Home Purchase Loans
Understanding Today’s Mortgage Market
It’s been about 8 years since the ’08-’09 recession and housing market crash. While the economy is slowly continuing to rebuild, it is no longer as easy to obtain a mortgage as it was during pre-recession years.
Over the past year, mortgage rates have been historically low, motivating many Americans to pursue their dream of home ownership, but the mortgage crisis of ’08 has certainly left its mark and caused mortgage underwriting to be more stringent.
This is not necessarily a bad thing since all applicants should be fully prepared and stable enough to take on a mortgage. However, knowing how to navigate the mortgage application process will make it less stressful for home buyers to secure their mortgage.
Getting Approved For a Mortgage
When applying for a mortgage, there are a few steps you want to take to get prepared and ensure your application is approved.
Step 1: Preparing Your Finances
Lenders want to see that you’re financially prepared to obtain a mortgage and pay it back over time. They’ll want to look at all sources of income, your job history, self-employment income, and your credit history.
If you’re self-employed, they’ll want to see copies of your last two tax returns to show consistent income. They require this to make sure you have an acceptable debt-to-income ratio. A debt-to-income ratio is basically all your monthly payments divided by your gross monthly income. This number helps lenders measure the ability you have to pay off your existing debt along with your mortgage. Generally, lenders like to see a debt-to-income ratio lower than 43%.
When it comes to your credit, lenders will like to see a solid credit history and often require a minimum credit score, depending on the type of mortgage. For example, you need at least a 620 credit score for some mortgages and at least a 580 credit score for an FHA mortgage.
If you are applying for a mortgage with a spouse who will be your co-borrower, their credit will also need to be run. Your score will also help determine what type of interest rate you get, making it essential to maintain a good credit score.
Step 2: Determining Your Mortgage Budget
The next step involves determining how much house you can afford. Your income and current debt amount will help lenders decide how much to pre-approve you for. No matter what amount you get approved to borrow, keep in mind that a good rule of thumb is to keep your total monthly housing expenses at or below 35% of your gross (pre-tax) income. For example, if you earn $70,000/year or 6,250 per month, your maximum housing costs should never exceed $2,187.50 per month.
Keep in mind that other costs may be tied into your house payment like property taxes, private mortgage insurance (PMI), and homeowner’s association fees. It’s best to go through your existing budget and determine how much you can comfortably spend on your mortgage each month.
Step 3: Figure Out How Much You Need For a Down Payment
Finally, you’ll want to determine how much your down payment will be. Your down payment requirements can vary, depending on what type of mortgage you get. Below are down payment minimums for three popular mortgage types:
USDA – as little as 0% of the home’s purchase price
Conventional – around 3-5% of the home’s purchase price
VA – as little as 0% of the home’s purchase price
FHA – 3.5% of the home’s purchase price
Down Payment Assistance
Down payment assistance can be furnished by local governments, charitable foundations, and other organizations. It cannot, however, be supplied by anyone who has a financial interest in the sale of the home, such as a real estate agent, the property owner or mortgage broker. Most down payment assistance programs have income guidelines and are limited to first-time buyers purchasing primary residences. In addition, most of them require that you complete a homebuyer education course. Down payment assistance can be an outright grant or a “silent second mortgage” that requires no payments. You may be asked to repay it when you sell the home, or it may be waived if you stay in the home long enough.
Good Neighbor Next Door Program
Law enforcement officers, teachers, and firefighters/emergency medical technicians who meet all other requirements of the program are eligible to purchase HUD Homes at a 50 percent discount. And if you finance your home with an FHA loan, the required down payment is almost nothing – just $100! HUD Homes are FHA-financed properties that have gone into foreclosure and are now owned by HUD. The Good Neighbor Next Door program provides an interest-free and payment-free silent second mortgage for 50 percent of the home’s value. If you live in the home for three years or longer, the second mortgage balance is forgiven.
While it is clear that you can purchase a home with little to no money down if you put less than 20% down you will have to pay private mortgage insurance (PMI), which will add to your monthly mortgage insurance. Depending on the type of mortgage you get, you may be able to get rid of PMI after a while but it still raises the cost of your housing expenses as long as you pay it.
PMI varies depending on the size of the down payment and the loan. It generally ranges from .3 percent to 1.15 percent of the original loan amount per year.
Finding a Mortgage Lender
When it comes to finding the right lender, you have many options to choose from. It’s important to shop around and compare different loan options. You can do this in a secure and easy manner online without even having to have your credit ran.
Determine what you’re looking for in a mortgage lender, along with if they specialize in the particular type of mortgage you want. Once you have all your information gathered, it’s not hard to work through multiple deals and bargains with lenders. Also, be sure to keep in mind that loans are normally sold after the first payment of the loan, so don’t worry about the lender’s brand as much as you should worry about the cost associated with the loan.
The Process For Actually Applying For a Mortgage
Once you’ve found your ideal mortgage lender, you can start the mortgage application process.
Normally, it begins with a pre-qualification once you determine the type of loan you’d like to qualify for. This usually doesn’t take much time at all. Generally, the lender will run your credit score and credit history to determine how much money you can borrow for your mortgage. Once you get approved, you can start house shopping. Once you’ve found a home you like and have it inspected, you can make an offer.
The next step is the mortgage application process.
If you’re filling out an application for a government-sponsored, first-time home buyer’s program, have your lender explain the requirements beforehand. In most cases, for all types of mortgages, you’ll need to submit information and documents like your driver’s license, employer information, copy of your social security card(s), pay stubs, bank statements, tax returns, your profit and loss statements (if you own a business), and specific information about the property.
Once you’ve completed the loan application, your lender will verify all the information you provide and ask you for any additional supporting documents. Shortly after you apply for your loan, expect to receive a loan estimate (estimate of your closing costs) and a commitment letter (specific conditions of the loan) from your lender. At this time, you should avoid any major changes to your financial situation. Do not finance a new car or apply for any credit cards or other loans because that could derail your mortgage approval.
Then, the lender should get everything organized and processed for underwriting. The mortgage underwriter is the key decision maker and they carefully evaluate all the documents prepared by the loan processor for a final verification. Once the underwriter approves your loan process, you’ll enter the closing process. You’ll review all the terms of the loan, pay closing costs, and do a final walk-through of the property. During your closing meeting, you’ll receive a lot of documents that you need to carefully review and sign. Once everything is signed, you’ll have your loan.
Overall, the entire process can take a few weeks on average.
Free Consultations are available to help you plan for your home purchase