The first and most important step in buying your new house is obtaining a home mortgage loan. Home mortgage loans have many layers, variables, terms, and conditions. If you aren’t prepared, applying for a home loan may feel intimidating, anxiety-ridden, or even frightening. These are necessary things you need to know about home mortgage loans.
Banks will first review your credit report to determine your payment history based on previous and current payments to other lenders. It’s imperative that you’re not behind on any payments, that you don’t have accounts in collections, and that your record shows timely payments to all debtors. If your credit report needs tidying, take care of that before you apply for your loan. Get any and all settlements documented in writing to verify good standing.
When the bank verifies that you’ve got a good payment history with creditors, the next step is to compare your debt-to-income ratio. Your debt-to-income ratio compares what you owe to what you make. Divide your monthly expenses by your monthly income to determine your ratio. In general, 43 percent debt-to-income ratio is the highest you can have and still qualify for a home mortgage loan. When your debt-to-income ratio is greater than 43 percent, consider paying down some of the debts to lower your monthly expenses before applying for your loan.
If your credit is in bad shape, your debt-to-income ratio is out of balance, or both, you can still qualify for a home loan if you have a cosigner. The cosigner, although not considered a co-owner of the property, is a co-owner of the loan. When a person agrees to cosign for a loan, they are lending you their credit and agreeing to accept responsibility for the balance of the loan if you default on payments.
Lifespan of the Loan
Home mortgage loans usually span 30 years, or 15 years, which is referred to as the lifespan of the loan. If you choose a 30-year loan, your payments will be cut in half but last twice as long. When you choose a 15-year loan, you pay off your loan in half the time, but your payments are twice as much.
Fixed or Variable Interest Rates
The bank earns its money through the interest you pay on your home mortgage loan each month. On your statements, you’ll see a principal amount which is the amount applied directly to the amount you borrowed, and the balance of the payment is usually applied to interest. It’s not uncommon for the interest payment to exceed the principal amount.
Fixed-rate interest means that you may initially pay higher interest amounts, but the interest rate is consistent, unchanging throughout the life of the loan. Fixed-rate interest means your minimum loan payments will always be the same amount.
Variable-rate loans are tempting because they begin with a lower interest rate and smaller payments but then increase with inflation. As interest rates rise over time, so do your payments.
Down Payment & Closing Costs
Although the lender is willing to provide a home mortgage loan so you can purchase real estate, they’re usually not willing to foot the entire bill. In most cases, the bank will lend 80 percent of the value of the property you’re buying, and you supply the other 20 percent in the form of a down payment.
The real estate transaction involves many steps, including title check, title insurance, title transfer, surveyor, inspector, appraiser, lender, escrow agent, legal fees, courier fees, agent commissions, and more. Collectively, there are referred to as closing costs, for which the buyer accepts responsibility. Closing costs are not included in your home mortgage loan. You can estimate closing costs at between one percent and eight percent of the value of the property you’re purchasing.
Loan Programs & Terms
Special loan programs exist to assist first-time home buyers, military personnel, and more. Furthermore, the terms of home mortgage loans will vary from bank to bank. Before you submit your application for a home loan, research the various loan programs and compare terms between lenders. Only submit your application to the lender with whom you most want to work because each time a lender orders your credit report, your credit score negatively changes.
It’s best not to go into the loan application process with a sense of desperation. Before you begin your search for the perfect house, shop for the right loan with the best lender.
Your real estate agent is the best source of information about the local community and real estate topics. Give Robert Stewart a call today at 952-412-1290 to learn more about local areas, discuss selling a house, or tour available homes for sale.