ad collaborative post // Finding your dream home is fun, but applying for a mortgage is scary. Spending hours on Zillow dreaming about the home you can afford is an entertaining game played by many Millennials. Building spreadsheets and financial models to figure out how to pay for that dream home is hard and time consuming. For those new to the mortgage journey, we’ve written a quick mortgage beginner guide to help you along this process.
Check Your Financial Status
Before applying for a mortgage, you must make sure that you are financially ready to become a homeowner. Lenders investigate your financial history to determine whether or not you are qualified for the loan. They’ll look at your credit score to see if you qualify for the mortgage. Your credit score determines the interest rate on your mortgage.
Things you should consider in terms of finances are:
- Are you in a lot of debt?
- Do you have enough money to pay for the down payment?
- Do you have enough money to cater to the closing costs?
- How often do you plan to refinance your mortgage or not at all?
Knowing your income and debts is an important first step in determining how much you can afford for a home.
Choose the Right Mortgage
Once you’re ready to buy a home, finding the best mortgage for you will be based on your housing priorities and financial condition. Which is a really important point in this mortgage beginner guide to consider. There are many different types of mortgages on offer, and when searching for what is right for your situation you might want to consider wholesale lenders as well.
Wholesale mortgage brokers have access to multiple lenders and their respective loan products so finding the right mortgage is often quicker and easier this way. The following are some of the various loan sorts available when obtaining a mortgage:The following are some of the various loan sorts available when obtaining a mortgage:
- Conventional loans: They have stricter qualifications. This is because the government does not insure them. However, they are the best option for you if you have a good credit score.
- FHA loans: These FHA-insured loans have lenient standards and are accessible to anybody. They also accept gift money as a down payment, which is useful if you don’t have cash available.
- VA loans: They are limited to veterans or active service members. These types of loans need no down payment.
- USDA loans: These are a program from the U.S. department of agriculture and require no down payment. They are suitable for low-income people who reside in rural areas.
Adjustable or Fixed Rates
Fixed-rate loans are one of the most popular types of mortgages in the United States. They are fixed-interest loans that do not change throughout the loan. The agreed interest rate will remain constant until you decide to sell your house or refinance it.
On the other hand, adjustable-rate mortgages begin with a low-interest rate used in fixed-rate, but as time goes by, the rates fluctuate upwards. This plan is suitable if you do not plan to stay in that house for long.
A super important factor in this mortgage beginner guide, when applying for a mortgage, are the several documents that you must submit. The mortgage application requires you to verify the following things through a paper trail:
- Source of income and employment
- Assets and liabilities
- Credit score
- Rental history
- Bankruptcy, divorce, and gift funds
When lenders ask for proof of income, they want to ensure that you are stable and consistent. With these two, the lender is sure that you can afford to pay for the mortgage.
They ask for the following documents to verify income:
- W-2 forms: The lender will ask you to submit W-2 forms dating back to one or two years.
- Pay stubs: You will be asked to submit pay stubs from the last month. Occasionally, your employer might be required to sign them.
- Income tax returns: Your 2-3 years tax returns will be checked to ensure that the reported salary and deductions are actual.
For the verification of assets and liabilities, you will be required to submit the following:
- Bank statements: This ensures that you can cover the down payment, closing costs and maintain cash reserves if need be.
- Investments and retirement accounts: If you intend to use money from an investment or retirement account to cover the closing costs, you will need to show a 2-3 month statement from these accounts.
Credit verification will have the lender looking at your credit reports.
Identify Mortgage Lenders
If you’re still with me, take a pause and a deep breath. Manifest your dream home and have faith that this process is almost over. It’s now time to choose a lender. Do not be quick to pick the first lender you come across. Various lenders to consider, including credit unions, traditional banks, and online non-bank lenders. If you are specific about the mortgage you want, you may want to get details about the lenders. The following are things you should consider when choosing a lender:
- Mode of communication with your lender
- The minimum qualifications or requirements by the lender
- Available unique programs that are appropriate for your needs
- Do the sample rates shown include points?
Preapproval for the Mortgage
Mortgage pre-approval indicates that you can offer an actual price for the property. It also aids in determining the cost of the mortgage. This is because you will receive information on rates, closing fees, and APR. At least three lenders should pre-approve your mortgage.
After pre-approval, you will still need to present your latest financial documents. Upon receiving your documents, the lender will give you a loan estimate (LE). The items listed on the LE will include:
- The cost of the loan
- APR and interest rates
- Associated fees
The Underwriting Process
The administration and operation of a mortgage loan is the most drawn-out process. In the underwriting process, you are officially accepted for a loan. The lender also obtains a home appraisal to verify the market value of your house during this stage. The lender can only advance you as much as the property is worth. In the meantime, you will schedule a home inspection.
Finalize the Purchase
After the loan is approved, it is time to close the home. There are a lot of documents to review at this point. It would be best if you took your time to go through the papers. Ask questions where need be. Some people are present at closing. They include:
- Mortgage broker
- Your real estate agent
- Your attorney
- Your seller’s attorney
- A representative of a title company
- The seller and the seller’s agent
However, the people present at the closing may vary from one state to another. After the conclusion, you are finally a homeowner, and you can move into your new house.
Making Your First Mortgage Payment
It is crucial to make the first payment on time. This will prevent you from having lots of problems with your mortgage provider. You can stay on top of your mortgage payment by paying on time, making double payments, and setting up an automatic payment.
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If only this post was around 12 months ago when I was applying for a mortgage! Some great tips in this guide which are so helpful to first time buyers!
Honestly, I swear buying a home is just so stressful! I have had a meeting with a mortgage advisor (which I definitely recommend everyone doing) and it was really eye opening to understand! It is just frustrating sometimes that mortgages can be offered so much lower than you expect. But this post is extremely useful especially for those just starting to think about buying a home x
Thank you for this post, I’m looking to buy my own house and this post about mortgages has helped me understand it so much better x
Lucy | http://www.lucymary.co.uk
We just bought our first house last month and this blog post speaks so strongly to everything we went through! These are such helpful tips and I wish I had this a couple of months back before starting the process – this is going to be so helpful to a lot of people Jenny! Thanks for sharing this awesome guide.