.
You should also figure out how much down payment you can make in getting a mortgage. Generally, the larger the sum that you can shell upfront, the smaller the principal amount that you have to borrow. As a result, the better the interest rate that you are given. For this reason, make sure that you have sufficient savings for a relatively large down payment. Additionally, when you can make a down payment of at least 20% of the value of the property that you are acquiring, then you will no longer be subjected to private mortgage insurance (PMI), which will significantly reduce your monthly mortgage payments.
Unfortunately, most first-time homebuyers often purchase a house with a minimal down payment or even nothing at all, depending on the deals and promotions offered by real estate brokers. However, what they fail to consider is that expenses such as a mortgage, taxes, and insurance are only the tip of the iceberg when it comes to homeownership. You should also factor in other expenses such as repair and maintenance costs, which can instantly deplete your savings. Thus, if you cannot afford to make a down payment that is at least 20% of the home value, then you may not be ready to acquire a property.
The good news is that there are various ways on how you will be able to save for a down payment. Just keep in mind that the more expensive the home that you are interested in is, then the bigger the down payment you have to save up for. In this case, you may want to put off purchasing a new car or making major purchases on your credit card as you are shopping for a home. If you have family members who are willing to pitch in to ramp up the down payment amount for the property you want to acquire, make sure that the money coming from them is already in your account long enough to show on at least a couple of bank statements.
In getting a mortgage, your credit score is one of the most important factors that can affect not only your eligibility for a loan but also the interest rate that you will need to settle together with the principal amount. This is one of the factors that lenders look into before they allow you to borrow any sum from them. The reason behind this is that your credit score reflects your ability to make repayments on your debt. For instance, if you frequently max out your credit cards, then a lender will have doubts about letting you borrow money that you can use to acquire a property. If you have a poor credit score, or worse, no credit history at all, then you may not be qualified to make a mortgage.
Nevertheless, the acceptable credit score may vary from one lender to another because most of them have their own specific set of requirements. Fortunately, you can already check your credit score ahead of time. In this modern-day and age, there are already several online channels that you can access to verify your credit score for free. In this way, you will already have a good idea of where your credit score stands.
In case you find that your credit score is unhealthy, then you may want to take immediate steps to boost them. What you can do is to talk to a professional who will be able to help you come up with a plan to improve your credit score in parallel to having to explore the steps that you need to take in buying a property. They will most likely check your credit report for any errors as well and promptly correct any issues they find with it. You can also secure a copy of your credit report because, under federal law, credit reporting agencies are required to provide you with a free copy once every year if you ask for it.
Types of Mortgages
You should also make an effort to learn about the different types of mortgages such as a conventional, FHA-insured, as well as a VA-guaranteed loan. Conventional loans carry no guarantee for the lender in case you fail to make a repayment. This means that if you can only afford a down payment that is less than 20% of the value of the property, then you need to pay for a PMI. In this way, if the loan is the default, then the mortgage insurance company will be able to settle the loan to the lender in full.
Conventional loans are further categorized into two, namely the conforming and conforming loans. If you have good credit and a steady source of income, then you can get a conventional conforming loan. This is in addition to your ability to afford to make a down payment.
FHA-insured loans are those that are guaranteed by the Federal Housing Administration. In this case, if you default on the loan, and the worth of your property is insufficient to fully repay the debt you owe through a foreclosure sale, then the FHA will be the one to pay the lender in full. Because of the insurance that the FHA offers, lenders can offer you better loan terms. However, you may be required to pay a mortgage insurance premium as part of the loan.
There is also a VA-guaranteed loan that is secured by the US Department of Veterans Affairs (VA). However, this type of loan is only available for certain types of borrowers such as current members of the US armed forces, as well as veterans. Reservists or national guard members, as well as their eligible surviving spouses, are also qualified for a VA-guaranteed loan.
Aside from the type of loan, you also need to consider the loan term. For instance, not everyone is willing to endure a 30-year mortgage even if it is one of the most popular loan terms, especially for first-time homebuyers. In this case, you may deem that a 15-year fixed mortgage is more suitable for you and your family based on your budget and savings. To figure out the best loan term for you, make sure that you take the time to research and explore your options.
Pre-qualification Process and Documentation
Finally, you need to be aware of the pre-qualification process and the documentation required in getting a mortgage. The reason behind this is that even if you think that you can afford to borrow a specific amount of money, the lender may not readily agree with you. In this case, what you can do is to get pre-qualified for you to gain good insight on how much you will be allowed to borrow.
To get through with the pre-qualification process, you may be required to supply certain information about yourself to the lender. Some of the things that you may need to share include sensitive data about your assets, income, and debts. Based on this information, the lender will be able to provide you with an estimated amount that you can borrow.
However, they won’t be able to guarantee that the amount they estimated will be approved but at least, you will be in a better position to make more informed decisions as you shop for a new home.
Some of the things that you should know in getting a mortgage include those listed above. You need to carefully think about the impact of each of these factors in your mortgage application. For instance, your budget, assets, and savings will dictate how much you can borrow while the down payment you can make, as well as your credit score, can affect the interest rate of your loan. You should also take the time to familiarize yourself with the different types of mortgages, as well as the pre-qualification process and documentation because all these are geared towards ensuring that you get the home loan that suits your needs.