The Mortgage Process
Applying for a mortgage can seem like a complicated process tothe first-time home buyer. Even if the applicant knows about lender jargon suchas “Annual Percentage Rate” and fixed rate versus flexible rates, there arestill a lot of tips that will help you along the mortgage shopping market.
A mortgage is a loan where the value of the house, otherstructures,and land are used as collateral to back it. It the loan is defaultedon - the lender is within their rights to repossess the house. Until you havepaid the complete loan amount, the bank holds a lien against the property and structures.
A lien is a term used when the lender has the right to takeback possession of the property in case of default payments. If your house hasan outstanding mortgage, it means you own a property with a lien attached toit.
How Much Can I Borrow?
We recommend that you ask as many questions about the mortgageprocess from us until you feel completely informed and comfortable. If ahomeowner borrows more than what the property is worth, re-mortgages it beyondits worth or borrows more than can realistically be re-paid, this is called asub-prime mortgage.
The thinking behind this is the hope that the housing marketcontinues to rise in valuation which would enable more equity and lead to themortgage being re-financed at a lower rate. Dealing in hypotheticals in anymarket always carries with it some risk.
Our recommendation is to look carefully at what can reasonablybe afforded, even with some minimal belt-tightening, and stick to that limit.
How Can I Become Pre-Approved for a Mortgage?
Before you make an offer on a property to the agent orhome-owner, they may want to know if you are pre-qualified or pre-approved fora loan. This is actually one of the first steps in the mortgage process.
Pre-qualification is when a lender runs your credit history and sitsdown with you to chat about what are your home ownership goals. Pre-approvaltakes the process further and requires pay stubs or proof of income and taxreturn verification.
With both processes, you will be given a letter of confirmationstating that the lender is willing to extend a certain amount in loan to you.The end result of pre-approval and pre-qualification is identical: giving thesellers the confidence to accept an offer from you.
Different Loan Types
Figuring out which mortgage type works best for you requiressome research. A good lender can walk you through the different loan types andtalk to you about what options are available to you. A good starting point isto first understand the three main loan categories.
These terms refer to which type of interest rate with which youwill be comfortable.
Fixed-Rate Mortgages: This is the most well-known mortgage thatgets paid off over a certain number of years at a specific rate of interest.30-year fixed-rate loans are the commonest choice among home buyers. It doesn’tmatter if interest rates rise or fall because your percentage interest ratewill not change.
If bank rates drop, it is possible to refinance your loan. Ifthe bank rates rise, you will be protected from your loan payments escalating.The only payments that may fluctuate with the rise and fall of bank loan ratesare your insurance and property taxes.
The only time that this form of mortgage may not be ideal is ifyou plan on moving in five or ten years. A lower adjustable rate would then bemore suitable for you.
Adjustable-Rate Mortgages: A lower initial interest rate applieswhen you choose an adjustable mortgage rate. You will not be faced withconsiderable monthly fluctuations when choosing this mortgage type as theadjustment intervals will be predetermined. There will be rate caps set tolimit the minimum and maximum adjustment size.
Any loan that is not government backed is called a conventionalloan. You may qualify for a government-backed loan if you have less thanperfect credit rating, are a veteran, active military service person or buyingin a USDA designated area.
A conforming loan is a home loan that follows the conformingguidelines set by Fannie Mae andFreddie Mac. There are set limits as to howmuch can be borrowed, which is around $417,000 to$938,250 – depending on whicharea you are looking to buy.
If the loan amount exceeds these figures, then they are calledjumbo loans.
No matter what questions you have regarding a mortgage and theprocesses involved in getting one, we are always happy to answer them with allour years of expertise at your disposal.