Obtaining a mortgage proves necessary for many people. It is often the only way a potential buyer can purchase the house they desire. Mortgage companies, banks, and credit unions generally provide mortgage loans to borrowers who qualify. The lender a person chooses to work with will depend on what type of mortgage the company offers and the terms the lender has available. Learning how mortgages work and understanding the requirements of each enables potential buyers to find the best mortgage for them.
People often decide which house they want to buy before they actually apply for a loan. The application process should begin immediately so potential buyers know what rates to expect and which loan requirements they meet. Those with poor credit often see limited options due to their low score. Those with a higher score typically meet more requirements and have access to additional loan types.
Applicants receive a pre-approval amount after an initial application. This lets potential buyers see how much money the mortgage loan includes compared to the amount needed for a down-payment. Those who make a bid on a home need to complete an in-depth application that determines if approval for the specific property they have in mind becomes guaranteed.
Applying for a Loan
Applying for a loan consists of turning in volumes of paperwork and providing personal details. This information allows lenders to discern which applicants meet loan requirements and which are unfit for a loan altogether. Lenders also check credit scores to help them decide who qualifies for lower interest rates and who must pay higher premiums.
Applicants must turn in basic tax documents, such as W-2s or 1099-MISC forms. Full tax returns must also be included with all required signatures shown. Additional paperwork includes recent paycheck stubs, months of bank statements, and information on financial investments made in the past. Lenders do not consider an application until all required paperwork gets turned in with it. Banks and mortgage companies then decide to approve or deny the application based on all material in front of them. Completed applications with valid proof turned in by those with a decent credit score will typically get approved quickly. Approved buyers should speak with their lenders to discover which types of loans are best for their needs.
A variety of loan types make up mortgages. Buyers should understand each one before settling on the right choice. Four main types are available, including:
- Conforming Loans
- Non-Conforming Loans
- Conventional Loans
- Government Loans
Conforming Vs. Non-Conforming
Conforming loans refer to any loans that meet the standard requirements set forth by Freddie Mac and Fannie Mae. These are typically easier to obtain since banks are more willing to offer a loan that follows the benchmark regulations and rules. Most conforming loans offer a fixed rate. An adjustable rate can often be negotiated as well if a borrower would prefer that option.
Mortgage companies often refer to non-conforming loans as jumbo loans. This is due to their high prices. Jumbo loans rise far above the common limit that lenders set. This limit is $417,000 for any single-family home. The limit applies to nearly all states within the U.S. This excludes places like Hawaii and Alaska that offer higher limits due to the higher cost of living in those areas. Loan limits for these states reach $533,850 for two-unit homes. Acquiring a jumbo loan is possible as long as buyers are willing to pay higher mortgage rates. Buyers looking for luxury homes or vacation houses typically seek jumbo loans.
Conventional Vs. Government
Conventional loans typically fall in the conforming category. They meet standard regulations and are not backed by the government in any way. These types of loans are usually meant for people with an established credit history and high credit score. Those with poor credit history and low scores will not meet all requirements necessary for the underwriting regulations. Fixed rates apply to most conventional loans. Adjustable rates can sometimes be set if a lender agrees.
Government loans are available for those who do not qualify for conventional loans. These are loans like the FHA and VA that the government insures. Both types of government-backed loans also have a limit. FHA stands for Federal Housing Administration. They work to help the average American family find a home they can afford. An FHA loan must not exceed $271,050 in most states. Some states offer higher rates due to a higher cost of living. FHA covers more of the overall loan cost. This means less money spent up front for a down-payment. It makes it more affordable for the average person. Borrowers often receive an adjustable rate. A fixed rate can sometimes be negotiated.
VA loans offer the same benefits of FHA loans. The difference is that the average American cannot receive it. VA stands for Veterans Affairs. This type of loan only applies to veterans and their spouses. Spouses that remarry after their veteran loved ones have passed do not qualify.
The type of loan is not the only consideration to make either. Loan programs also need clarification so buyers find the best option. Fixed rate loans and adjustable rate loans are the two loan programs to choose between. Some loan types can use either program. Other loans only offer one or the other as an option.
Fixed Rate Loans
Fixed rates will remain the same throughout the terms of the mortgage. Both the payment amount and the interest rate stay the same year after year. Many types of loans offer this loan program as the only option. The downside is that it takes longer to pay off. The upside is that the monthly payments are generally lower.
Adjustable Rate Loans
Adjustable rate loans change throughout the course of the loan terms. Market conditions will play a role in determining the amount of the interest rate. Many adjustable rates start out on a fixed term price and change after meeting a particular achievement. This is usually once a set number of years passes, such as five. The remaining payments get decided by the current housing conditions and what rates other mortgage lenders offer at the time. Payments may change numerous times over the remainder of the mortgage term. Some mortgage lenders will only offer adjustable rates if the borrower has poor credit and poses a greater risk.
Paying Back a Mortgage
Most mortgages require full payback by the time the loan terms end. Not paying the loan back in time may mean losing the property. Mortgage terms can sometimes be extended if the full amount has not been paid. Some homeowners even take out a second mortgage to help pay the first one.
Home equity refers to an entirely different type of loan. The appraised value of the home gets used as collateral for the mortgage. An initial mortgage must get taken out before a homeowner has access to this type of loan. It is often used as a second mortgage in hopes of paying for a major expense, such as a new roof or other home remodeling project. Some even take on this second mortgage when debt reaches a high point. Homeowners may use a home equity line to pay for college, credit lines, and even to help pay off the first mortgage.
The total home value is not what gets borrowed. The estimated value is actually subtracted from the amount that is still owed on the home. The remaining balance then becomes what homeowners get to use. Homeowners that already made several payments will have access to a higher loan amount. Not paying off this second loan is not an option. Failure to pay results in loss of the home.
Home Equity Loans Vs. Lines of Credit
There are actually two considerations to make when it comes to home equity. There is the general home equity loan and a home equity line of credit. The loan lets homeowners borrow one lump sum amount. It is usually set up similar to a typical mortgage and has a fixed rate. The difference is the length in terms. Homeowners usually need to pay back home equity loans sooner than mortgages. A mortgage may take 30 years to pay off while a home equity loan has a 15 year term rate.
The home equity line of credit allows homeowners to take out money as needed. The term rate may also determine when the line of credit ends. Homeowners can take out money here and there as needed during a ten-year term. Borrowers cannot take any additional money once the term period ends. Some mortgage lenders allow homeowners to renew their line of credit once. Others may require a full payback of all money borrowed over the course of the term with no additional renewals.
High interest rates cause major problems for many homeowners. Those struggling to pay their rates can consider refinancing as an option. Refinancing allows homeowners to change their term length and get a lower interest rate overall. It may take longer to pay off the loan if homeowners choose this method. The benefit is that it makes payments lower so people no longer struggle to make the necessary monthly payments.
Potential buyers considering mortgages can use mortgage calculators to find the best deal. Most banks and mortgage lenders have these calculators available on their websites. Users start by entering the total price of the home, minus the down-payment they have available. This is the total mortgage loan amount. An interest rate is then selected. Some users may already have an interest rate in mind given to them by a bank. This amount should get entered exactly as shown. If the bank quoted a rate of 3.92%, then the user must enter that exact amount in the designated field. It will help find the most accurate mortgage payment. The final detail to enter is the term length. Thirty years is the most common option. Any range between 10 and 40 years can also be selected.
With all information entered, the calculator will work to determine the new total cost with interest added. It will also provide the monthly payment amount that borrowers can expect to pay. The use of mortgage calculators helps people find better deals on rates and helps them decide the correct term length needed.
Potential buyers interested in learning more about mortgages and the varying options available can search through mortgage news. Numerous publications are available that provide people with the information they need.
Mortgage News Daily
Mortgage News Daily is one possibility. Any time mortgage rates hike, Freddie Mac and Fannie Mae regulations change, and details about home sales emerge, Mortgage News Daily has the details.
National Mortgage News
National Mortgage News is another option. They provide regular updates on mortgage news throughout the entire United States. This is ideal for those looking at housing markets in other locations. Rising mortgage rates, average home prices, and typical loan terms are all listed regularly.
HousingWire is another valuable source. The site includes any details related to the home. It discusses Freddie Mac policies, home sales, important information for borrowers, and tips on finding a better mortgage lender.
Inside Mortgage Finance
Buyers still interested in learning more should seek information from Inside Mortgage Finance. This publication provides full details on the mortgage market and expected trends. Full-length data and research reports showcase important information, while feature stories discuss current news. Differences between FHA and VA lending get discussed, while loan types for condos vs. houses also make headlines.
Mortgages are ideal for people looking to buy a home now. It allows buyers to find the home of their dreams without having to wait to have the cash in hand to pay for it. Understanding how the different types of mortgages work and knowing the requirements proves necessary for choosing the best mortgage out there.