Buying a home for the first time doesn’t have to be scary or stressful. Now is a better time than any for first-time home buyers.
It’s tempting to go house hunting immediately after you decide to buy a home, but if you’re going to need a mortgage, then it’s smarter to get your finances arranged first.
There are a lot of things to know before applying for a mortgage or learning how to get a 2nd mortgage. You’ll most likely need to start preparing months in advance.
Here’s a brief guide on everything that is essential to know before you apply for a mortgage.
What is a Mortgage?
Simply put, a mortgage is a loan people can use to finance a home. The majority of home buyers, especially in the US, use a mortgage to buy their home because not many people have tens of thousands of dollars lying around.
Most mortgages go for either 15 or 30 years. They’re not too different from any other loan in your life. If you need a set amount, you borrow it, get an interest rate to pay it back in, and have a monthly payment schedule.
Mortgage payments are collected on the first of every month but lenders can also grant a 15-day grace period, after which the late fees are assessed. Before we move on, there are some basic mortgage terms you should be aware of:
- Interest rate: The amount lenders charge borrowers.
- Loan amount: The amount of money you still owe. It is sometimes called the principal.
- Loan term: The time you have left to pay back your loan.
- Down payment: The money that you pay upfront in a real estate transaction.
How Can I Qualify For a Mortgage?
Getting a mortgage isn’t that difficult if you know what you’re doing. For instance, it’s a piece of cake to apply for a mortgage if you’re pre-approved. When you get pre-approved, the lender reviews assets, credit reports, and annual income. It’s the closest you can get to a mortgage approval without making an offer for a house.
Lenders need to know if you have a consistent income and if that income can support a mortgage. So it’s crucial to have financial planning or assistance and manage any outstanding debts.
Generally, approval depends on the type of mortgage you choose and how you’re employed. Some might ask you to show evidence of income, while others will require copies of your tax returns. Nonetheless, if you meet the basic criteria, you will highly likely get a fast mortgage approval:
- The home being bought is for personal use, not for a builder or corporation.
- The person borrowing the money is a first-time home buyer.
- The person has a consistent salary.
- The person is setting a down payment of at least three percent.
- The percent has a decent history of paying taxes and bills on time.
What Are the Different Types of Mortgages?
There are several mortgage options out there to fit the needs, budgets, and life stages of different people, like the Texas homeowner assistance fund. There are mainly six types and it’s important to get all the info so you can make an educated decision.
1. Conventional Mortgage
Conventional loans are exactly what the name implies, conventional. They’re ideal for the average adult that has an hourly or monthly salary, good credit, and a decent amount of money saved up. You can get conventional loans through any individual lender.
2. FHA Mortgage
FHA loans serve as a fallback for qualified lenders in case of mortgage default. They are backed by the Federal Housing Administration (FHA). These loans allow lower down payments, down to 3.5 percent, and credit scores as low as 500. FHA loans have benefits like:
- Options for low down payments
- Approachable debt ratios
- Usually a better interest rate
3. USDA Mortgage
USDA loans are a different story. They are guaranteed by the U.S Department of Agriculture and they were created to promote homeownership in fewer-density and rural areas. They are the best option if you’re a modest home buyer, looking to purchase a modest home.
4. VA Mortgage
VA loans, which are backed by the Department of Veteran Affairs, are specifically for people who are current or past members of the U.S military. Some veterans are exempt from standard VA closing costs, as well as not being required to set a down payment or have mortgage insurance. The VA guarantees the loan once it’s closed, to protect the lender in case the borrower fails to repay it.
5. Portfolio Mortgage
Portfolio loans are not conventional. The government doesn’t back up these sorts of loans, so there are no proper means of approval. An example of a portfolio loan is jumbo mortgages, which are the most common non-conforming loans. They require above-average income and credit scores.
6. Off-Market Options
Off-market mortgages are for those borrowers that may not qualify for traditional loans. They are designed for borrowers that are self-employed, have negative credit, or are investors. Two common off-market loans are non-qualifying mortgages and reverse mortgages.