Getting your home mortgage loan is one of the most important and potentially challenging aspects of buying a house.
But getting pre-approved for your home mortgage loan is one of the best things you can do to enhance your home buying experience and eliminate stress.
Here are the basic things you need to know about a home mortgage loan.
Don’t Finance Anything
Leading up to your home mortgage loan application, it’s best not to finance any significant purchases, obtain new credit, or take out a loan.
If possible, avoid going into additional debt for at least two years before applying for your loan. Otherwise, you may be in a predicament where you have to pay down those debts to qualify.
Don’t Change Jobs
Lenders will explore your work history, looking for consistency and longevity.
They need to be sure that you’ve got a stable employment source and that you’ve not bounced between jobs.
This lets them know you’re likely to maintain employment to repay your loan.
Debt-to-Income Ratio
Your debt-to-income ratio, also called a DTI, is the accumulative monthly debt divided by your total gross income. Your DTI is one reason not to finance anything leading up to your loan application.
Your DTI, in a perfect world, should be 36 percent or lower to ease through that portion of the loan application. However, you may still qualify with a DTI as high as 43 percent.
To lower your DTI, pay off any outstanding debts.
Your Credit Score
In addition to your DTI, lenders will investigate your credit history by obtaining a copy of your credit report.
They’ll consider how many open accounts you have, how much of your credit you’ve used, your payment history, and your overall credit score.
Your credit score, ideally, should be no less than 620. However, with a score that exceeds 740, you may qualify for a lower interest.
As with your debt-to-income ratio, you can improve your credit score by paying down current debts and removing any derogatory marks.
The Documents You Need for a Home Mortgage Loan
When you apply for a home mortgage loan and list your income and expenses, you’ll need proof of every item listed.
Examples of documents you’ll need to include are pay stubs, tax documents, bank statements, credit card statements, and proof of any other debts or assets you have.
The longer it takes to get your documents in order, the longer the loan process will take. Gather up two years’ worth of documents and be prepared to submit them when asked to expedite the process.
Your Down Payment on a Home Mortgage Loan
In most cases, a lender will finance 80 percent of the value of the property you’re buying, and you’re responsible for the other twenty percent as a down payment.
Your twenty percent deposit on a house that costs $250,000 is $50,000, cash-out-of-pocket. There are, however, certain loan types and programs that may assist with lowering that down payment.
Ask your real estate agent about down payment programs that may be beneficial to you.
Earnest Money Deposit
You’ll submit an earnest money deposit, or a good faith deposit, with your offer on a house in addition to your twenty percent down payment.
An earnest money deposit, held by the lender, proves to the seller and the lender that you’re serious about making the purchase. An earnest money deposit is typically one percent of the home’s value, so on a $250,000 property, your earnest money deposit would be $2,500.
Closing Costs
When you buy a home, you’ll also pay closing costs. Buyer closing costs encompass all of the services and fees associated with your real estate transaction. Examples of closing costs include lender fees, appraisals, inspections, surveys, attorneys, escrow agents, title check and transfer, and more.
Generally, closing costs are another out-of-pocket expense to the tune of two to five percent of the property’s value. So, on that same $250,000 property, your closing costs would be between $5,000 and $12,500.
Closing costs, however, are negotiable with the seller. You may ask that the seller pay a portion of or all of your closing costs in your offer. This could be a strategic move in a buyer’s market but could be risky in a seller’s market.
Some lenders may be willing to allow you to roll your closing costs into your home mortgage loan, but you’ll be paying interest on those costs for your loan’s life, which will run in the thousands over the long run.
There are also some programs available that can help specific buyers with closing costs. Ask your real estate professional about closing costs and how you may be able to negotiate them with a seller.
The other thing that influences your closing costs, more than any other, is the lender, so it’s essential to compare rates and terms.
Shop for Lenders
There are different types of lenders, including large banks, community banks, and independent mortgage brokers. Each has a unique set of fees and conditions.
Some lenders might lower your down payment or closing costs while other financial institutions are more stringent.
When you apply, Lenders will provide you with a list of estimated closing costs on the loan amount you’re seeking.
With your credit and finances in good condition, armed with research from varying lenders, you can try to negotiate terms with the lender.
Different types of lenders include:
- Credit Unions
- Correspondent Lenders
- Mortgage Bankers
- Mutual Savings Banks
- Savings and Loans
Different Types of Home Mortgage Loans
There are traditional home mortgage loans that require the standard 20 percent deposit and closing costs. But there are also government-backed loans for individuals with less cash-on-hand to invest.
Here are a few of the loan types you can consider:
- FHA Loan: An FHA loan specifically lowers your down payment from twenty percent to as low as 3.5 percent. However, because the loan is government-backed, there are stringent requirements to qualify.
- VA Loan: A VA loan is for members who have served in the United States Military. The VA loan can eliminate the down payment, and has many benefits, including no mortgage insurance requirements. But, the government also has strict regulations for residential real estate purchases.
- USDA Loan: a USDA loan is designed for lower-income families living in rural areas.
Except for some loans backed by the government, you may choose a fixed-rate loan or a variable-rate mortgage. A fixed-rate loan means you pay a higher monthly mortgage payment, but the amount of that payment is unchanging. However, a variable rate allows you to begin with a lower interest rate, which increases over time, so your mortgage payments will change.
Conclusion
Applying for your home mortgage loan can be one of the most stressful parts of the home-buying process.
However, with a bit of foresight, preparation, and guidance from your real estate agent, you can alleviate stress and expedite your approval by having everything in order before you apply.
Your real estate agent is a wealth of knowledge when it comes to financing your new home. Ask your agent for more information about applying for a home mortgage loan.
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