Beginner’s Guide to Residential Mortgage | brand voice
Yes, applying for a mortgage can seem overwhelming – and it can certainly be time consuming. But it’s not the daunting and complex process you imagine. Here’s everything you need to know to get started.
What is a mortgage loan? Let’s cover the basics
At its most basic, a mortgage is a loan specifically designed to help buyers afford real estate. A mortgage agreement, which can last from 15 to 30 years, defines the terms of the contract you have with your lender.
Generally, the chosen lending institution agrees to lend you the money needed to buy a house while you agree to repay the loan in monthly installments.
Mortgages vs Loans: Key Differences
Home loans are slightly different from other types of loans, such as student, personal, or car loans. First, some loans are available without a credit check. In the case of mortgages, you may be able to obtain funds without a credit history or with a bad score, but the lending institution will still perform a credit check.
Additionally, mortgages are “secured” loans, which means that your property will be used as collateral in the event of late payment or inability to repay the loan.
Types of mortgages
Mortgages can vary in duration (10, 15, 20 or 30 year loans) and in terms (fixed rates vs adjustable rates). But they also vary in nature. Some of the more common types of mortgages to consider include:
- Conventional Home Loans – Conventional mortgages are those that meet the limits and lending terms set by the government-backed mortgage companies Fannie Mae and Freddie Mac. They typically require a 20% down payment and let you borrow up to $647,200 (as of 2022).
- USDA Loans – these mortgages are designed for buyers looking to invest in rural areas. They’re backed by the USDA and don’t require a down payment, but only homes in certain areas may qualify.
- VA loans – these loans are for members of the US military and their families. They are backed by the Department of Veterans Affairs and do not require a down payment or private mortgage insurance (PMI).
- FHA loans – These are loans backed by the Federal Housing Administration and only require a minimum down payment of 3.5 and a score of 580.
- Jumbo Loans – these loans are for home buyers looking to borrow more than the limits set by Fannie Mae and Freddie Mac. They usually require a 10-20% down payment.
The Process of Getting a Mortgage: An Overview
The process of getting a mortgage should always start with finding the right lender. The best deals, such as SoFi mortgages, will have lower interest rates and greater potential for customization.
For example, you’ll want to find a lender that offers mortgages of at least 10, 20, and 30 years, as well as the option to choose between fixed or adjustable rates. Don’t forget to review the fees charged by the lender, which may include prepayments and origination fees.
The essentials you need to get a mortgage
In most cases, getting a mortgage is easier than you think, and on average, only 8% of mortgage applications are turned down. However, there are some boxes you need to tick before submitting your application – remember that a mortgage rejection can impact your chances of getting the best deal!
A good credit rating
Some government-backed loans are accessible with a score of 580, while conventional loans require a minimum credit score of 620. But, even if you qualify for a mortgage with a low FICO score, you should consider switching. time to build your credit before applying. .
Indeed, low scores can prevent you from accessing the best rates, which can impact the amount of interest you will repay over the life of the loan.
A solid down payment
With the current availability of different types of loans, you no longer need to put that famous 20% down payment and you can access a loan with a 0-3% down payment.
However, with a lower down payment, you may have to pay PMI (which is 0.5-1% of the total loan amount) until you owe at least 20% of your home equity.
A debt-to-income ratio below 36%
The debt-to-income ratio (DTI) measures how much of your income is used to pay off outstanding debt. While some mortgages are accessible with a DTI of 46%, this indicator gives lenders insight into your financial health. So, to access the best rates, you have to aim for a DTI of less than 36%.
Estimation of your loan amount, closing costs and monthly repayments
In addition to the amount borrowed (the principal), your monthly payments will include interest, property taxes, homeowners coverage and mortgage insurance.
The sum of these fees must not exceed 28% of your gross monthly income. Your lending institutions will review your financial situation and assess the length of your mortgage and how much you can comfortably repay.
Bonus tip: Make sure you also budget for closing costs, which are typically 2-5% of the property value!
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