A mortgage is a pledge of real property as security for the payment of money, and today's homebuyers have a variety of options in terms of lenders and loan types. Obtaining a mortgage can be a daunting task, but understanding the options and process can help buyers find the best mortgage for their unique situation.
Get Finances in Order
The financial crisis of the late 2000s has stressed the importance of being realistic when determining how much money one can afford each month for mortgage payments. Buyers should take a close look at their expenses and current and projected income when determining how much house they can reasonably afford. It is important to remember that additional expenses beyond the mortgage will be added. Insurance, property taxes, homeowner association dues and maintenance costs must also be considered.
A credit score is a numeric expression that helps lenders evaluate a person's credit report and estimate the risk of extending credit or loaning money to people. A person's credit score is provided to lenders by the three major credit reporting agencies: Equifax, Experian and TransUnion.
Since a person's credit score affects his or her ability to qualify for different loans and varying interest rates, it is in a person's best interest to achieve the highest credit score possible. Credit scores should be checked well in advance of applying for a mortgage so that steps can be taken to improve the score, if necessary. To improve a credit score, individuals can:
- Check their credit report to identify problem areas
- Set up payment reminders to pay bills on time
- Reduce debt
- Pay off debt rather than move it around
- Keep credit card and revolving credit balances low
- Apply for and open new credit accounts only if necessary
A variety of banks, mortgage brokers and online vendors provide mortgages to homebuyers. Banks are the traditional source of mortgage funding, offering in-person meetings, recognized name-brands and competitive fees. Banks, however, may not have a broad variety of loan programs and, as a result, may not offer the lowest interest rates or lowest fees.
Mortgage brokers act as the middle-person between lenders and borrowers and typically offer a variety of loans, including loans for people who have bad credit. Brokers may offer in-person service and be able to provide loans with lower interest rates; however, the fees may be more expensive than other funding sources.
Finally, online mortgage providers offer a large variety of loan types, convenient 24-hour shopping and instant comparison between multiple loans. In-person services are not available, however, which can leave a borrower with unanswered questions.
Personal and financial factors may affect the decision to go with a bank, mortgage broker or online mortgage provider. If the borrower will want to discuss the mortgage face-to-face with the lender, for example, he or she should shop at banks or mortgage brokers. Conversely, borrowers who are web-savvy and who don't mind a do-it-yourself approach to home financing may benefit from using online mortgage providers. Often, the financial factors, including the loan size and type, interest rates and fees, will be enough for a borrower to choose one lender over another.
Pre-Qualification and Pre-Approval
A lender can help determine the amount of money someone can borrow through a process called pre-qualification. Typically, the borrower meets with a lender and provides information regarding his or her assets, liabilities and income. The lender will provide an estimate of the size of the potential loan, though the lender does not formally agree to approve the mortgage at this point. Pre-qualification helps buyers determine the ideal price range when shopping for a home.
Borrowers need to apply for the mortgage by completing the necessary paperwork. After a lender verifies all of the financial information provided by the borrower (checking credit scores, verifying employment information, calculating debt-to-income ratios, etc), the lender can pre-approve the borrower for a certain amount. This confirms the buyer's eligibility to qualify for a mortgage, strengthening the buyer's position when finding a desired property and submitting an offer.
Complete the Mortgage Application
Once the buyer makes an offer that is accepted by a seller, the parties will determine a closing date. Certain lenders will allow borrowers to "lock in" an interest rate at this point, though this typically involves paying a fee. The buyer must complete the mortgage application with the lender and work out the details of the loan. At the closing, the final paperwork for the transaction will be completed.
The Down Payment
Depending on the type of property involved and the particular mortgage, down payments can range from about 3.5-20% or higher. Lenders may require up to a 50% down payment, for example, on certain condominiums that are not on the FHA-approved condominium list. People considering buying need to save for a down payment, and they must be willing and in a financial position to use the money. Homebuyers' Walkthrough: Buying A First Home
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