How To Apply For A Mortgage

Applying for a home loan should be a simple, straight-forward process, but there’s a lot of factors that determine the loan amount and interest rate you’re offered.

For those in the preliminary stages, here’s three things you can start doing today.

  1. Watch your spending – The bank or loan company is going to ask for a 20% down payment, but you can negotiate it as low as 3%. Do yourself a favor and don’t apply for new credit cards or make a large purchase leading up to your home purchase.
  2. Improve your credit score – You might not qualify for all the mortgage types, but you can definitely work the system in your favor. In many cases a mortgage type will require a minimum credit score. For this reason try to make sure you have all your “bad debt” loans paid off, have no late charges, and dispute any incorrect credit report mistakes.
  3. Have a history of employment – Lenders generally want to see 2-years of tax returns. If you were unemployed within the last two years it’s best to wait before applying for a home loan.

What To Do Before Applying For A Mortgage

1. How Much Can You Afford?

Your first task before shopping for a new house is to establish your budget. It’s not enough to calculate what you have for the house down payment, or how much you can pay each month.

Lay out expenses:

  • Are you planning to have children?
  • Cost of college tuition (or student loans)
  • Medical and drug prescriptions
  • Alimony payments
  • Weddings
  • Will you have to take care of elderly parents?

Remember that for a fixed rate mortgage, the rate you agree to is the one you’re locked into for the duration. If there’s a crisis – laid off, large medical expense, COVID-19, etc. – you’re still on the hook to make the monthly payment.

In a recent article, Seattle estimated that 47% of Seattle residents struggle to pay their mortgage, or are rent burdened due to COVID-19. And many are accumulating significant personal debt due to loss of income.

Before shopping for a home Todd Murphy at 1-855-Jet-Debt says that consumers separate “good debt” vs. “bad debt”.

Good DebtBad Debt
Home MortgageCredit Cards
Student LoansPersonal Loans
Business OwnershipAuto Loan
Store Credit

If your bad debt is higher than your good debt, you may want to reassess if now is the best time for such a big purchase.

2. Get All Your Mortgage Paperwork Ready

Before you apply for a homeowner loan, you’ll want to have all your ducks in order. Below are some of the docs and paperwork you should have ready.

  • Two years of tax returns
  • bank statements (showing that you can afford a 5% down payment)
  • last 2-3 months of pay stubs
  • updated credit report from the credit bureaus

3. Home Mortgage Loan Questions

How long will you stay in the home?

  • If relocation is your reason for moving, it can impact the type of loan you want to choose. There are loans as short as 10 years, and go up in increments of 5 years and up to a 30 year mortgage.

What’s happening in your family?

  • Having children or sending having to pay college tuition within the mortgage loan term can have a big impact on you financially.

What other big expenses can I expect to have?

  • Maybe you need a new car, or will have to help parents who will need assisted living care.

What does the bigger financial picture look like?

  • A 15-year mortgage may sound tempting like a middle ground, but if it means gutting your savings or withdrawing on your retirement fund, it may not be worth it. Take a full look at your finances, including long-term investments.

Where To Shop For A Mortgage

As you can guess there are a lot of mortgage types available. Some are available to everyone, and others like a FHA Loan or VA Loan (or Veterans Loan) will only apply to a certain people.

Explore your loan options

1. Fixed rate or adjustable mortgage

A fixed-rate mortgage, commonly for a 15 or 30-year term, is often the safest bet because you know that the rate won’t change on you. However in some circumstances an adjustable-rate mortgage (or ARM mortgage) may suit you better.

There’s no harm in exploring a mortgage loan with an introductory fixed rate and annual rate resetting, as long as you understand that payment amounts will be less predictable if interest rates change.

2. Put less money down.

For people who can’t come up with a 10% down payment, there are government issued mortgage loans, and specifically the Federal Housing Administration loans (known as FHA loans), which only require a 3.5% down payment. But be prepared to factor in the cost of private mortgage insurance.

3. Check rates online.

Online calculators such as Google’s Mortgage Calculator can help you estimate the types of different mortgages and payment scenarios.

Mortgage Lenders

 A mortgage lender is the bank or institution that offers and underwrites your mortgage loan.

Each lender has specific borrowing guidelines that they use to verify your creditworthiness and ability to repay the loan. This includes your credit score with the major credit bureaus, income, and the size of the loan. The lender will set the terms, interest rate, repayment schedule and other key aspects of your mortgage.

What To Look For In a Mortgage Loan

  • Annual Rates. Get a list of rates that each lender or broker offers, and if considering an adjustable rate mortgage (ARM), about how your monthly premiums may vary.
  • Points. Sometimes points are referred to as “mortgage discount points”, and are not always understood by the borrower. Points are equal to 1% of the total loan amount, and they are used to pay interest ahead of time. So if you are getting a loan for $200,000, one point would be equal to $2,000. Mortgage discount points are paid up-front, at the time of closing. It is important that a borrower understand that discount points are an interest payment, so they do not reduce the loan amount.
  • Potential Fees. Home mortgages often include a loan origination fee, home closing costs, broker fees (3-6% of what you pay for the home), or early payment penalties.
  • Down payments. If your down payment is less than 20%, you may have to pay private mortgage insurance (PMI). For those who can afford a 20% down payment, you can apply to cancel the PMI.

How to Shop For A Home Mortgage Loan

Depending on your down payment percentage, lenders may offer the same type of loan but at varying costs. This can be due to overages, or fees pocketed by lending institutions or brokers.

Take the information you’ve gathered with you as you visit various lenders, and don’t be afraid to make them compete for your business by informing them that you’re shopping around.

Once you are happy with the mortgage negotiated, get a written lock-in rate. There’s usually a fee for this, but it’s often refundable after closing. Plus, you won’t have to worry about what happens if interest rates rise while your loan is being processed.

While you may be tempted to take a lender’s first offer, remember that even a small difference in interest rate can add up to tens of thousands of dollars over the next 10-30 years.

At the end of the day, a home mortgage loan is a big commitment and you should have a lawyer look over the paperwork before you sign and submit anything.

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