Defined simply, a mortgage is an agreement of ownership on a property (personal or real) between the owner and lender to make sure the loan is paid off in a set time period. If you’re just getting your feet wet, this may seem like an intimidating process.
Fear not – here are some things to know while you set up your mortgage.
Basic requirements for obtaining a mortgage
If you’re looking to buy a house, there’s a process you need to go through in order to make sure you qualify. Lenders want to make sure everything is good to go before approving you for the next step. Some of the things you’ll need in order to qualify for a mortgage loan include: your credit history, income within the past two years, employment history, loan-to-value ratio and home affordability.
Remember, lenders want to take the route where the least amount of risk is available. The goal is to avoid lending money to someone who presents a risk for default or foreclosure. Good credit is necessary when it comes to getting approved at reasonable rates, because lenders need some indication as to how well you’ll be able to pay back the loan.
Your employment history shows how long you’ve historically been able to hold a job, which is another indication of your ability to keep regular with mortgage payments and other associated monthly expenses. If your monthly expenses exceed your income, it will be difficult to maintain the home. With that being said, take a look at how much of a down payment you need to put in the property before going through the full process of setting up a mortgage.
How much of a down payment do you need?
Typically, most lenders want you to have loan-to-value ratio of 80 percent. This means you should plan to put down a 20 percent down payment on your home. For example, if the house you want to get a mortgage on is valued at $400,000, you’ll pay $80,000 as a down payment. You can use a mortgage calculator to help you figure it out.
Some lenders base the amount you pay for the mortgage on your credit score. If your credit score is below 620, chances are good that the lender will make you pay a higher down payment. Your credit score and income history together demonstrate that you are capable of paying the mortgage, but the better your score and income, the more you’re able to negotiate with your lender on a rate that suits your needs.
Another thing to note when it comes to setting up a mortgage is that you may be able to get pre-approved or pre-qualified. If you’re pre-qualified, this means that the lender doesn’t need to run a Social Security or credit check. Pre-approval means that the lender will do a thorough check of your credit and may even have questions regarding any hiccups such as missed payments, defaults, and so forth. If you do have any pending issues, make sure you clear them so you don’t impede the qualifying process.
Next, you’ll want to think about whether you should get a conventional or FHA loan.
Should you consider a conventional or FHA mortgage loan?
Right off the bat, most lenders want you to put in a down payment of 10-20 percent. If you’re lucky, you’ll pay lower than this rate (especially if your credit score is higher than 620). Unlike with an FHA (Federal Housing Administration) mortgage loan, you don’t have to pay an upfront fee plus monthly mortgage insurance. Mortgage insurance in a conventional loan is only required when your LTV is higher than 80 percent. A conventional loan covers higher loan amounts for a house.
Conversely, an FHA loan only requires 3.5 to 5 percent down payment in the home. Though you don’t need as much money on the front end, an FHA loan does require higher closing costs. You will take on lower interest rates, but it could result in a higher monthly mortgage. The good news for those with iffy credit? You can get away with having a 500 credit score as minimum to apply for an FHA loan.
Getting good mortgage rates
A lower mortgage rate doesn’t necessarily mean you’ll pay less for your mortgage. There are a lot of variables to think about before agreeing on a particular rate. Consult different lenders and banks in your area before you decide on a property to see what they have to offer.
Narrow your choices down to a few you can afford. Also, weigh options between a fixed rate and an adjustable one. The market always varies, so an adjustable rate could work well if you decide to own a property short term. A fixed rate is more advantageous for a permanent home, because you don’t have to worry about the market fluctuating. Always keep this in mind before you make your final financial decision.
Do you have any additional questions and concerns regarding your homeowner status? Leave a comment below with your feedback.