When you’re shopping for your first home, you’re likely not prepared to pay all cash. For non-cash real estate purchases, buyers seek out a home mortgage loan from a bank or financial institution.
Applying for a home mortgage loan takes around 30 days to complete. Furthermore, it’s best to complete the home mortgage application process and get pre-approved before you shop for houses.
- What is a Home Mortgage Loan
- Managing Your Credit and Debt-to-Income Ratio Before You Apply
- Getting Your Documents in Order
- The Money Matters: Down Payment, Earnest Money, and Closing Costs
- Varying Loan Types
- Shopping for Lenders
- What’s Included in My Monthly Mortgage Payment?
- Your Real Estate Agent as an Ally
- Have Questions? Ask Becky!
What is a Home Mortgage Loan
A home mortgage loan is specific to residential real estate purchases.
Lenders provide a percentage of the funds for the purchase, charge interest and other fees, and allow for choices such as a variable interest rate vs. fixed interest, a 30-year mortgage or a 15 year, and other options.
To qualify for a home mortgage loan, you must meet the lender’s requirements, which involve credit score, debt-to-income ratio, work history, and a seemingly endless amount of documentation and paperwork.
Managing Your Credit and Debt-to-Income Ratio Before You Apply
One of the first things a lender is going to do when you apply for a home mortgage loan is to run your credit report to determine your credit score and view your credit history.
For this reason, it’s a wise idea to order a copy of your credit report in advance to make sure it’s crystal clear and ready for review.
If you have any outstanding accounts or derogatory marks, rectify those before moving forward. Make sure your history shows that you made your payments on time. Positive payment history assures the bank that you’re likely to be reliable in your home mortgage loan payments.
At the bare minimum, your credit score should be at 620 or higher before you apply for a home mortgage loan. Even better, a score of 740 or higher could earn you better interest rates.
Your Debt-to-Income ratio, better known as DTI, measures your current income against your existing debts such as credit card payments, auto payments, student loans, etc.
Your DTI should measure 36% or lower to prove to the lender that you’re not over-extending yourself financially. At the high end, your DTI should be lower than 43% before you apply for your home mortgage loan.
To figure out your debt-to-income ratio, add together all of your monthly expenses, and then divide that number by your gross income.
Getting Your Documents in Order
There’s a mountain of paperwork involved in applying for a home mortgage loan.
Before you walk into a bank with the intent to apply, anticipate that you’ll need two years proof of income via pay stubs, W2s, or other proof of income.
Gather up those bank statements and proof of any assets, and then do the same with your debts and monthly expenses.
If you rent, you’ll need to provide a rental payment history.
If you’ve gone through a bankruptcy, foreclosure, or other legal matter, you must disclose that to the lender and provide documentation for that as well.
In some cases, buyers have a family member or friend gifting them money towards the down payment. In these cases, a gift letter must be provided stating that the money is not expected to be paid back.
Each lender’s requirements are different, but these are a few of the things you can anticipate.
The Money Matters: Down Payment, Earnest Money, and Closing Costs
When a bank approves your home mortgage loan, they typically only pay for about 80 percent of the home’s value. You are responsible for the additional 20 percent as a down payment.
If the home buying budget is $300,000, then your cash-out-of-pocket down payment is $60,000.
In addition to your down payment, buyers also pay closing costs. Closing costs include lender fees and bank required assessments like appraisals and inspections, private mortgage insurance, homeowners insurance, property taxes, etc.
You can estimate closing costs to be between two and five percent of the home’s value.
Home mortgage loans do not generally cover closing costs. Closing costs are another expense you’ll need to account for before applying for your loan.
Furthermore, when you purchase a property, you’ll submit an earnest money deposit with your offer to show the seller that you’re serious about buying. Figure this earnest money deposit at one to two percent of the property’s value.
Varying Loan Types
There are special loan programs, such as FHA loans and VA loans that can assist with down payments and closing costs for qualifying buyers.
When you apply for a home mortgage loan, you can apply for a 30-year mortgage with lower payments or a 15-year loan with double the cost.
You also have the option to select a fixed-rate loan, meaning the interest rate doesn’t change but is usually higher – or a variable interest rate, which generally starts lower but can inflate over the life of the loan.
Shopping for Lenders
Each financial institution has its own rates, terms, and conditions for home mortgage loans. You have the right, if not the responsibility, to shop lenders for the best prices and conditions.
The various types of lenders include credit unions, mortgage bankers, correspondent lenders, savings and loans, and mutual savings banks.
Start by researching lenders online to obtain mortgage rates. Then, use the information you gathered to negotiate the best possible rates.
Ask the lenders what fees you’ll be responsible for at closing and what the down payment requirements are. You can also ask to see if any of those costs can be rolled into your home mortgage loan.
What’s Included in My Monthly Mortgage Payment?
When you pay your monthly mortgage, your money isn’t all applied to the cost of the house. The principal in your mortgage is the amount that you borrowed or financed.
Next, you’ll pay interest – the price you pay for borrowing the money. Property taxes and insurance are also included in your monthly mortgage payment.
Your Real Estate Agent as an Ally
If you have a real estate agent already, they may be a great wealth of information for you regarding your home mortgage loan.
Real estate agents can often refer to lenders and service providers to accommodate your transaction.
They may also be aware of special first-time buyer programs or special funding to make the home-buying process easier.
Applying for your home mortgage loan may be the most critical and difficult step in your journey to homeownership.
Before you get ready to search for the right lender, make sure you’ve got all of your financial ducks in a row. Make sure your credit score is 620 or higher and is free of any derogatory marks.
Then, make sure your debt-to-income ratio is between 36 and 43 percent. And, make sure you’ve got all the necessary documentation on hand.
Account for your down payment, closing costs, and earnest money deposit.
Shop lenders to make sure you get the best interest rates and terms for your home mortgage loan.
And, last but not least, rely on the expert advice of your experienced real estate agent to guide you through the process of applying for a home mortgage loan.
Have Questions? Ask Becky!
Give Becky Nay a call today at 801-573-2077 to learn more about local areas, discuss selling a house, or tour available homes for sale.