Who hasn’t had the dream of finally being able to purchase a home? One of those pretty houses, with a nice yard for the children to play in, and in a good school district. However, most people simply do not have $250,000 or in some cases more in spare funds readily available to use for this purchase. How are so many able to make this dream a reality without these spare funds? This is where a mortgage comes in.
A mortgage is a type of loan that is secured by real estate; for example, a home that you have purchased. An individual, who takes a loan, promises to pay back to the lender in monthly installments. If the person fails to give monthly payment to the lender, he/she will go into default. This gives the right to the lender to take the property back.
Mortgage loans are availed by individuals, who find it hard to collect enough funds to buy a house. They also use the mortgage loan to get cash for some other business by keeping the house as collateral security. Mortgage helps the borrower to make large purchases such as another house, investment in some venture, etc.
What all is included in Monthly Payment?
Following is the breakdown of the monthly payment, which we say includes PITI:
Principal (P) - Amount borrowed by an Individual also known as the amount financed.
Interest (I) - The amount charged by the lender on the amount borrowed for purchasing or refinancing the home.
Taxes (T) - Property Tax to be paid to the local city/municipality or country.
Insurance (I) - Amount paid to the insurer to insure the home from any damages such as natural calamities. This is also called Private Mortgage Insurance, which should be paid on most loans if the down payment is less than 20%.
Escrow Account - a part of the monthly payment that an individual has to make goes into the escrow account. Taxes and insurance are kept in the escrow account and paid to the lender as and when they are due. An escrow account is beneficial for someone who has bought home for the first time and does not have significant savings.
Escrow account ensures that an Individual does not need to save a large amount, annually or semi-annually and can instead set aside small amounts. However, the mortgage amount will increase and will reduce the cash flow each month. Not every lender requires the escrow account and some pay their taxes and insurance directly.
Types of Mortgage
In this type of mortgage, the interest rate is fixed throughout the life of the loan. This makes it easier for the borrower to access how much he/she needs to pay.
Interest rate is flexible and can fluctuate according to the market conditions or at specific time period such as 3 years, 5 years or 7 years. The benefit of the adjustable rate mortgage is that it can sometime provide the lower rate and can increase at some point in time.
Government guaranteed mortgages
Borrower can also get loans from the government institutions. Those who are serving in the military or are veteran can take the benefits of loans offered by the government. These loans have lower down payment requirements, and eligibility for taking the loans is also not as strict as a private institution. An individual can check with the government institutions for exact criteria required before availing the best mortgages.
It is the name given to the small amount of loan taken by a borrower against the current property, in order, to finance the new property. It is a good choice, if someone wants to take a loan for six and twelve months. Normally, a bridge loan attracts interest at somewhere around 2% above the average fixed rate.
Hard Money Loans
This is an asset-based loan, and usually seen as the last resort. This facility is availed by those who have bad credit rating, and cannot apply for any other type of loan. Hard Money Loan attracts high interest.
In this type of loan, the borrower will have to pay the regular monthly payments for first few years, and then the remaining balance should be paid at once. Usually, this type of loan is availed in the rural areas. For instance, in a mortgage help taken for 30 years, one will have to pay a monthly payment, and the lump sum can be paid after five, seven or ten years based on the agreement between the lender and the borrower.
This type of loan is suitable for those who do not want to pay down payment. The 100% financing home loan means that an Individual will not have to give any down payment. However, closing cost will still need to be paid, and PMI will also be applicable. Further, the monthly payment will be much higher compared to interest paid in case of down payment.
How to get a Mortgage?
Pre-qualification for availing the mortgage
An Individual needs to offer basic information to get mortgage help. Basic information that you need to furnish for applying the loan are Annual income, assets owned and other movable and immovable property. The lenders will assess the overall financial health of the candidate and estimate the amount of loan that they will be able to give.
If a lender is pre-qualified, the banks do not need to review the credit report or access if the borrower can qualify for the mortgage. On pre-qualification, the banks will just provide the amount that the borrower is qualified for.
For pre-approval, the borrower needs to fill the complete mortgage application and furnish the documentation and personal records. Usually, the borrower needs to pay the application fee and the lender reviews the credit score. Pre-approval is usually more time taking than the pre-qualification process because it is more extensive research in respect to the finances and creditworthiness.
Although, pre-approval is a more time taking compared to the pre-qualification, pre-approval is a bigger commitment. If you qualify for the mortgage, the lender will potentially offer you the amount of financing, interest rate and also the estimate of the monthly payment.
Annual Percentage Rate (APR)
As a borrower, an individual should not just think about the interest rate as ‘Annual Percentage Rate’ also holds importance while quoting and reviewing the financing. Interest rate is the amount charged by the lender for borrowing the money. APR, on the other hand, is the interest rate, as well as, the fees that will be added to the life of the loan including fees, closing cost and so on totaling to the annual cost of borrowing.
Therefore, while comparing the lenders, one should also compare the APR and not just the interest rate. Further, all lenders should follow the same rules by federal law while calculating the APR to ensure consistency as well as the accuracy.
Before taking the loan, you should ask the lender if it contains the pre-payment penalty. Pre-payment penalty implies that one can charge a fee if one pays off the mortgage early i.e. before the term expires.
Every lender will ask you six piece of information: Name, Income, Social Security number to get the credit report, Property Address, Approximate of the value of the property, Size of the Loan wanted.
After getting the this information, the lender assesses the loan estimate within three days. Everything including the closing cost, amount of loan and loan term will be discussed between the borrower and the lender.
What Can Be Done to get the Loan Without Being Rejected
In order to make sure there is no hurdle in getting the loan, an Individual should track their credit score, and also make efforts to set it right in case of any shortfall. Further, track down all the loans available having low down payment requirements.
How to Determine Down payment?
There are various online tools that help in accessing the down payment amount. The amount of money put upfront while buying the house will determine how much will be the monthly installments. Putting more money upfront generally brings lesser monthly installments.
- Higher down payment means less mortgage is to be paid, and therefore, lower monthly installments
- Very small down payment will increase the number of mortgages that one is eligible for, and can also attract higher interest rate.
- If any down payment is less than 20% of the asking price, lender might ask the borrower to pay the Private Mortgage Insurance.
- If the down payment is very small, then lenders usually all ow the sellers to cover less of the closing cost.
Federal Housing Authority Loans – Most Suitable
Loan taken from the FHA is mortgage insured by the Federal Housing Administration. It is the most popular type of government loans. The borrowers who avail this loan pay for the mortgage insurance, which safeguards the lenders from suffering any loss if the borrower fails to pay the mortgage insurance. The interest rate is attractive compared to the loan taken from the bank, and therefore, it is among the best mortgages. Also, the eligibility criteria for such loans are usually less strict.
Therefore, instead of going to a bank and fulfilling mesh of eligibility criteria, it is better to take a loan from the Federal Housing Authority. There are few things that should be considered while applying for the loan with FHA.
Credit Score- There will be different credit score depending on the type of loan that you require. For instance, if an individual is looking for best mortgages with down payment as less as 3.5%, then the credit score required will be somewhere around 580 or higher.
Minimum Down Payment – For most of the borrowers, FHA has set a minimum down payment requirement of 3.5%. Either the borrower can use their own saving to make the down payment, or can pay through other sources such as a grant from the State, family member help etc.
FHA approved Lender – To those who are confused with the status of FHA, it is an insurer rather than the lender itself. Thereby, if you as a borrower are looking to avail the loan, then the lender should be FHA approved. Not all the FHA approved lenders will offer the loan at the same rate or the same cost. It might differ from lender to lender, and therefore, an individual should assess all the details before applying with a particular lender.
Two part Mortgage Insurance – For all the FHA loans, there is a requirement of two mortgage insurance premium. The upfront premium will be somewhere around 1.75% of the loan amount, and is paid when the borrower receives the loan amount. Next, the annual premium, which is paid monthly and the rate, depends on the length of the loan, amount taken and the initial LTV or Loan to Value.
-Cash for Repairs – Those looking for extra cash in order to complete repairs in their homes, FHA provides the facility. The loan amount is not based on the current appraised value of the home, rather on the projected value once the repair is completed.
- Financial hardship relief – It is true that the FHA insurance will not cover the borrower’s entirely in case they have persisting financial hardships. However, it brings a big relief for the borrowers who have the FHA insurance approved loan, and are not able to make their payments. The relief might come in the form of temporary leniency or modification of the loan, lowering the interest rate or deferring the part of the loan balance at nil interest.
- Even before you apply for a mortgage help, start developing your financial credibility, and accumulate savings for down payment.
- One must consider a reliable, reputable lender than a lender with unbelievably cheap rates.
- Even though mortgage is a debt, but it’s a good debt.
Most importantly, the dream of finally owning a home can be a reality, and we will be there every step of the way.