Getting a mortgage is not as easy as it is claimed by some. You must put in a lot of diligent effort and complete several steps to get the money you need for buying a home. We have put together this write-up to make the process of getting your first mortgage simpler for you. Here, you will come across expert advice and information on mortgages that would make your dream of buying a home come true in an absolute hassle-free manner. Read on to know more.
One of the most difficult steps of applying for a mortgage is getting the paperwork ready. Lenders would want you to submit detailed information about your finances for determining your eligibility for home loans. Here are the documents you must gather before you apply for a mortgage.
Proof of your income: You would need to submit a proof of your income to let the lender know that you have the ability to repay the sum borrowed. Some of the basic items you would need to present include:
• The W-2 form you received during the previous year
• Previous year’s tax returns
• The most recent pay slip
You might need to provide some more documents depending on the loan amount you have applied for and the kind of job you do. For instance, if you are a self-employed individual, you would need to submit your business’ profit-loss statements in order to get a mortgage. Contracted workers, on the other hand, need to submit 1099 forms.
It’s mandatory for the applicant to submit detailed information about money earned from various other sources besides the regular job. These include amounts received as alimony or for child support. Individuals earning income from their rental properties might need to provide a photocopy of their lease agreement.
Debts: Applicants must submit a detailed list of all kinds of debts they have. These include car loans, student loans, credit cards, child support payment, alimony, etc. In addition, the lender would also need detailed information on minimum monthly payments you need to make and an accurate balance breakdown.
The debts you have can have a serious impact on your debt-to-income ratio, one of the main components of one’s credit score. Individuals, who keep spending more than what they can afford or have several high-interest debts, are unlikely to become eligible for a low rate mortgage.
Assets: The lender might also ask you to submit details of your assets. These include investment records, bank statements, real estate ownership, retirement accounts, auto files, and so on. The documents revealing information on the above subjects would help the lender to find out whether you have sufficient savings for dealing with various unexpected expenditures after closing on your new house. You might also need to submit documental evidence for testifying that you have made the down payment from your own pocket (i.e. you haven’t taken a loan for making the down payment).
Additional paperwork: The lender might require you to sign Form 4506-T from the IRS. This form would provide the lender with the right to get detailed transcripts of your returns from the Internal Revenue Service. Transcripts of the applicants’ tax returns help in determining whether they have provided all information about their debts and assets accurately.
Individuals, who have gone through bankruptcy during the past few years, might be asked to submit their bankruptcy discharge documents. At times, credit reports feature bankruptcy for as many as 10 years.
You can get home loans from various kinds of lenders; these include commercial banks, thrift institutions, credit unions, and mortgage companies. You may get different rates from different lenders. Thus, it’s mandatory that you get in touch with multiple lenders and get quotes from them for getting the most affordable mortgage.
It would also not be a bad idea to get your home loan via a reputable mortgage broker. The broker would not lend money directly, but would arrange transactions i.e. he/she would find you a lender. Working with a broker would mean that you would have access to multiple lenders offering a bigger assortment of loan terms and products.
When talking to a lender, you must gather information about all kinds of costs you will have to bear when taking a home loan. Often, there are several other costs involved besides the rate of interest and the monthly payment. In addition, you would also need to consider the amount of money you can arrange as down payment. Read on to find out what more you should find out:
Rates: Request every lender (and/or the broker) to provide a list of the current mortgage interest rates it is offering. Ask whether the rated quoted by them are the best they can offer for that week or day.
Ask whether the interest would be adjustable or fixed. This is important as an increase in interest rate in case of adjustable-rate mortgage might also cause the monthly payments to go up.
If the lender is offering adjustable-rate mortgage, ask how the rate would vary. Also, find out whether a drop in rates would result in a reduction in monthly payments.
Ask the lenders to state the APR (annual percentage rate) for the loan. The APR of a loan is decided based on factors like broker fees, various credit charges, and of course the rate of interest.
Points: The term “points” is used for fees paid to brokers or lenders for loans. These fees often have a link with the rate of interest. Typically, the more would be the points paid by you the lower would be the interest rate.
Request the lenders to quote points in dollars and not just as points. To have an idea of how much you might need to spend, you can check local newspapers; there, you will find enough information about points and rates that are being offered currently.
Fees: Request the lender to inform you about all kinds of fees you would need to pay when getting a mortgage. Some of the additional fees borrowers need to bear include loan origination fees or underwriting fees, closing costs, broker fees, etc. There are also certain fees that need to be paid when applying for the loan; examples include appraisal and application fees. Some lender lump all the above-mentioned fees into a single sum; in such cases, you must ask the lender to break the things up for you.
Private mortgage insurance and down payments: You will come across lenders that would need you to arrange 20% of the purchase price of the new home to make a down payment. Individuals, who fail to arrange that 20%, are typically required to buy PMI or private mortgage insurance for protecting the lender against possibilities like the homebuyer’s failure in repaying the loan. Here, it must be noted that the amount of down payment is significantly smaller for government assisted programs like VA, FHA, and Rural Development Services.
Both private lenders and mortgage brokers have merits and demerits of their own. So, to decide on the type of lender you will get your loan from, you must get acquainted with the pros and cons of both kinds.
Private lenders: The biggest benefit of dealing with a private lender is that it would make solving various issues pertaining to the loan much easier for you. Unlike the broker, a lender would be able to answer all kinds of questions you might have regarding the loan terms. Additionally, working with a private lender typically makes the loan approval process much faster. What’s more, banks, where you have multiple accounts, might even make the loan available for you for a discounted rate.
When taking quotes from private lenders directly you will have to get in touch with them all by yourself. The process is thus quite time-taking and might even become slightly tiresome for you.
Mortgage brokers: If you are interested in doing some comparison-shopping, contacting a mortgage broker would be a good idea. The broker would get quotes from a number of lenders and bring them to you together. This also means that instead of talking to several lenders you will have to stay in touch with just one broker. A competent broker would also streamline the application process for you.
There was a time whether mortgage brokers had a dubious reputation. Those professionals were regulated quite loosely. What’s more, they often enticed people to pick high-risk mortgages and forced them to borrow an amount much bigger than what they actually needed for getting heftier compensations. Today, the situation has become a lot better. Today, there are significant protections available. At present, brokers play the role of middlemen or advisors and deal with lenders on the behalf of the borrower. While there are lenders whom you can get in touch with both directly and via brokers, there are also some who work only with brokers.
However, it’s important for you to remember that the final fee of the mortgage broker is still decided based on your loan amount. So, you must be very careful about the intent of the broker when seeking services.
Fixed-rate mortgage: As its name suggest, the interest rate for this mortgage type remains the same all through the loan’s life. This makes the most preferred option for borrowers. Recently obtained numbers suggest that as much as 75% of all mortgages belong to this category. A fixed rate mortgage can be available with three different loan terms, 10 years, 15 years and 30 years. The most popular one among them is the 30-year fixed-rate mortgage. The primary benefit of opting for fixed-rate mortgage is that the homebuyer would know the exact amount he/she would need to pay as interest and the monthly payment he/she would need to make. This means, the person would need to face less trouble when creating a budget for his/her future.
Adjustable-rate mortgage: It’s a mortgage, in which the rate of interest keeps changing at regular intervals once the “fixed period” for the loan is over. It is much riskier than fixed-rate mortgage as the monthly payment might increase significantly due to change in interest rate. However, as a reward for the risk, the borrower gets a much lower rate of interest compared to the rate offered for a 30-year fixed-rate mortgage.
Interest-only jumbo loan: This loan type would require you to pay just the interest you owe to the lender every month. This would continue for specific period of time (usually for 5-10 years), after which the borrower would need to start paying back the principal loan amount. Even during the interest-only period, the borrower can definitely pay back certain parts of the principal amount; but that’s not mandatory.
Here are a few things you must do for getting your mortgage application approved seamlessly:
Check your credit score: You should never submit the application without checking your credit history. That’s because your credit score not only decides whether you will be eligible for the loan you are applying for, but also influences the rate of interest the lender would offer you.
You should always have a high credit score. A high credit score would testify that you are good at managing your assets and accounts.
If you have plans of buying a house, but have a low credit score, you must start changing your spending habit much before submitting your loan application. Try to spend less than what you have done all these years. As your spending will decrease, your credit score will gradually increase over time.
It would be good if you don’t have multiple credit card account. If you have, make sure that you make all the payments on time. This will automatically improve your credit score.
Be Ready to Make the Down Payment
Many lenders would require you to make a down payment for becoming eligible for the mortgage. So, it’s important that you keep a lump sum ready for making the down payment for your home.
Here, we would like to remind you that down payment is not the only expenses you will have to bear when buying a home. So, it’s important that you save some more money for things like closing costs, inspection and appraisal charges, title searches, credit report fees etc.
Reduce the debts
When applying for a mortgage, you must have clear idea about your current debt portfolio. This is crucial as the more would be the number of debts you have the lesser would be your chances of getting a low interest rate on the home loan. So, before submitting your application, try to lessen the current liabilities you have. This will not only increase your credit score, but will also make the job of making monthly payments less troublesome for you.
Getting mortgage is not easy. However, with the right tips, you can surely get a mortgage at an affordable rate. This article must have helped you to understand things you must and mustn’t do for getting your first mortgage seamlessly. So, start getting the paperwork ready and if required do the needful to improve your credit score. Your dream of buying a new home will soon become true.
Want to learn more about the first steps with your first mortgage? read our friends of Housetipster.