Two-thirds of the United States population are home owners. If you’re among the nation’s renters, allow me to guide your transition into home ownership.
The Basics of a Mortgage
A mortgage, simply put, is a loan that is used to buy homes. It is like other loans except that mortgages are specific to purchasing real estate. The purchase of a home will be arguably the single largest and most important purchase of your life. Houses cost a fortune. There are few things which cost as much and even fewer that will impact your life as much. Therefore, as a first-time buyer, it’s important to have the knowledge as to how the home buying process works and what you should expect from your mortgage.
Importance of A Mortgage
Mortgages are God’s gift to home buyers because very few actually have the cash on hand for this large purchase. And, those that do have the cash often prefer to keep their cash money for other things in life.
How Do Mortgages Work?
Basically, the home buyer takes a loan from the lender. The said money is used to buy a portion of the home and the remaining amount is paid by the buyer.
For example, if a buyer purchases a home for $1,000,000 and the mortgaged amount is $800,000, then the home buyer is responsible for paying the remaining $200,000. This $200,000 is known as the “down payment” and the terms of the loaned amount are entirely up to the buyer. You can think of down payment as the amount you don’t borrow from the lender.
Depending on the loan you choose, the down payment will vary. A larger down payment is linked to reduced monthly installments, because technically you are borrowing less money, and lower mortgage rates.
As the borrower, the ‘term’ of the loan is up to you – this is the number of years until the loan must be paid in full. The most common loan term is 30 years. However, the shorter the loan term, the lower the mortgage rate plus your loan gets cleared sooner too.
Types of Mortgages
There is a myriad of loan programs available including:
- Low and zero-down payment loans
- Loans for buyers of condos
- Loans for members of the U.S military, among others.
With the help of your mortgage lender, you can find a loan that is tailored to your needs. In the U.S, the four most common types are all government-backed and are the conventional mortgage, VA mortgage, FHA mortgage and the USDA mortgage.
Although each loan is different with different qualification standards, the steps taken to qualify are procedurally similar.
How to Qualify for A Mortgage
- First, you need to meet the minimum credit score threshold.
- Next, you will be required to verify your income. W-2s, pay stubs and federal income tax returns are employed to achieve this.
- Your monthly expenses compared to your monthly income is known as your Debt-To-Income Ratio. Banks will normally approve an application where the DTI doesn’t exceed 45%.
- Your debts will be verified using a recent copy of your credit report. If it happens to include errors, you can provide documentation to clear such mistakes.
- Your employment history and savings will also need to be verified.
And with that done and dusted, you are good to go.
- Financial experts recommend that housing payments stay within 30% of your total monthly income.
- All banks underwrite differently. If your mortgage application is turned down, don’t give up! Try another bank for different results.
Finding quality lending takes hard work and sometimes is best to hire a mortgage broker Brisbane to ensure you are getting the best possible solution for your needs.
To read more on topics like this, check out the budgeting category