How to Get a Mortgage
It's time to get down to business and see some of the homes that peak your interest in person. But before we start doing so, it is best to get pre-approved for a mortgage. A mortgage, by definition, is the loan you will need to borrow from a mortgage lender to purchase a home.
It's important to note that a monthly mortgage payment is more than just repayment of the loan with interest. In that monthly payment, there are also property taxes, insurance on the property, and PMI (private mortgage insurance), which is required by loan institutions if you are borrowing more than 80% of the home's value. In other words, your down payment is less than 20% of the home, than you would need to purchase PMI.) For the purpose of figuring out how much they can loan you, financial institutions will estimate the cost of these extras and factor that in to the equation of how much you are allowed to borrow.
Applying for a Mortgage: What You Will Need
- W2 forms from past two years
- Pay stubs for past 3 months
- Borrowers tax returns for past two years
- If you are self-employed, business and personal tax returns for past two years, year-to-date profit and loss statement and balance sheet
Names, balances, and account numbers for all credit cards, store lines of credit, student loans, auto loans, and any other debt with monthly payments, including alimony payments and child support payments (You may need to bring a copy of your divorce decree and the court-ordered amounts that you pay.)
Proof of your down payment
- Bank statements from the previous two months showing account balances
Investments and assets
- Two months of statements of any stocks, bonds, or other investment accounts
- Retirement account statements (401K and IRA)
Residence history for previous two years
- If you rent, the name and phone number of your landlord
- Proof of current mortgage or documentation of payments and status
Pre-approval is a very detailed and thorough financial process completed with your bank or mortgage lender. It will provide you a letter that states that the loan brokerage or bank has reviewed your finances and are willing to loan you a specific amount of money to buy a house, once you find one.
Benefits of Pre-approval:
- It will show you which homes you can actually afford, and prevent you from wasting time on ones that don't fit your budget
- It will help you make an offer more quickly and one that sellers will take seriously
- For any bank-owned property (Real Estate Owned or REO, which are foreclosures for sale), buyers need to be pre-approved in order to make an offer
In order to start the process, you'll need to meet with your mortgage lender or broker. Conduct a search and look at their lending rates. Do an interview over the phone to help you decide which company seems on top of their business, who will work to make everything come together smoothly and on time for your home purchase. Please remember, I'd be happy to make recommendations too.
Mortgage Types: An Overview
As you narrow down the search criteria for a home, your mortgage broker can tell you about financing programs specific to your needs and the benefits or drawbacks of each type of loan. Here are some common types of loans:
- Fixed-rate mortgages have the same interest rate (the percentage of added cost for being able to borrow the money) for the entire span of the loan.
- Adjustable rate mortgages (ARMs) mean your interest rate may change throughout the life of the loan.
- In a conventional mortgage, a private lender assumes the risk of losing its money if you default on your loan.
A government-backed loan is insured by the government, meaning the government is not the lender, but it does promise to pay back some or all of the lender's money if the borrower defaults. This reduces the risk for lenders when it comes to foreclosures. These types of loans may be a good option for anyone who may not qualify for a conventional loan. Government-backed loans tend to have a lower down payment requirement and less-stringent credit score requirements, though they may carry a higher interest rate. Examples of government-backed loans include:
- FHA loans: These loans work well for first-time home buyers and are an option to anyone who qualifies. They typically provide competitive rates, less-stringent credit requirements and lower down payments than other types of loans.
- VA loans: Available to eligible veterans and their spouses only, these loans offer low down payments and lower interest rates.
With a pre-approval in hand, I can come up with a list of properties in the general price range of homes for sale that you should be looking at. You're ready to house hunt!