Can I Afford?
Before you decide to pick a lender, make sure you do comprehensive mortgage shopping to identify the best deal available.
A good lender is willing to explain the pre-approval, approval, and closing processes clearly. Be sure your lender explains all fees, up-front costs, taxes, insurance, and other costs of owning a home.
Once you select a lender the next step is to pick the right loan for your financial status.
The type of loan is very important since it will determine your monthly payment amounts, the length of the loan, and other terms of the mortgage.
Loan Interest 101
The amount of interest a buyer needs to pay to the lender usually depends on the interest rate and how it will be applied for the duration of the loan.
- Fixed-rate loans are mortgages with an interest rate that will not change over the life of the loan. The interest rate is fixed in advance to a set rate, usually in increments of 1/4 or 1/8 percent.
- Interest-only loans are loans where the borrower pays only the interest on the principal balance, typically for a five or ten-year interest-only period.
- Adjustable-rate mortgage (ARM) is a mortgage interest rate that changes periodically based on a selected index that reflects changes in inflation and cost of credit. The interest rate and your payments are adjusted up or down as there are changes in the index.
Types of loan available to home buyers
- Conventional loan—A type of loan made available by a bank, savings and loan association, or other financial institution that is without governmental underwriting (such as the Federal Housing Administration (FHA) insurance or a Department of Veterans Affairs (VA) guarantee.) To determine how much loan, you can avail the lender usually examines your debt-to-income ratio, credit history, and credit score. This type of loan is usually s can be an adjustable-rate mortgage (ARM) or a fixed-rate loan.
- FHA loan—Compared to a conventional loan this loan is less stringent since it just needs two years of a steady income and your new mortgage must be 30 percent of your gross income. If you have filed for bankruptcy, your discharge must be at least two years old. If you have gone through foreclosure, it must be four years old. FHA loans tend to be fixed-rate loans. As the name implies this loan is also insured by the Federal Housing Administration.
- VA loan—This type of loan is only available to veterans, National Guard, the reserve, and some surviving spouses who can apply. A loan guaranteed by the Department of Veterans Affairs the common requirement for this type of loan is steady income and at least two years of military service. Compared to other types of loans, this loan offers fixed-rate loans.
- Purchase money loan—Commonly known as a seller-financed loan where the buyer makes payments directly to the seller until the loan balance is satisfied. This type of loan is risky for a seller because the seller may not recover the balance from the buyer and runs the risk of foreclosure. The loan is equally risky for the buyer because the seller holds the title to the property and can potentially sell the property to another person without the knowledge of the buyer.
- Construction loans–A type of loan that is usually short-term, variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. The contractor/builder and the lender establish a draw schedule based on stages of construction and interest is charged on the amount of money disbursed to date. This loan is nice because you only need one application and one closing.
Pre-qualify for a mortgage
Before applying for a mortgage, you need to qualify for a mortgage loan; for example, adequate income to support the continuing loan obligations and creditworthiness to demonstrate persistence in meeting credit obligations.
Why pre-qualifying for a mortgage is important?
- The lender will consider your income to determine the amount of the loan. Lenders look at your debt to income ratio to determine the amount of loan you will qualify for. In other words, the balances on your credit and other loans will reduce the amount of the mortgage loan you will qualify for. Your credit score determines the amount of interest and type of loan you can qualify for.
- The down payment is equally important. This is the amount of money you have to reduce the amount you need to borrow or increase the value of the house you can purchase. Some of your down payments can be applied to your loan to decrease your loan interest; this is called buying down points.
Pre-approval letters also matter
Before you put an offer on a home, a seller will generally want to see a pre-approval letter. This letter tells the seller and their agent how much of a loan you qualify for, excluding the amount you have available for a down payment or have to bring to the closing table. Most realtors like to see a preapproval letter before they will agree to represent a buyer and begin showing them homes. Based on your income, expenses, and credit, a lender will provide you with a pre-approval letter for the loan amount and type of loan that they are willing to lend to you based on those factors.
Where can I get pre-approved for a mortgage loan?
- Your current bank or credit union. They typically have in-house loan officers and underwriters who review all of the information and decide if you qualify.
- A mortgage lending company that specializes in residential home sales. They can look for a wide variety of loan products and lenders that best suit your need.