Understanding Mortgage Loans and How to Apply
Mortgage loans are necessary for most home buyers. Not everyone has the means to purchase a home outright and instead require assistance with making such a large investment. Understanding mortgage loans and learning how to apply is an essential part of obtaining a valid mortgage with appropriate terms.
Qualifying for a Loan
Qualifying for a loan is not as difficult as one might think. The proper documentation and credit history will help lenders determine who meets the requirements and who does not yet qualify. Common loan qualifications include:
- High Credit Scores - Most lenders look for a score above 700
- Low Debt to Income Ratio - Credit card and other debt needs to remain low while income stays high
- Three Times the Income - The amount of income coming in each month must equal three times more than the monthly mortgage payment sent out
Some of these qualifications may seem difficult to meet. The good news is borrowers are not required to meet every qualification to obtain a mortgage. Some lenders are willing to offer a mortgage to those with low credit as long as they pay higher rates. Obtaining a higher mortgage amount with low-interest rates will require borrowers to meet each qualification.
The loan application requires extensive details and paperwork. This ensures the bank or lending company has complete access to financial history and debt information. Lenders need verification proving the money they lend ends up in the hands of someone capable of paying it back on time.
Signed tax documents make up the first requirement. Applicants must also turn in all W-2s and previous paycheck stubs for current jobs and previous ones. Bank statements and financial investment records are another component. These documents, paired with a credit check, allow lenders to determine how much income is available and what each buyer can afford. The lender will send out a pre-approval letter informing the buyer of how much the mortgage approval is worth.
Pre-Approval Vs. Full Approval
A pre-approval does not mean a guaranteed mortgage offer. It only indicates a possible amount the buyer can hope to receive. The second step of the application process comes after the potential buyer chooses a home. The buyer makes a bid on the house he or she wants and submits up-to-date paperwork and documents on current financial status. The bank, mortgage company, or other lender will then make a final decision on approval and the terms for mortgage repayment.
Four Types of Mortgage Loans
Not every homeowner has the same type of mortgage. There are four separate types that people may choose. They include:
- Government Loans
- Conforming Loans
- Conventional Loans
- Jumbo Loans
Government loans include two types. The FHA loan and the VA loan are government-insured and guaranteed. Both have similar limits and policies.
The FHA loan receives support from the Federal Housing Administration. Average families get the help they need to find a home with this loan type. It has a limit of $271,050 for single family houses in low-cost of living areas. The limit price increases for higher cost of living areas.
Veterans Affairs backs the VA loan. Only veterans and their spouses may apply. Spouses that remarry at any time become ineligible for consideration of approval. The limits for this loan type are the same as the FHA.
Conforming loans make up a large percentage of loan types. Home buyers typically obtain these loans easier thanks to the rules and regulations they follow. Banks are often more willing to lend money for a loan that meets strict standards.
The technical term for jumbo loans is non-conforming. Lenders refer to them as jumbo because of the large mortgage price. Homeowners can receive a loan up to $417,000 for an average family home. Homes that surpass this limit require a non-conforming loan instead. Many jumbo loans cover second house mortgages and vacation homes. Jumbo loan mortgages must reach a minimum of $625,500.
Another common loan type is the conventional loan. Lenders designed this loan for buyers with high credit scores and an established credit history. They are similar to conforming loans. Conventional loans are not ideal for buyers with low credit scores because the government does not back them. This leaves no guarantee of loan repayment. The lending agency is not often comfortable loaning money to those who do not have an established history with on-time payments.
Fixed Rates Vs. Adjustable Rates
One important difference to note is between the types of rates buyers receive. Fixed rates and adjustable rates are both possible for many loan types.
Fixed rates refer to an unchanging payment amount. Homeowners continue to pay the same payment amount each month. They also pay the same interest rate and never have to fear it will change.
Adjustable rates typically have a fixed rate in the beginning. The amount will stay the same for the first few years, such as five or ten. The rate will then become adjustable after this time period ends. The current market condition determines the new interest rate. It gets updated as market conditions change.
Payments and Terms
Each lender has their own rates for mortgages. The terms are typically the same, although there are several options. The 30 year plan is the most common. It offers a long-term period with smaller monthly payments and lower interest rates. The same buyer can choose a 15 year plan instead, but their payments and rates would increase. Settling on the right term amount and payment option will depend on what the buyer can afford and the agreement made between themselves and the lender.
Potential home buyers considering finding mortgage loans must take the time to learn and understand just what types are available. Mortgages are not a one-size-fits-all deal. Varying mortgages are available to meet the needs of each potential home buyer so every person finds the right rates for them.