From different mortgage types to different lenders and interest rates, it can be challenging to understand the essentials of financing a home purchase. When making an uninformed decision can result in serious financial consequences, it’s important to have a thorough understanding of the home loan process. Read through this guide for everything you need to know about mortgages before starting your own search.
What is a mortgage?
A mortgage consists of several different parts to be mindful of. The first part is the principal, which is the total amount you’re borrowing after paying the down payment. The second part is the interest, which depends on your principal amount and mortgage rate. Through monthly payments, you’ll pay off the principal and interest. A lender can also collect monthly homeowners’ insurance premiums and property taxes. Lastly, lenders usually require mortgage insurance if you can’t pay the loan. There is private mortgage insurance, which is required if your down payment is under 20% of your home’s value, or separate insurance for government-backed loans.
Who’s involved in the process?
The borrower, which is you in the situation, is a person applying for a loan. You’re able to borrow by yourself, or you can add a co-borrower, like a spouse or family member. A co-borrower’s income can help you become eligible for a larger loan. You may need a co-signer if you have a poor or no credit history. This person agrees to the loan with you and becomes responsible for paying off the mortgage if you default on it.
How to get a mortgage
There are several points on a mortgage to know when starting your search, and when you know all the steps, it becomes a less complicated process. First, you need to review your credit report to ensure your credit score makes you eligible for a loan. A score should be 620 or higher to qualify. Then, you need to get preapproved for a mortgage. This isn’t the same as prequalification, as that only provides you with an estimate of what you could borrow. A preapproval tells you how much you can actually borrow. This amount is affected by your credit, income, and debt.
Next, research different mortgage types, rates, and lenders. A more thorough overview of different mortgage types will be provided later. When you’ve found a property and negotiated an offer, submit your mortgage application to receive the funds. Then, get approved and close. Closing includes processes like paying closing costs, verifying your financial profile, and getting a home appraisal.
Different mortgage types
Conforming vs. nonconforming
Nonconforming loans are mortgages that don’t follow established guidelines, whether you’re a borrower who requires more money than limits allow based on your financial profile, or you’re a borrower who doesn’t have a credit score or debt-to-income ratio that meets a lender’s requirement. An example of a nonconforming loan is a jumbo loan, which goes over regular loan limits and has stricter qualification requirements.
VA loans are backed by the U.S. Department of Veteran Affairs, and only people who are service members, veterans, or spouses of veterans can qualify for them. Perks like a waived down payment and private mortgage insurance are included, in exchange for a funding fee upfront. Lastly, USDA loans are financed by the U.S. Department of Agriculture and are designed for buyers in select rural areas.
Fixed vs. adjustable rate
Adjustable-rate mortgages (or ARMs) fluctuate with interest rates after a set amount of time. Although there are benefits to ARMs, you can end up paying more on your mortgage when rates rise.
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Recommended Reading: The No-Cost Thirty Year Fixed Rate Mortgage