Applying for a Mortgage - Some Frequently Asked Questions
My wife and I have decided that it is time to stop throwing our money away on rent and look at buying our own home. Where do we start?
You have already started, simply by making the decision. The next step is to seek out a reputable mortgage company. In
We have been looking at some houses but how do we know if we can afford to buy the house we like?
This is precisely where the mortgage company will help you. As a very general concept, you can likely afford a home that is valued somewhere between two and three times your annual income level. A couple earning $50,000 per year can likely afford a home in the $100,000 to $150,000 range, depending on current debt and savings levels.
But if you want to know how much house you can truly afford, you need to set up an appointment with a mortgage lender. These professionals can help you determine an appropriate monthly payment, then back that figure out into amount of house you can truly afford, based upon any particular down payment.
Is it possible to get loan approval prior to selecting a house?
Mortgage approval is ultimately for a specific house. But, your mortgage lender will begin by helping you determine just how much house you can afford. Then, when you start looking at homes, you will have a full grasp of what you can likely afford as well as have a sense of what loan amount you will likely be approved for.
How do I know which
Actually, you should make a list of lenders in your area to begin doing some basic research. Then talk to your friends and co-workers regarding who they have worked with in the past, who they might recommend as well as who they would not do business with.
Contact a loan officer at each of the places that you receive a recommendation and set up a routine appointment to discuss the basics including their current lending rate. By visiting, you will determine how you feel about the people you are doing business with - for many home owners, the relationship and confidence level they have in certain folks is as important as the loan percentage terms. As you compare rates, be sure you take note of any additional fees that a lender may be assessing - many loans sound very similar but be sure to ask for clarity regarding the costs of securing your loan.
Are there truly many different loan types?
Actually, there are two essential types of loans, with all other loan aspects being variations of those two formats. The most preferred type is called a fixed-rate mortgage. For such a mortgage, the home owner will be given one specific interest rate that will never change during the life of the loan, no matter whether it is a 20, 25 or 30 year mortgage. The beauty of this type of mortgage is that monthly payments are set for the entire life of the loan - even if interest rates go up for future buyers, your interest rate never changes.
The second type is referred to as an adjustable-rate mortgage. In this case, your interest rate and therefore your monthly payment will vary during the life of the loan. The beauty of such a loan is that the lender can give the borrower the current going interest rate without having to build in a cushion should rates increase later. Therefore, with an adjustable-rate mortgage you will likely begin with a lower interest rate, often times as much as 1 or 2 percent below the rate of the fixed-rate mortgage.
These loans are set up with specific intervals of time where rates can change according to market fluctuations. Many such adjustable-rate loans are evaluated each year. If the interest rates go up, your rate will also increase. But if rates were to go down, you could conceivably see a lower rate the next year also.
However, rate adjustments lead to monthly payment changes. So a rate increase leads to a greater monthly payment, while a rate decrease leads to a smaller payment. The vast majority of home owners stay away from this type of mortgage because of the fear that payments could rise for several consecutive years, making it much more difficult for the home owner to make ends meet.
Remember also that your loan payment will include the interest on the loan, payback of principal, home owner’s insurance and your property taxes. The latter two items will vary slightly, increasing over time, so even a fixed-rate loan will actually change modestly when it comes to the monthly payment, in future years.
What determines the choice as to the length of time for the loan?
The answer to this is quite simple. Let us discuss two basic options, the 20 year and the 30 year loan.
If you are borrowing $100,000 on a home, the amount of interest you will pay depends on the length of the loan. If you borrow for 30 years, you will pay 30 years of interest; but if you borrow for 20 years, you will have 10 years less interest to pay. In the long run, the shorter the time frame, the fewer dollars you will actually pay over the life of the loan.
On the flip side, a shorter time frame forces a person to pay more money each month, otherwise the borrower will not be able to pay off the loan in the specified time frame. So to reduce the loan period, you have to be able to pay more per month for your mortgage.
When buying a home, this is a major decision and it should be made so as to have as short of time frame as possible as long as that yields a monthly payment that you can work into your current lifestyle.
How do I get a basic grasp on some of the finer points of a loan, such as points, closing costs, etc.?
With the Internet today, you can easily head to a number of sites that will help you understand the multitude of vocabulary words that pertain to the mortgage industry. Then, create a basic cheat sheet for yourself - each time you find a new word that you do not understand, add it to your list of terms so that you can readily review your list whenever you need to.
I am concerned about my first visit. Do the lenders really want to know everything about your personal life?
No, they do not. But they do need to know about your finances - in fact they must have a complete understanding of all aspects of your monetary situation, savings, debts, expenses, etc. In fact, before making an appointment, try to gather as much financial information as you can so that your session with the loan officer is as productive as possible.
I have never checked my own credit history. Does this have any impact on my ability to secure a loan?
Your credit history is important - especially your current status. You should begin by obtaining a copy of your credit report before doing a formal loan application. You should also be open and honest, sharing that history with your loan officer. Credit issues vary, from people being irresponsible to others who have been laid off or been out of work for a period of time due to illness. The reasons for the credit issues are critical - the most important factor is your current status. If you have had past problems but have been able to square things away in recent years you will be eligible.
What is the basic expectations regarding a down payment? Ten percent down, twenty percent down?
Surprisingly, this number varies greatly from household to household and from lender to lender. Some have been able to secure a loan for as little 3-5% down while others have been unable to get a mortgage company to commit without a 20% down payment. Much will depend on the value of the home in question and the borrower’s current monthly payment ability. In addition, banks may vary the closing costs and points to be charged to make up for a smaller down payment.
How long does it take to get formal loan approval?
Many folks are disappointed to learn that they will not know the formal verdict for several weeks. However, your lender will need to verify the financial information you have provided. A reasonable expectation is three to six weeks though some local institutions may provide you the information in a matter of days.