Purchasing a home is one of the great achievements in adult life. It represents a major asset and a serious move toward establishing strong credit and a lifelong investment. However, there are several important factors involved in securing a home mortgage loan needed to purchase a home. With the proper information and knowledge acquisition, however, getting hold of a secure and advantageous mortgage loan can be relatively simple.
Types of Mortgages
The most common mortgages are first mortgages – either for refinance or for purchase. If you are buying a new home for the first time, you will need a purchase mortgage. However, if you are simply looking for a new mortgage on an existing property, you will likely need a refinance mortgage. First mortgages simply indicate the lien position of the secured loan on your property title. What this means is that when the house is sold, the lenders will be paid in the order on which they are listed on the property’s title. Usually, however, first mortgages are much larger than any second, third or another mortgage. Second and third mortgages are sometimes equity lines or equity loans, depending on the type of credit. Credit lines are often used for home refurbishment as they can be borrowed against, repaid, and borrowed against again. Closed-end second and third mortgages are not revolved and therefore cannot be borrowed against once the initial payout is made.
Variable, Fixed, Other Options
All mortgages have an interest rate attached so that the lender can earn profit on the credit extension. If you secure a mortgage with a fixed rate, that rate will never change – regardless of economic conditions or changes in the Federal Reserve rate – over the life of the loan. Some rates are variable. This means they are tied to a national- or global – interest rate, like the LIBOR (London Interbank Offered Rate). As this global or national rate increases or decreases, so will your mortgage interest rate. Some newer mortgages have optional plans, including teaser fixed rates. In this scenario, there is usually a period of time (often 2-5 years) during which your mortgage rate is fixed. After this period, the rate becomes variable against a global rate – like the Prime Rate or the LIBOR.
Gaining preapproval for a mortgage loan is an important step in acquiring a loan for a real estate. Often, if you are purchasing a new home, a real estate agent will require a preapproval from your bank before completing offer terms or moving forward in the escrow period. Preapproval is just that – an initial approval, pending a true underwriting evaluation. Generally, however, the most pertinent information is collected for preapproval. This includes paystubs, tax returns, bank statements, and debt statements. The lender will then calculate your debt-to-income ratio (DIR), which will show how much income you have versus how many obligations you have each month. A low DIR will suggest that you are a low risk to the lender, and thus a good candidate for a mortgage loan. Other forms of preapproval may include a rudimentary title search to determine the number of existing liens on the property, which could cause problems later in the loan process.
Credit, Debit, Income
Different lenders have different criteria for underwriting on a mortgage. Since the 2008 financial crisis, however, many lenders have more stringent criteria for lending to mortgage borrowers. Most applicants will likely need to show a strong credit score (usually a FICO of 680 or above is required for low interest rates), a strong down payment, if purchasing a home (20 percent of the purchase price is standard), and consistent, reliable, and strong income that can be verified at least two ways (paystubs and tax returns are standard). Lenders will also take a close look at your existing debts to see if your current obligations might get in the way of repaying a large debt like a mortgage loan.
Purchasing a home or refinancing a mortgage can be a big decision, particularly given the sometimes very high fees associated with this kind of transaction. However, with proper planning and close monitoring of your debts, your income, and your savings, you should be able to get preapproved and ultimately fully approved for many different types of mortgage loans. Be wary of very high fees from some lenders, however, particularly if an origination fee is charged – good lenders will charge for closing costs, and perhaps a small processing fee, but large origination fees often signal that you are doing business with a subprime lender.
Your real estate agent is the best source of information about the local community and real estate topics. Give the Rigley Realty Group a call today at 916-396-7487 / 916-397-4787 to learn more about local areas, discuss selling a house, or tour available homes for sale.