All About Mortgages
What is a Mortgage
The closing is the final step in which the home is transferred to you. Once your loan is approved, a closing date is set. The purpose of the closing is to make sure the property is ready to be transferred to you from the seller. This article reviews the closing process and prepares you to take the final step in purchasing your new home.
A mortgage loan is a loan used to buy a home. The home is the collateral for the loan and acts as a guarantee that the loan will be repaid.
There are many mortgage choices available to you. Selecting the right one that fits your needs is important.
- Fixed-rate loan. The interest rate is set for the full length of the loan. Because the monthly payment for principal and interest stays the same for the life of the loan, it's easier to plan a budget.
- Adjustable-rate loan. An adjustable rate mortgage (ARM) usually starts with a lower initial interest rate than traditional fixed rate loans. After a set initial payment period (usually 1, 3, 5, 7 or 10 years), the interest rate may change periodically based on market conditions. As the rate changes, your monthly payment changes. ARM loans feature an adjustment "cap" which limits how much the interest rate can go up. This helps protect you from large increases in your monthly payment. If you plan on being in your home for a shorter period of time, or expect your income to increase over the years, an ARM loan may be right for you.
- umbo loans. These are loans for homebuyers who require larger loan amounts. Bank of America offers a variety of jumbo programs for up to $2 million. They are available in both fixed-rate and adjustable-rate mortgages. They generally have slightly higher interest rates because of the amount of money borrowed.
- Loans for first-time homebuyers. These affordable financing programs can help make it easier to buy a home since they require little or no money down and offer flexible credit and income guidelines.
Consider how quickly you'd like to repay your loan — within 15 years, 20 years, 25 years, 30 years? Typically, the sooner you repay the loan, the more you'll save in interest payments. However, the longer you extend the term of your financing, the lower your monthly payments may be. When choosing a loan term, consider your budget, your long-term spending patterns, your income over the life of the loan and how long you plan to stay in your home.
How mortgages are approved
There are several factors involved in the approval process of your mortgage application.
- Income. When you're qualifying for a loan, lenders usually use your gross income (all the money you earn before taxes) to determine the monthly mortgage payment you can afford. Gross income may also include the average of overtime pay and commissions, and child support or alimony, if you wish to have them considered.
- Monthly mortgage payment as a percentage of your income. In general, lenders require that your total monthly mortgage payment — principal, interest, property taxes, mortgage insurance, hazard insurance and any homeowner association dues - be no more than 28% to 33% of your monthly gross income.
- Your total debt situation. You may have car loans, student loans, credit cards, child support, alimony or other monthly expenses. In general, lenders require that the total of all your monthly expenses (excluding basics like utilities and groceries) not exceed 38% of your gross monthly income.
- Credit history. A satisfactory record of paying your bills on time is an important part of getting a home loan. If you've had credit difficulties within the past two years, a good explanation of any late or missing payments on your credit report will be taken into consideration.
- Employment history. Lenders usually prefer to lend money to people whose incomes have grown steadily over the past several years and who have worked consistently in the same or related occupations. You will need to verify employment. If you're self-employed, work on commission or have been at your job less than two years, you may need to provide additional information about your work history.
- Property appraisal. A professional appraisal is done to determine the value of the home. An appraisal is based on the home's condition and selling prices of comparable properties in the area and confirms that the property is worth the purchase price you're offering for the home.
Reviewing Your Credit
Credit involves the borrowing of funds with the intent to repay the lender at a later date, such as credit cards, car loans and student loans. Lenders review your credit report to help determine if you are capable of repaying the ammount applied for.
- Credit report. After receiving a loan prequalification request or application, the lender will request a credit report from the credit bureau. The credit bureau collects and organizes information about people who have credit. The information generally goes back seven to 10 years. This report includes your name, address, employer, length of employment and previous credit history. Credit history includes account types, balances remaining, payment status, collection information and inquiries.
- Lack of credit history. Most traditional mortgage loans generally require some kind of established credit history. Some lenders offer flexible home loan options for people with limited or no established credit history. These options look at other ways to establish credit worthiness, such as timely payments of rent and utility bills.
What you should know about credit reports
Credit reports document your financial behavior over the past seven years - how much credit you have, how long you've had it and whether you pay your bills on time, among other things. Knowing what information is in your report can help you identify any problem areas and plan what steps you might take to correct them.
Three credit reporting agencies - Equifax, TransUnion and Experian - maintain credit reports. Lenders buy credit reports to help them decide whether to offer you a prequalification. You can also purchase a copy of your report from these agencies. Your credit report contains information about:
- Credit accounts and payment history
- Applications you have made for loans and other time payments
- Personal information, including your name address and Social Security number
- Employment information
- Legal actions (for example, judgments, collections, bankruptcy)
Your credit report also carries your credit score, a numeric ranking between 300 and 850 that many lenders use to decide whether you are creditworthy. The score is used to help predict whether you'll repay a loan. It's calculated using five sources:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Types of credit in use
In addition to telling lenders your creditworthiness, your credit score can also influence the interest rate you pay. In many cases the hig
Applying For Your Loan
When applying for a loan, be prepared. Gather your information together to allow for a smooth application process. Information you may need to provide to apply for a mortgage:
- Employment information. Names, addresses and telephone numbers of all your employers for the last two years.
- W-2s.These are the forms you get from your employer every year to file your income tax returns. Usually you will need to provide copies of your W-2s for the two most recent years. You may also provide other income information, such as social security, pension, interest or dividends, rental income, and child support or alimony, if you choose to have them considered. Self-employment income may also be considered.
- Length of credit history
- Pay stubs. Provide your pay stubs that cover the 30-day period before the date of your mortgage application.
- Federal income tax returns. If you are self-employed, or more than 25% of your income comes from commission, overtime or bonuses, you may need to provide complete copies of federal income tax returns you filed for the two most recent years.
- Bank statements. You may need to provide statements from all your accounts (checking, savings, mutual funds, money markets, certificates of deposits, 401(k) or other retirement accounts) for the last two months to verify the exact amount of cash you have available for your down payment and other costs associated with your home purchase. For certain mortgage loans, a portion of the down payment may come from a gift from a family member or a grant from a local down payment assistance program.
- Current debts. You'll need to provide the account numbers, current balances and the minimum monthly payments of all credit accounts, such as loans, credit cards, child support and other payments you make each month.
Once all the required documentation has been gathered, your application is submitted to underwriting. Underwriting is the process of reviewing all of the information and making a decision as to whether a borrower qualifies for a loan. Underwriters evaluate your ability to repay the loan (income), your willingness to repay the loan (credit) and the value of the property that you've identified (collateral).
- Loan application. The information provided on your application helps the lender answer basic questions such as:
- What is the source of your income, and is the source stable?
- Is your income adequate to cover the expense of the new mortgage payment?
- How much long-term debt (debt that will not be paid within the next 10 months) do you have?
- Credit history. Your credit history helps lenders evaluate your ability to manage debt. It reflects how repayment of your bills has been handled in the past. In some cases where borrowers don't have an extensive credit history, some lenders will consider alternative payment records, such as rental payments and utility bills.
- Property appraisal. An appraisal provides an estimate of the market value of the home that you wish to buy and is based on similar homes sold in the neighborhood. Lenders usually grant up to a certain percentage of the property's value in a mortgage loan. This percentage is called the loan-to-value (LTV) ratio. The rest of the property value is covered by your down payment.
- Hazard insurance. Hazard insurance (sometimes referred to as a homeowner's policy) protects you and the lender from loss in the event the home is damaged or destroyed by fire, storm or other hazards. You're responsible for obtaining hazard insurance prior to closing and for providing proof of insurance to your lender. The lender may also require additional insurance against loss by flood or earthquake.