Getting a mortgage isn’t something you do on a regular basis. So, whether you’re a first-time buyer or you’ve applied for mortgages multiple times, it’s still possible that you’re wondering about all the things you’ve heard about the mortgage loan process. Some of those things are probably true, but many could be myths that could hurt you when you’re financing a home.
According to the National Association of Realtors® 2019 research, first-time buyers typically had a 6% down payment and repeat buyers financed with 16% down. Nothing dispels a myth like facts.
The amount of down payment you need depends on the type of loan you get. Conventional mortgages start at about 3-5% down, and some government-backed loans like USDA and VA loans even have zero down mortgages.
The decision about how much you put down will depend on your financial situation. If you have a strong income, but are low on savings, a low down payment loan may be just what you need. The thing to keep in mind is that many loans require mortgage insurance if you put less than 20% down. The lender will add the premiums for that insurance to your monthly payment.
If you want to get the most accurate feedback on what type of home you can buy, you need a pre-approval. If you want to have the upper hand during negotiations, especially if there are multiple offers, you need a pre-approval. There’s a big difference between a pre-approval and a pre-qualification.
A pre-qualification is a piece of the mortgage loan process where you give a lender basic information about your income, employment, and debt. The lender uses that information to estimate how much you could probably qualify for, but the lender doesn’t verify any of the information you provide. A pre-qualification is just an educated guess.
For a pre-approval, you’ll complete a mortgage application, and your lender will verify all the information you provide. The pre-approval will be for a specific loan amount and interest rate. Smart buyers always get a pre-approval before they start looking at houses for sale.
The pre-approval you receive says that you can get a loan of a specific amount at a specific interest rate depending on successful processing of your loan. There are reasons why you may not be successful even with a pre-approval.
For example, if you run up your credit cards or finance a large furniture purchase in anticipation of your new home, you will change the amount of debt you have. That change could be enough to cancel out the pre-approval you got when your financial situation was stronger.
Also, loans carry some requirements for the home being financed. If the home you choose to buy doesn’t meet those requirements, your loan won’t go through. This seeming contradiction is just one of the complex parts of the mortgage loan process.
You know that your down payment can range from 3-20% of the purchase price of a house. If you purchase a $250,000 house, your down payment would range from $7,500 to $50,000. But, that isn’t the only money you’ll need to have available when you close.
You also need to account for closing costs. A number of things are included in closing costs for the buyer, such as an escrow deposit, homeowner’s insurance, title insurance, and more. Closing costs for buyers typically range from 3-4% of the purchase price of a home. So, your costs could range from $7,500 to $10,000 for that $250,000 home.
The interest rate a lender offers to you will be lower if your credit score is in the exceptional range, from 800 to 850. But, if your credit score is lower than the exceptional range, you can still get a mortgage, especially from government-backed loans like FHA loans.
In fact, some lenders use the FHA minimums and you could get an FHA mortgage loan with a score of 580 if you put 3.5% down. And, if your score is between 500-579, you could get an FHA mortgage if you put 10% down. However, some lenders require higher scores than the FHA minimums, so make sure you find the right lender for your financial situation.
Many people know that multiple hard inquiries on their credit reports will hurt their credit score. A hard inquiry is one that lenders make when they check your credit report. The credit reporting firms get nervous if you have too many hard inquiries because they’re afraid you’re going to take out multiple loans.
There are exceptions, though, and shopping for mortgage loan rates is one of them, along with shopping for car loans. In those situations, the credit companies count all hard inquiries as one within a specific timeframe. The timeframe varies depending on the credit company, but it is typically from 14 to 45 days. So, if you want to compare loan terms, don’t delay between applications.
You might think that someone who makes $150,000 per year will have no problem getting a loan. The truth is that income is only one of the criteria lenders use to decide if they will offer a mortgage loan to an individual. A lender will look at at least two other critical factors.
Lenders look at your DTI ratio to determine if you will have enough cash each month to pay your mortgage. Lenders may work with a borrower who has a 43% ratio, but they prefer to see a 36% ratio. You calculate your DTI by dividing your total monthly debt by your income. So, if you make $150,000 a year that would equal about $12,500 a month.
A 36% DTI ratio means you could have about $4,500 in monthly debt. If you have several cars, a boat, a vacation home, and student debt, you could easily have more than $4,500 in monthly payments once you add your proposed mortgage. At that point, you wouldn’t be a good candidate for a mortgage loan.
That’s not to say that you can’t get a mortgage if you have debt, you just need to have manageable debt.
It’s also possible for someone with a large income to have a bad credit score. If you have a large amount of debt, don’t pay your bills on time every month, miss payments, or open new credit cards on a regular basis, your score will go down. You don’t need a perfect credit score to get a mortgage, but you need to protect your credit score to keep it as high as possible.
The mortgage loan process can be frustrating because there are lots of rules, and many myths that can lead you in the wrong direction. You can look to professional advisors to help you move through the entire real estate process successfully. That’s why LemonBrew was created.
We can help you at each step by matching you with a professional local real estate agent. Then, we’ll help you master the mortgage loan process by ensuring you find the right mortgage loan for your financial situation.