When you apply for a mortgage, it’s potentially one of the most important things you will ever do. Most people require a mortgage in order to finance a house. Because buying a home is one of the greatest investments you will make in your life, it’s important that you choose the right mortgage and go into the process of obtaining a mortgage with knowledge and preparation.
This guide is designed to help first home buyers, property investors and those looking to refinance by providing a complete guide through each stage of searching for and applying for a mortgage.
What Is A Mortgage?
A mortgage is a loan taken out to cover the costs of purchasing a home or land. Mortgage financing is offered by banks, building societies and other private lenders. When you take out a mortgage, the home or land that you buy is used as security for the loan until the loan is paid off. That means that if you can’t make the repayments and you default on the loan, your home may be repossessed by the lender.
Apply for A Mortgage: Stage 1 – Research
The process of applying for a mortgage can be broken down into two stages. The first stage is where you research your mortgage options, and look at which mortgage choice is right for you based on your needs and circumstances. The second stage involves the process of actually applying for a loan and getting financed. The second stage relies heavily on the first stage, so it’s important to prepare well. Before you start a mortgage application, here are questions you should ask and research you should do:
Choosing a Mortgage
There are a number of options to choose from when it comes to selecting the right mortgage for you. It will depend on your circumstances, your requirements, your needs and your financial situation. These will influence the type of mortgage you need as well as the options you have available to you.
Determining Your Needs and Situation
When applying for a mortgage, it can be helpful to first look at your situation, and research which mortgage options might be best for your unique needs. Here are some questions you can ask when looking at your personal circumstance and financial information to help make the right decision.
Employment or Income Source
In order to make consistent, adequate mortgage repayments, you will need to have stable employment with reliable income. You will need evidence of employment when you apply for a mortgage, so it’s important to collect this information from the start. By prepared to provide tax returns, pay stubs and even employment contracts to help you qualify for a home loan.
If you were previously in the military, you may qualify for a VA home loan. A VA home loan is a Federally insured loan that’s only available to former service personnel. With a VA loan, you may not need to meet the down payment or credit score criteria of conventional loans. Ask your mortgage broker if you think you might qualify for a VA loan.
Income Amount
To qualify for a mortgage, you will need to have and prove a substantial and stable income. Documentation related to your income should be collected as soon as you start thinking about applying for a mortgage. This can include employment income as well as income from investments and other sources. Keep in mind that lenders will usually want evidence of income for at least 2 years. This can be difficult for those who are newly employed or are self-employed, but saving for a larger down payment can help.
The amount of income you’ll need to qualify for a mortgage comes down to debt-to-income ratio. This is the percentage of your annual income that your debts make up. The recommended ratio is 36%, but that’s after accounting for what you will owe for a mortgage. Your income can be a good indicator of what you can afford in a mortgage. A mortgage broker can help you do the math to determine what mortgage you can afford given your income and debt.
Savings
Your savings will effect the down payment you can afford. The higher the down payment you make, the lower your monthly mortgage. Most lenders require a minimum of 20% down payment for a mortgage. This can be quite a lot of money, particularly if you apply for a jumbo loan.
If you can’t afford a 20% down payment, there are other options. FHA loans are Federally insured loans that allow you to make a down payment of as little as 3.5%. If you are a veteran, you may qualify for a VA loan with no down payment.
If you apply for a conventional loan, and can’t afford a 20% down payment, you will most likely need Private Mortgage Insurance, which is discussed further below.
Credit Score
Your credit score is one of the most important factors that’s taken into account when you apply for a mortgage, so start boosting your credit now. A higher credit score makes you more attractive to lenders and means you may qualify for loans with better rates. Scores over 760 qualify for the lowest interest rates. If you have a high credit score, you may also qualify for a Jumbo Loan. You can ask your mortgage broker about your credit score and the types of loan you can qualify for, or tips on how to improve your credit score.
How Much Do You Need?
The size mortgage you need depends on how much money you need to borrow. With house prices climbing, particularly in the Bay Area, the mortgage amount required to purchase a home is also increasing. Knowing the property you want to buy and the sort of price range you are looking at for that purchase can help you determine how much you need to borrow.
How Much Can You Afford?
The mortgage that you can afford depends on factors including your debt-to-income ratio, your down payment, and your income. A mortgage broker can help you explore different options that change the mortgage you can afford. If you have an excellent credit score, you may qualify for a Jumbo Loan, but this should be balanced with the down payment and monthly mortgage payment you can afford. If you have a reliable income but don’t have the savings for a large down payment, you might buy additional Private Mortgage Insurance to help you qualify for a larger mortgage. It’s important to really weigh your overall debts with your overall income to determine what monthly mortgage payment you can afford. This determines what your down payment should be, and how much you can afford to borrow overall.
What About Rates and Term?
Mortgage terms are generally 15-year or 30-year. The longer the mortgage term, the lower your monthly mortgage payment (but the more you end up paying in insurance overall). Mortgage rates are the interest rates charged by the lender on the amount you borrow. The better your credit score, the lower the interest rates available to you. However, if you choose a Jumbo Loan, the interest rates may be slightly higher.
Do You Meet Any Special Qualifications?
Conventional mortgages such as those offered by Freddie Mac and Fannie May are the most popular options, but there are special circumstances that may allow you to apply for different loan types. If you are a military veteran, you may qualify for a VA loan. If you have a low income and meet the criteria, you may qualify for a FHA loan (Federal Housing Association loan). On the other hand, if you have a high credit score and higher down payment, you may qualify for a Jumbo Loan, allowing you to borrow more. Understanding what’s available to you is important, so ask your mortgage broker about the special programs you might qualify for before you apply for a mortgage..
Will You Purchase Private Mortgage Insurance?
If you want to apply for a mortgage but don’t have enough savings to meet the 20% down payment threshold, you can purchase Private Mortgage Insurance to qualify for a higher loan amount. PMI (Private Mortgage Insurance) adds a monthly premium to your monthly mortgage payment. It’s important to understand what this additional cost will be, and whether you can afford is as a part of your monthly payment.
Apply for A Mortgage: Stage 2 – Submitting an Application
Once you’ve assessed your situation, understood how much you can afford and talked about some of your options with a mortgage broker, it’s time to apply for your mortgage.
Gather Documentation
Solid documentation will be needed regarding your financial and employment situation when applying for a mortgage. As you do your research regarding what you can afford, collect the documents that you’ll need to apply for a mortgage. This includes tax returns, pay stubs, employment contracts, bank statements, investment statements, brokerage statements, and any other documentation that provides evidence of what you will need to be approved. Gather as much evidence as you can, particularly if you are self-employed or haven’t yet been working for 2 years.
The lender will verify your documents, especially your employment and income, at the beginning of the loan application process, and again a few days before closing on your home purchase.
Talk To Mortgage Broker
It’s a good idea to talk to mortgage broker once you’ve gathered all the information, but before you start looking at houses. A mortgage broker can help you determine whether you have credit problems that should be worked on before you even begin applying for loans. They can also help you understand what your options are and what you can afford, so you go into the housing market prepared and informed.
Look At Homes
Prepared with your knowledge of mortgage options and budget, you will be better equipped to conduct your search for the perfect home. In the current seller’s market, buyers have to be extra prepared and qualified to secure the home they want. Start your home search by being pre-approved for a home loan to give you an edge. Your mortgage broker can help you get a pre-approved loan so you are more appealing to sellers and you have a better chance of buying the home of your choice.
Shop Around
Don’t make the mistake of only talking to a bank about your mortgage options. Banks will offer you the products that they have, but can’t offer a broader scope of advice and options like a mortgage broker does. You may also like to speak to more than one mortgage broker to see what different brokers have to offer. Be sure that when you are comparing different loans you are comparing “apples to apples”. Mortgage brokers can change different aspects of the loan such as by adding points that lower the interest rate or offering no closing costs. These extras can change other aspects of the loan such as the rate or term, so examine each offer carefully and discuss with your mortgage broker before making a decision.
Submitting the Application
Once you’ve chosen your loan, it’s time to make your application. You will need all your documentation for this process. Applying for a loan also triggers an official credit check. It’s important to know that too many of these official credit checks in a short amount of time can lower your credit score, so also be prepared when submitting your documentation and applying for a loan to ensure you don’t have to do it again. Your mortgage broker might also be able to help you find a closing agent that allows you to save on closing costs when it comes to finalizing the purchase of your home. Ask for recommendations from your mortgage broker and choose your closing agent wisely to get the most savings.
To apply for a mortgage can be a difficult and complex process, and it’s important to get it right. It’s essential to talk to an experienced and knowledgeable mortgage broker before you apply for a mortgage, and even before you start looking at homes. Contact Karen Douglas today for a free quote and expert advice on applying for the ideal mortgage that will help you finance your dream home.