Getting a mortgage is always a big deal, especially for those who are first-time home buyers. Unlike car loans that are paid off in a couple of years, mortgage loans can have you in debt for anywhere from 10 to 40 years. Therefore, it’s important to gather all the necessary information you can before you put your name on the dotted line. This article offers helpful information, as well as at least 11 various websites and resources you need to know about before getting your mortgage.
What is a Mortgage?
A mortgage is a loan taken on for the purchase of a home and, according to Realtor.com, is the largest debt you’ll ever take on in your lifetime. When you take on a mortgage, you’re putting your home down as collateral. You’ll make monthly payments for the life of the loan, which can be as long as 40 years. Your monthly payments include principal (the amount you originally borrowed), interest and other costs such as closing costs, taxes and insurance. If you fail to make the monthly payments as agreed, the bank can be taken back the home and sell it to pay off your debt. Taking back the home is usually done through foreclosure.
Steps Involved in Getting a Mortgage
Knowing what you’re required to do to get a mortgage can make a difference in your approval, as well as how long the process can take. MSN Money provides this handy list of documentation you’ll need to give before you get your mortgage.
- Driver’s license
- Second form of identification (social security card, passport)
- Most recent pay stubs
- W-2 forms from employers from the previous two years
- Last two year’s federal income tax forms
- Bank and asset statements for the past two months
- Completed purchase contract for property you hope to buy
- Copy of your deed, if refinancing or name and address of landlord if buying
There is actually a step-by-step process involved when potential home buyers are considering getting a mortgage.
- What can you afford? It’s important to go over your finances and know what you can afford to pay so you don’t waste time looking at homes that are beyond your budget.
- Check your credit report. It’s very important to know what your credit scores are prior to obtaining financing. If there are errors or inconsistencies on your credit report, you want them corrected prior to visiting your bank. It can really speed up the process.
- Get pre-approved. In addition to knowing what you can afford to pay, it’s important to know how much money you can borrow to buy your home. Shop around at different banks to find the best deal in terms of mortgage options and interest rates.
- Find a realtor. You may want to go house hunting on your own, but having a realtor can make the process easier. A realtor will be familiar with different neighborhoods and will be able to show you a variety of homes based on your needs.
- Begin house hunting. Take your time when looking for a house. This is a lifetime investment, and you don’t want to rush into the process and buy the first home you see. Make a checklist of what you’re looking for in a home and of what you don’t want in a house.
- Make an offer. Once you have found the house of your dreams and have determined it’s within your budget, it’s time to make an offer to the seller. In most cases, your Realtor will take care of this.
- Get insurance. Prior to signing the mortgage loan, you lender will require that you have home insurance so their investment is covered against loss. Do your research and shop around until you find an insurance company that offers you the type of coverage you need at a competitive rate.
- Close the loan. When all steps above are completed, you’re ready to sign on the dotted line and close the transaction. Your lender will generally take care of all necessary paperwork.
If you’re still in the planning stages of getting your mortgage, you can find some very helpful information here.
Throughout the mortgage process, you’re going to hear a wide variety of terms – many of which may be unfamiliar to you. While they’re commonly-used terms for bankers, they may be confusing to first-time home buyers. Don’t be afraid to ask the bank to explain the process to you in simple terms so you know what you’re doing and what you’re signing. Learning terms such as mortgage, fixed-rate mortgages, PMI, equity, and collateral can help you make wise decisions during this critical process. Feel free to check out this helpful mortgage glossary of terms you’ll hear a lot during the mortgage process. For more resources on understanding mortgages check out the Facebook page of Matthew Chan, Mortgage Broker.
Types of Mortgages
You may know that getting a mortgage is part of home ownership, but do you know what type of mortgage you want and need? There are various types of mortgages available, depending on the bank or lending institution.
- Fixed rate mortgage – Fixed rate mortgages charge you the same interest rate throughout the life of the loan. There are advantages and disadvantages to fixed rate mortgages. One advantage is that even if interest rates increase, your loan is locked in at the same rate. However, this could also be a disadvantage if interest rates are decreasing. You’d have to pay closing costs to refinance and get the lower interest rates. Fixed rate mortgages also make it easier to budget your money because you’ll always know what you’re paying in interest and principal.
- Adjustable rate mortgage – Adjustable rate mortgages are mortgage loans that have specific interest rates for a certain length of time but change when the market rates change. This type of mortgage can offer both an advantage and a disadvantage, depending on the market rate. Adjustable rate mortgages may be one-year adjustable mortgages, 10/1 adjustable rate mortgages, 2-step adjustable rate mortgages, 5/5 or 5/1 adjustable rates, or 10/1 adjustable rate mortgages. In the one-year type, you have the same interest rate for the first year, and then it will change. In the 10/1 adjustable rate mortgage, your interest rate will change after ten years.
- Balloon mortgage – Balloon mortgages are similar to fixed rate mortgages but have interest rates for a lesser amount of time. For instance, in a 36-month balloon mortgage, the borrower will pay the same interest rate for 36 months. At the end of the 36 months, the loan is re-written with a different interest rate, which can be higher or lower based on the current market rate.
Mortgage Broker vs. Bank
Once you’ve decided you’re going to get a mortgage; you’ll probably hear about mortgage brokers. What’s the difference between a Burnaby mortgage broker and a bank and what should you choose? A mortgage broker acts as a middleman during the banking process. As one of the steps in obtaining a mortgage, you were advised to shop around for the bank or lender that offers the best deals and best rates. A mortgage broker will do the leg work for you. While you won’t be borrowing the money from the mortgage broker, it is the mortgage broker who will find the bank for you. Mortgage brokers are part of an extensive network of banks, so they can quickly hook you up with the bank or lender that has the most to offer you. They can also negotiate with the bank for you. The downside is that they will get a commission, which is often paid by both the bank and you.
Understanding Interest Rates
Many new home owners find that they’re paying more for their home than what they initially thought when they took out their mortgage. After multiplying their monthly payment by the number of months they’re paying, they often wonder why they’re paying so much more. Knowing what interest rate your bank is going to charge you can help you know how much your home is going to cost but only if you understand how interest rates work and how they’re determined. Quicken Loans offers an excellent chart that can help first time home buyers determine how much of their monthly payment is interest and how much is principal.
Mortgage Resources You Need To Know About
Different Kinds of Mortgages
Learning about the various types of mortgages available can be imperative for first time home buyers. It can make the difference in getting the best rates for you and saving you thousands of dollars in the process. It can also make it easier to get a mortgage. There are various organizations other there designed to help the first time home buyers not only get the home of their dream but also in a fashion that allows them to get affordable terms. One such organization is the U.S. Department of Housing and Urban Development, also known as HUD.
HUD, a cabinet of the United States Federal Government, is an organization that helps low- and middle-income families buy affordable homes. HUD is not a lender but will help potential home buyers find lenders. Additionally, HUD offers a wide variety of counseling services to help potential home buyers understand the process and make wise financial decisions. HUD can provide potential home buyers with a listing of foreclosed homes, HUD grants, and even offers programs for borrowers with poor credit. Their purpose is in helping individuals and families become home owners.
One very popular type of mortgage loan is the FHA loan, offered through the Federal Housing Administration. The FHA has a list of approved lenders to help make the process easier for home buyers and also offers low-interest programs to consumers that might otherwise be ineligible to buy homes. It also provides mortgage insurance on FHA-approved loans. This organization is the largest insurer in the world for residential mortgages. While the FHA does have specific guidelines regarding credit scores and income-to-debt ratios, they are more lenient than many other organizations, which make it more possible for first time home buyers to become home owners. The FHA works very closely with HUD and, like HUD offers counseling services to help first time home buyers reach their dream of home ownership.
Fannie Mae Loans
Fannie Mae is an organization committed to helping families and individuals become home owners by buying mortgage loans from lenders and banks. In addition to helping families buy homes, Fannie Mae is also instrumental in helping home owners retain their homes and avoid foreclosure. They can provide borrowers with low-interest mortgages and competitive lending terms. Some of the loans include Fannie Mae No PMI program, Fannie Mae HomePath, and Fannie Mae Home Possible, among others.
VA loans, offered through the U.S. Department of Veteran Affairs, are loans provided to veterans and their surviving spouses. Veterans and their spouses can typically obtain a mortgage in situations where they may not otherwise be eligible. In addition to providing low-interest mortgage loans, VA loans may also be available without the borrower having to have a down payment. They also allow potential home buyers to borrow more money than other organizations such as Fannie Mae or FHA.
Government Home Buyer Programs
In addition to Fannie Mae, VA, and FHA loans, potential home owners can take advantage of many government programs designed to help first-time home buyers obtain financing to purchase homes. These programs may offer low-interest rates to eligible applicants or may provide financing with no down payment. Borrowers may also be eligible even if they have weak credit. Some of the programs include Dream Makers Program, Good Neighbor Next Door, Down Payment Assistance, and Grant Program, Family Opportunities, and USDA Rural Zero Down Loan. Some of these programs are only available in certain states. HUD provides a list of most of these programs.