Financing a house is one of the most significant commitments a person can take on. If you’re not sure what to expect from the process of obtaining a home mortgage loan, you could easily get overwhelmed both emotionally and financially.
Your real estate agent can help you fully understand the layers of purchasing residential real estate, but here are the basics of a home mortgage.
What is a Home Mortgage Loan?
A home mortgage loan is the way that most people finance the purchase of a house. Hopeful buyers can borrow between 80 and 100 percent of the value of the home they want to buy. You can obtain a home mortgage loan from a bank, mortgage broker, or other financial institution.
There are four types of mortgage loans, including:
- Conventional loans
- VA loans are backed by the Department of Veterans Affairs for members of the military and their spouses.
- FHA loans are backed by the US Federal Housing Administration for qualifying applicants who need help with their down payment and lower credit requirements.
- USDA loans for agricultural properties
VA, FHA, and USDA loan types are not funded by those programs, but those programs offer insurance to the bank that they’ll cover the losses if the buyer fails to pay.
Not all lenders accept each type of loan, so ask your lender first if they work with these programs.
Down Payments on a Home Mortgage Loan
With conventional loans, it’s standard to pay a twenty percent down payment against the amount that you’re borrowing.
For example, if the house you’re planning to buy is worth $200,000, the lender will finance $160,000, and you’re responsible for the other $40,000. However, there are some first-time buyer programs that can assist in lowering the down payment if you qualify.
VA loans, FHA loans, and USDA loans can all significantly lower or eliminate the down payment altogether.
Closing Costs
Closing costs is a term used to represent the collective fees associated with your transaction. The majority of closing costs are lending fees, which vary from lender to lender.
Closing costs accumulate in the thousands, between two and eight percent of the value of your loan, with an average of five percent. On a $200,000 loan, your closing costs, at five percent, will be $10,000.
In most cases, closing costs are not rolled into your home mortgage loan but are due, cash-out-of-pocket, at closing.
Don’t Finance Anything or Change Jobs
Lenders will look into your work history, and if you’ve recently changed jobs, it could hurt your chances of qualifying.
They’re looking for at least a 2-year work history, but longer is better. A solid work history lets the lender know that you’re dependable, that your job is secure, and that you’ll be able to make your payments on time.
Financing major purchases within two years of applying for your home mortgage loan could also prove damaging.
Borrowing large amounts of money prior to applying for a loan signals to the lender that you’re financially overextended and that your finances are allocated elsewhere. It also affects your credit score and your debt-to-income ratio.
The Credit You’ll Need to Buy a House
To qualify for a loan of such a substantial size, you’ll have to prove to the lender that you’ve got a reliable credit history and a balanced DTI, or debt-to-income ratio.
In terms of credit score, your number should be no lower than 620, but a score of 740 or higher will likely result in lower interest rates.
A good debt-to-income ratio, which is your monthly debt divided by your gross income, should be less than 43 percent, but ideally 36 percent or lower.
You can improve your credit score and your DTI by rectifying any outstanding collections and by paying off credit cards and loans.
Get Documents Ready for Your Home Mortgage Loan Application
You’ll need to supply a mountain of documentation to prove your income and expenses, and the sooner you have those organized, the quicker your transaction will be.
Gather your pay stubs, bank statements, credit card statements, tax documents, and proof of any other debts or income that you have.
Fixed vs. Variable Rates
When you apply for your loan, which is usually a 30-year commitment, you’ll choose whether you want a fixed or variable rate.
A fixed-rate means you pay a higher monthly payment, but that it’s unchanging for the life of the loan.
A variable-rate starts you out easy with lower payments, but the interest increases over time throughout the life of the loan.
Shop Lenders and Get Pre-Approved
With your money saved, credit in good shape, and your paperwork ready, you’re empowered to apply for your home mortgage loan. You have options and are not confined to considering only one lender.
The lender is responsible for the majority of your closing costs, and lender fees vary between institutions, so it’s best to compare. Furthermore, with your credit and income established, you may be able to negotiate those costs with lenders.
When you’ve found the right lender, get pre-approved for your home mortgage loan. Pre-approval gives you an understanding of your home-buying budget, lets the seller know you’re ready to buy and can give you an edge over other offers.
Ask Your Real Estate Agent about Financing Your Home
There’s no greater resource available to you than your real estate agent, even if you’re at the beginning phases and haven’t yet begun the process of applying for a home mortgage loan.
Not only are real estate agents highly experienced in what it takes for buyers to qualify, but they also often have connections with lenders and other service providers who can assist you with your transaction.
Conclusion
Before you apply for a home mortgage loan, get all of your ducks in a row. Be financially prepared for your down payment and your closing costs.
Establish stability in your employment and don’t finance anything or open new credit accounts all the way through closing day.
Make sure your credit report is clean, get your paperwork in order, and shop around for the best lender to suit your needs.
Have Questions? Ask Puder Real Estate Team!
Your real estate agent is the best source of information about the local community and real estate topics. Give Puder Real Estate Team a call today at (805) 710-2415 or (805) 219-9559. to learn more about local areas, discuss selling a house, or tour available homes for sale.
