It isn't very often that you get to choose your home. So once you arrive…
Home Mortgage for Beginners
Buying a home can be a very intimidating process, especially for first-time homeowners. Choosing the neighborhood, the number of rooms, available amenities, and other home features can be complex. Still, arguably the most challenging part of the home-owning process in the U.S. is paying for the home. This is where a home mortgage comes in. Getting a mortgage is an essential part of buying a home. Whether you’re a beginner or experienced in the home-buying process, you should know the basics of home mortgages.
What is a Mortgage?
A mortgage is a type of loan to help people finance buying a home or other real estate. A home mortgage, also referred to as a “mortgage loan,” is a legally binding agreement between a borrower and a lender (a bank or any financial institution), allowing the borrower to buy a home without paying all the cash upfront.
Types of Home Mortgage Based on Interest Rate
An interest rate is a percentage of how much of your monthly payment will go directly to your lender. There are different types of mortgages, each with its advantages or disadvantages. It’s best to be familiar with these three popular home loan options or programs to find the best option for you.
#1 Fixed-Rate Mortgage
Fixed-rate mortgages are what some people know as “traditional” mortgages. With this type of mortgage, the interest rate stays the same for the entire duration of your mortgage. Loans like these are commonly paid in either 30 years or 15-year terms.
Home-buyers would prefer a fixed-rate mortgage because they would more or less know how much they’ll be spending for housing costs every month. The payment will be relatively stable, making it easier to budget your finances. On the other hand, this kind of mortgage loan would be a disadvantage if you purchased your home with a high interest rate. You may miss out on a lower interest rate and potential savings.
#2 Adjustable-Rate Mortgage
In an adjustable-rate mortgage (ARM), the interest rate is fixed only for a certain period. A home may appear to have a low interest rate, but the pace will fluctuate over time and depending on the market. These “adjustments” are predetermined, follow a minimum and maximum rate cap and happen in intervals.
This type of mortgage works well for those who don’t plan to stay home for a long time. You can qualify for a higher loan amount with ARM. One thing to consider is that ARMs are risky because the rates might increase after your adjustment period. If you’re not prepared for those risks, this may not be the best option for you.
#3 Combination Mortgage
This type of mortgage involves combining different types of mortgages. Besides the previously mentioned types of mortgages, other loan options are available, namely, Conventional loans (backed by private lenders and institutions) and Government-insured loans such as FHA loans, USDA loans, and VA loans.
What does it mean to ‘Mortgage a Home’?
Getting a mortgage is a process that involves several parties and critical functions. Every home-owner needs to learn basic terminologies used to understand better what it means to ‘mortgage a home.’
A lender is a bank, credit union, online mortgage company, or any financial institution that can loan money to people when buying a home. Lenders review mortgage applications and they determine whether or not the applicant is qualified enough to repay their loan through the applicant’s financial profile.
Equal Housing Lender
The term ‘equal housing lender’ refers to all banks insured by the Federal Deposit Insurance Corporation (FDIC) in the U.S. Under the FDIC law, these banks are prohibited from discriminating based on race, color, religion, national origin, sex, handicap, or familial status. This ensures housing opportunities for all.
A borrower is an individual who is seeking to purchase a home through a mortgage loan. He or she sends in their application for a mortgage.
Loan officers can be called “mortgage consultants.” Lenders usually employ them to help them find new clients and assist them during their loan application process. A loan officer can also help small business owners with a variety of secured and unsecured loans.
The Mortgage Process
The mortgage process begins when borrowers can apply to one or more lenders, possibly with a loan officer’s help. This application includes all necessary information about the borrower, especially their financial profile. This economic profile includes bank and investment statements, recent tax returns, proof of employment, and other essential documents proving your financial capabilities. Submitting your financial profile is crucial because lenders want to ensure that you can repay their loans.
After getting initial approval from your lender, you can shop for your home and make an offer. In this part of the mortgage process, you have to coordinate with your real estate agent, not only for paperwork but also to order a home inspection. Doing so can help you come up with a more reasonable offer. Once you’ve agreed on an offer and your house’s payment terms, your lender will verify your documents and application once again for final approval. After you get the final approval, you’re able to close the deal on the house. During the “closing,” the seller will transfer homeownership to the buyer. This includes signing contracts and paying the agreed-upon down payment.
When getting a mortgage, the borrower promises collateral (the home) to the lender if the borrower cannot pay back the loan, resulting in a foreclosure. You cannot fully own the house until the mortgage has been paid off.
How can I qualify for a home mortgage?
Lenders will examine your application and determine whether a client has sufficient assets and income to pay back the loan. These are some of the factors which determine the mortgage loan qualification process.
Debt-to-Income Ratio (DTI)
A debt-to-income ratio (DTI) refers to your total monthly debt payments divided by your gross monthly income. This reflects a client’s ability to pay back and manage the money he/she has borrowed.
Lenders typically use your credit score in determining whether or not you are qualified for a mortgage loan. Depending on the type of mortgage loan, the minimum credit score varies. Although lenders usually follow this, some lenders do not and may follow their own set of requirements. The better the credit score, the more mortgage options and payment-saving opportunities you’ll have.
A critical determinant of your credit score is your payment history. It makes up 35% of your credit score. Lenders will primarily examine this to see if you make your payments on time and whether you meet the minimum amount needed to qualify for a home loan.
Employment and Income
As a borrower, you need to prove that your income is sufficient enough to pay the loan. One way you can do this is by presenting at least 2-year’s worth of documented income in a company/industry or showing your average income from the last two years of tax returns.
The down payment is how much you will pay upfront when purchasing a home. Depending on the type of mortgage loan, the percentage will vary. There are even some mortgage loans that require little to no down payment.
Generally, to qualify for a mortgage loan, you need a credit score of at least 580, 2 years of consistent and verifiable income, and a down payment. Whether or not you qualify for a home mortgage will ultimately depend on your lender and their requirements.
Finding the best home mortgage
Deciding on the best home mortgage loan for you needs lots of time and research. Aside from the features of the house itself, you have to pay close attention to how you’ll pay for the mortgage loan. You’ll need to evaluate the number of risks you and, in turn, your family are willing to take. After considering your financial capabilities, you have to look after the different current mortgage rates available in the market. Not only do these vary across time, but these also vary from lender to lender (bank or any financial institution).
To ensure that you’re getting the best home mortgage loan, it’s best to seek professional help. Through Home Lending Pal, you have your very own intelligent mortgage advisor. Let Home Lending Pal do the work for you and find the best mortgages and lenders just for you. Get started with your Home Lending Pal today and visit our website at https://www.homelendingpal.com/.