Mortgages: Everything You Need To Know
Buying a home can seem intimidating, and applying for a mortgage can be equally as scary. Many people aren’t applying for mortgages in the current real estate market because they assume that they won’t qualify. However, the fact of the matter is, this might not be true, and you won’t know until you apply. If you think you might be ready to make the jump into the real estate market, then it’s time to get your ducks in a row.
The first thing you need to know is the different types of mortgages and what each means.
Different Types of Mortgages
There are several different types of mortgages, each with its own benefits. Because of this, it is important to carefully go over each option to determine which is right for you.
A local lender will be able to help you with this process once you get to that stage. However, it is always good to brush up on your knowledge so that you are better prepared. Let’s take a look at the different types of loans you might want to consider:
A fixed rate mortgage means that the interest rate for the loan is locked at the beginning of the agreement. Fixed rate mortgages can come in terms of 10-15-30 years. The most common of mortgages is a fixed rate 30 year mortgage. This provides the owner with the lowest mortgage payment per month, as it divides the loan into 30 years of payments, with a fixed rate of interest.
Fixed rate mortgages are popular because they are the most predictable. As a result, the owner knows what their payment will be month to month for the entire timeline of their term in years.
Adjustable Rate Mortgages
There are many different types of adjustable rate mortgages (ARM). Essentially, the idea is that the interest rate can change over time. If a home buyer gets a one year ARM, the interest rates on their loan change to the current market rate once a year on the anniversary of their loan. This can be risky as you could wind up paying different amounts of mortgage payments from year to year. The payment amount may go down, but it also may go up.
10/1 ARM’s also change in interest as time goes on. This features a fixed interest rate for the first 10 years that is then subject to change every year to the current market interest. This loan is typically for 30 years, and is typically used by homeowners who intend to pay their home off before the initial 10 years have passed.
Balloon mortgages feature a much shorter term and a fixed rate of interest, much like a fixed rate mortgage. The difference is that balloon mortgages feature a larger or balloon payment at the end of the loan. The monthly payments are lower and typically go to interest being accrued. Balloon mortgages are great for responsible borrowers, and typically are for people who intend to sell the house before the balloon payment is due. But these mortgages can be tricky- you’ll be required to re-finance if you can’t afford the balloon payment when it’s due.
Government and Conventional Loans
A conventional home loan is one that isn’t issued by the government in any way. Most consider conventional home loans to be regular home loans. A government issued home loan is one that is guaranteed through the government. Here are the different types:
An FHA Loan is part of a mortgage insurance program. These types of loans are available to first time homebuyers and other home buyers. With this loan the government is insuring the lender against any losses they might have from borrowing money. FHA loans are managed by the Department of Housing and Urban Development. With this loan you can put a lower payment down, as low as 3.5%. With this also comes mortgage insurance, that might make your monthly mortgage payment higher.
If you or a family member have ever been a military service member, you qualify for a VA loan program. This mortgage is guaranteed by the VA. The benefit of this kind of loan is that veterans and their families can get 100% financing when they buy their home which means they have no down payment at all.
USDA or RHS Loans
Managed through the Rural Housing Service, part of the Department of Agriculture, this is for more rural residents. If you have a steady, but low or modest income, and other financing isn’t available to you, a USDA loan might be a good option. It takes into consideration the adjusted median income of the rural area, and bases the loan off of that.
What Kind of Mortgage Should You Choose?
Each kind of loan has benefits and problems. It’s up to you to decide what you’re willing to commit to. With a fixed rate you know your rate won’t change, even if the market changes. This means that if the rates drop lower than yours, you’re still stuck paying the rate you locked into. The flip side to this is that if you have an adjustable rate and the market rates soar, you’re stuck paying higher prices. Know what you can afford, and how long a payment schedule you want to commit to. Talk to a lender to see what your options are and what makes the most sense for you.
Now that you know what kind of loan you want, how do you apply?
How To Apply For a Mortgage
You’ve done the research, you’ve weighed your options, and you’ve decided you’re ready to apply. So, what does that look like? What do you need? As intimidating as it may seem, applying for a mortgage doesn’t need to be stressful. If you are well prepared and know the steps, there is no need to worry.
With that in mind, let;s go over what mortgage application looks like!
What you need
To apply for a mortgage, you’ll need to have saved a down payment, have a steady and stable income and also have a good credit history. Don’t let the down payment scare you! With different types of mortgages and home loans, you can save as little as 3% or as high as 20%. A lender can help with this amount.
Here’s a list of what you’ll need to apply:
- Current credit history and score – Don’t let non-perfect credit deter you from applying for a loan. You may already qualify so it’s time to find out.
- Gather your documentation – Get together your income verification, like W-2 forms or tax returns. You’ll also need your credit history, and any other assets you have, like bank statements from saving accounts.
Talk to your Bend Realtor
Duke Warner realtors have great recommendations when it comes to finding a loan officer. Typically, they have loan officers that they continue to work with time and time again. Ask your realtor for the lender that they recommend highly.
Trust your Lender
Lenders will help you determine what price of home you can afford. They’re there to help you review your income, monthly expenses and other financial goals you may have. They’ll help you make the best decision when it comes time to choose a mortgage, and how you qualify.
It is best to communicate fully with your lender, especially if you don’t understand something. Ask as many questions as you need. The process can seem complicated, but it is important you stay fully informed. A good lender will make sure you are involved.
If you’re starting to house hunt, and have faced the question “Are you pre-approved?” it’s time to take that step. Being pre-approved can speed up your house hunting search, and can help you secure the home or property of your dreams before someone else does. Here are some benefits of being pre-approved.
Why Pre-Approval Should Be Your First Step
If your lender thinks you’re ready to apply for a mortgage, and start your house search, getting pre-approved can make this process even easier. If you’re pre-approved, you know exactly how much house you can take on. It prevents you from putting an offer on a house that you will later find out you can’t afford. It also shows potential home sellers that you’re serious about buying.
Pre-qualified and pre-approved
Understanding the difference between being pre-qualified and pre-approved is important. Pre-approved means that a lender has checked your credit score and verified your documentation so that you are approved for a specific loan or mortgage amount if you need it. Being pre-approved usually lasts for a 90-day period in most states. Pre-qualified means that an estimation of how much you can afford to spend on a mortgage from month to month has been done, but is not final. Your final loan approval happens when you have an appraisal done on the property that you’re applying the loan to.
Bring proof of your income for the last two years. All loans currently need this proof of income. W-2s are also accepted, in addition to pay stubs. Bring bank statements, investment account statements, etc. to show that you have enough money for a down payment, closing costs, fees, etc.
You also will need to provide proof of employment, or employment verification. Today lenders want to make sure that they are loaning money to someone with stable employment. This increases the odds of the loan being paid back in full. They may call to verify your employment and check on your salary. Don’t forget the basics: your driver’s license, social security number and permission for the lender to pull your credit report.
Good credit takes time, and it’s necessary to purchase a home with a loan or mortgage. If you’re considering buying a home sometime in the near future, monitor your credit and make sure it’s acceptable to be applying for a loan. Talk to a banker, lender, or financial advisor to see how you improve your credit in the meantime.
Be advised to shop around to see who is going to offer you the best mortgage rate and the best interest rate in your state and area. Apply for those rates to get pre-approved. Meet with a lender to discuss your options, find out what you may or may not be able to afford. Getting pre-approved prior to house hunting helps your search, because you know what you can or can’t feasibly afford.
Factors That Can Affect Your Chances of Securing a Mortgage
There are several factors that determine loan amounts. These factors can even affect your chances of securing a loan altogether. You will want to make sure to carefully review each to make sure everything is in good shape.
Credit History and Credit Score
Lenders determine loan amount based on your credit score. Your score measures the risk a lender can expect if the loan is approved. The lower the score, the greater risk the lender is taking.
Along with your credit score, lenders will analyze your credit report for any unusual or alarming behavior. Red flags include numerous inquiries, applying for many different loans, and late or missed payments.
As we discussed above, if you are considering purchasing a home soon, closely monitor your score to make sure it is acceptable. There are ways to increase your credit score, but know that a good score takes time and effort.
Banks and lenders analyze the amount of debt you have compared to your income to determine how able you are to repay the loan. Mortgage lenders prefer a debt-to-income ratio between 28% and 36%. A ratio in this range indicates your ability to afford the loan.
If you have a high amount of debt, you may need to work on paying some off before applying for a mortgage.
While it may seem irrelevant, your relationship status can actually affect how you apply for a loan. Read more here!
Lenders prefer borrowers with stability. If you move around frequently (multiple moves within 5 years), lenders may see this as a red flag.
Social Media Behavior
As unbelievable as it may seem, what you post online does affect your chances of securing a mortgage loan. Banks and lenders may look at your online behavior to see how you handle money. Just as you would with a prospective employer, make sure your social media is private or cleaned up when applying for a loan.
How To Get Started
We know- we gave you a lot of information to consider! While you should be knowledgeable about the process if a home is in your future, it is also important to speak with an expert.
Get started by speaking with one of our brokers. We can help with any questions you have and help you get started on your journey. We are here to help get you in your dream home- don’t wait!