When you’re thinking about the possibility of buying a home, you should first think about how you’re going to finance that investment. The home mortgage loan is the money you borrow from a financial institution to finance the purchase of the house. Here are the basics of a home mortgage loan.
Qualifying Factors | Credit Score and Debt to Income Ratio
Your credit score is the primary influencer in whether or not you qualify for a loan. Credit scores lower than 620 make it difficult to be eligible. The ideal credit score is 740. Take the time to rectify accounts and improve your credit rating.
Your debt-to-income ratio, or DTI, determines the amount of money you owe (debt), to the sum of money you earn (income) on a monthly basis. Your DTI should be 36 percent or lower. When your DTI is above 36 percent, paying off credit cards or lowering your overall balances could increase your chances of qualifying for your loan.
Qualification vs. Approval
Pre-qualification is an informal estimate of what you might be able to borrow based on information you provide. There is no commitment in a pre-qualification from you or the lender. However, there’s still a chance you won’t qualify once all the official documents are submitted and other factors considered. It’s just an estimate.
Pre-approval, however, means you’ve already gone through the steps of providing official documents, filling out the standard loan form, and the lender agrees to lend you the money to purchase the house. Pre-approval is necessary before you begin house shopping and saves time in the transaction once you find a home you want to buy.
Paperwork, Paperwork, Paperwork!
You will need to provide your name, income, social security number, the address and estimated value of the property you’re buying, and the size of the loan you’re borrowing. Furthermore, you’ll furnish a list of your assets, W2 forms, profit/loss statements or 1099 if you’re self-employed, recent pay stubs if you earn paychecks, last two federal tax returns, and a complete list of your debts along with your total monthly payments.
At closing, you’ll need proof of title search and title insurance, flood certification, evidence of homeowner’s insurance and private mortgage insurance if required, and copies of your appraisal and inspection reports.
You will receive a loan estimate, contract, and closing disclosures.
Save all of your documents in a secure location.
The buyer usually pays 20 percent of the purchase amount as a down payment, and the bank finances the other 80 percent. However, some loan types may allow for a smaller down payment.
Different Types of Loans
Aside from conventional loans in which the buyer pays twenty percent down payment, some programs can make home-buying easier by having more relaxed qualifications and lowering the down payment. FHA loans are backed by the Federal Housing Authority to assist people with restricted incomes. VA loans are loans that are supported by the Department of Veteran Affairs to aid members of the military with buying a home.
Fixed rate loans are when the interest rate remains the same throughout the life of the loan. Fixed rate loans create unchanging monthly payments that are consistent from month to month and year to year.
Variable rate loans may start low and be more affordable in the beginning, but may later be adjusted based on time spans (three, five, seven years, etc.), or depending on market conditions. This variation means that monthly payments may change over the course of time.
Understanding Loan Payments
PITI stands for the principal, interest, taxes, and insurance, all of which you pay for within each payment. The principal is the amount you borrowed. Interest included each month is the payment to the lender for loaning you the funds. The state or city in which you live requires property taxes, and the financial institution requires that you have homeowners insurance and possibly flood insurance as well as private mortgage insurance if your down payment was less than the standard twenty percent.
Points and How They Apply
In lenders’ terms, a point equals one percent of the total value of the property you’re purchasing. The bank charges points to cover things loan closing costs. The buyer pays the point values at the close of the transaction.
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