Your Comprehensive Guide for All Things Home Loans
Our goal at home.loans is to teach you the basics of home finance and help you get the loan that’s perfect for your dream home purchase, not just to shove you into any old mortgage that could end with you in a house of horrors. If you’re looking for the TL;DR version, get in touch and we’ll give you our expert advice, free.
Getting Started with Your Mortgage
You've reached that All-American milestone. Maybe you've done the education, the job, the car. Wherever you're at, if you've decided to become a first time home buyer, you’re pretty sure you know where you’re going to live for a while and you’re thinking about that white picket fence. Or at least a balcony where you can set some plants. You’re ready to own a little bit of something that’s your own, where you can paint the walls “bicycle yellow” and play the television a little bit too loud at 10 PM on a weekday.
Or maybe you’ve bought before, done the bicycle yellow thing and are ready to move up to a bigger house because you’re starting a family. Maybe your job has relocated you, or you’ve relocated your job (gotta love the gig economy!), there are any number of reasons that you may be looking for a mortgage.
But there’s only one reason you came to this page today; you need more information on getting a home mortgage and you need it in an easy-to-digest format. After all, buying a home is an important financial decision, and you want to be as prepared as you possibly can. If this is your first time purchasing a home, our first time home buyer guide might be the perfect place to start your journey. If it's not your first time, keep reading-- because we still have plenty of information about the home purchase process ranging from preapproval to closing costs that might be helpful for you as well.
The Most Common Home Loan Programs
There are several great programs available to home buyers in the US, whether you have a huge downpayment or are just scraping up quarters from under the couch cushion. Some of the most popular home loan programs include FHA loans, VA loans, and USDA loans. While the list below includes programs available in most states, there may be additional offerings in your particular state that aren’t listed. Ask your lender if they have other mortgage products you’re eligible for before making a final decision.
This popular lending program from the U.S Department of Housing and Urban Development has been making low down payment mortgages for generations of homeowners. Often the best option for first time buyers, FHA loans can come with higher mortgage insurance rates, but are more flexible with lending criteria.
The Veterans Benefits Administration offers the VA loan as one way to compensate soldiers for their service in our nation’s defense. To be eligible, you have to have served in the military and have a certificate of eligibility showing your eligibility amount. The qualification criteria are very flexible, but fair credit and reasonable financial histories are still expected.
Buyers in rural areas can take advantage of the USDA Rural Development program, which offers low interest and, often, a zero downpayment. These loans can be difficult to qualify for, even in areas that are definitely considered rural because of the high standards the program has for the dwellings they will lend on. Thorough USDA inspection is require before you can close, at which time the lender will decide if the property is up to their standard. When it works, it works beautifully, but be patient with this program because it can take a lot of time to wrap things up.
Conforming Conventional Home Loans
You’ve probably heard of Fannie Mae and Freddie Mac. They’re the guys who buy these loans from your bank, ensuring that there’s plenty of money to make more of them for the next borrower. Fannie and Freddie often have stiffer requirements for borrowers, but may offer lower mortgage insurance rates, even with down payments as low as five percent.
A jumbo loan is a great big loan, but whether a loan is considered jumbo depends on where you live and what the market’s like. It’s generally considered to be any loan that exceeds the top conforming limits set by Fannie Mae and Freddie Mac, currently $453,100 in most markets (it’s $679,650 in high cost markets like parts of California). Jumbos are risky, so they come with higher rates, bigger down payment requirements, and much stricter qualifications.
These are reserved for homeowners that are 62 years of age and older. Reverse mortgages involve the homeowner converting the equity in their homes into cash. With this type of mortgage, payments are made to the borrower until the home is sold or vacated.
Fixed Rate Mortgages vs. Adjustable Rate Mortgages
For most of the loan programs and options listed above, you can choose whether to get a fixed-rate mortgage or an adjustable rate mortgage. Both kinds of loans have risks and benefits-- and it may be helpful to decide which type you want to focus on before you begin the loan application process.
Fixed-Rate Mortgages (FRM)
Home loans with an interest rate that doesn’t change throughout the loan term. Fixed rate mortgages are the industry standard for the vast majority of home buyers. The most common FRMs have 15-, 20-, or 30-year loan terms.
Adjustable-Rate MortgageS (ARM)
Home loans with a “floating rate” that can be changed. These are most common in a hybrid form, where the rate’s fixed for a set period, and then assessed (and possibly changed) annually.
Other Types of Mortgages
Bond Money Loans. Bond Money is actually more of a grant program, but it’s available in most states in one form or another. Bond Money is a program that allows first time home buyers to bring no or low down payments to closing with grant money generated through state bonds. Generally, these grants are limited in nature and not every lender will offer them, but they can be used with most loan programs.
Subprime. Sometimes, no matter what a person does, they just can’t quite hit the mark. That’s what a subprime loan is for -- when you’re down and out and still need to buy a home. They’re loans of last resort, often coming with high interest rates and unusual terms, like balloon payments or adjustable rates that usually only go up. They serve a purpose, but they should only be used for temporary situations. It’s wise to have an exit plan if you’re opting for a subprime loan.
Shelf loans. Credit unions and small local banks near you may still offer mortgages they keep in-house, known as “shelf loans,” though they’re getting harder to find every day. These offer attractive terms because they’re being made by your friends and neighbors, but are often for shorter periods than the bigger banks. Still, if you’re interested in a 15 or 20 year mortgage, asking the Bank of Anytown, USA if they have an in-house mortgage product might not hurt.
Important Factors for Home Loan Approval
Before you can get a loan, you have to qualify. This probably makes some amount of sense if you’ve ever applied for a credit card or a car loan. It’s a lot more complicated with a mortgage -- they all have the same basic metrics, some are just a little bit tougher than others. It’s always a good idea to get your ducks in a row about six months before you plan to purchase, though goodness knows that lenders have been known to perform miracles with less time.
The less stress you add to the homebuying process by procrastinating will be appreciated by everyone, from your real estate agent to your lender and even the closing agents. They might even bring donuts. But no promises. Here’s a handy list to get you started on that carb coma!
Mortgage Qualification Checklist
Forms of ID. You’ll need at least two, preferably a photo ID and Social Security card plus something that shows your current address. All of this is just to verify your identity and your residence, and to ensure that when a credit is pulled, it’s the right one.
Credit Report. Some websites say you need to bring your own credit report in with you, but this is incorrect. Your lender will ask for your permission to pull a credit on your behalf using their software, which then pushes that information through their credit grading algorithms. Officially, it’s pulling three credit reports, one from each of the major bureaus, but it’s all done with one action. This is called a “tri-merge” in the industry because it’s taking the three reports and inputting them together to get a better picture of how you use credit..
Tax Returns. You don’t necessarily need to bring these to your initial meeting, but it won’t hurt. The last two years’ tax returns, along with W2s or 1099s will help your lender get the most accurate picture of your financial situation. If you’re primarily self-employed, a profit and loss statement can be helpful.
Pay Stubs. Again, not necessary for the first meeting, but helpful. Pay stubs help establish your current pay rate, which may be different from the rate your taxes show. This happens when you get a different job or have a pay increase. Lenders want to check income from both directions. Pay stubs also give them the information they need to verify your employment later. If you get Social Security or Disability, bring that information.
Bank Statements. Lenders are really all about the money. Anywhere you have any stashed, they’re going to want to see a statement about it. Go ahead and print those statements off your bank’s website and bring them in, at least a couple of months’ worth -- three is even better. If you decide to get a loan from the bank where you have your checking and savings accounts, they can often pull this information out of their system, saving you the hassle.
Investment Statements. Putting a fine point on the “any money, anywhere” statement above, bring in your investment statements. That includes your retirement accounts, like your 401(k) or IRA. These investment accounts can be used in place of reserves, if your lender determines you’re required to put them up, or, as in the case of a vested 401(k), used as a down payment.
Divorce Decree. If you’ve been divorced, even if your divorce was uncontested, you’ll need to bring a copy of the decree. This is just for the bank to verify that the financial responsibilities you claim you have from that marriage are correct (including child support and alimony payments), because they have to document everything.
Certificate of Eligibility. If you’re applying for a VA loan, you have to be a veteran. Your certificate of eligibility will tell the bank that you did, in fact, serve your country, and it’ll show what the amount of your benefit through the VA loan program will be.
Understanding the Mortgage Process
When your lender has looked over all of this information, they’ll tell you what they think about things. You should not, under any circumstances, go house shopping before you’ve spoken to a lender about what you can afford. It might seem like it makes good sense to pick a house first, but if you do, you’re setting yourself up for a difficult transaction at best and a serious disappointment in the worst case.
What Do Potential Mortgage Lenders Use to Make an approval Decision?
Based on the following factors, your lender will determine how much buying power you’ll have. Remember, you are now at their mercy (though you certainly can shop around):
Credit score. Pretty much every loan eligibility matrix starts with a credit score. So, if your credit score is outside the range allowed by the program, no amount of compensating factors can get you into it. If your credit’s just barely in range, you may be able to buy, but with a much smaller loan than you might expect with your income.
Down payment. A downpayment can make a big difference to how much you can borrow, since your lender likes to see that you have some skin in the game. Most of the popular loan programs will allow you to bring a downpayment as small as three to five percent of the loan total, but if you can produce 10 or even 20 percent, lenders may overlook some blemishes in other areas.
Additional cash reserves. In some cases, you may be asked to provide reserve funds, to be verified prior to closing. These funds sort of act like a security blanket for the bank, so they worry less about you defaulting on your obligation. It’s common to ask for reserves for certain programs, if you’re considering buying another house before your current home is sold, or if you’re buying a second home. It’s not very often that first time home buyers are asked for reserves, but it does happen.
Income information. Ultimately, the total amount you can borrow is based on your income and how well you can support the payment. Always disclose all the income you have, even if you think your weekend lemonade stand doesn’t really count as real income.
Debt-to-income ratio (DTI). From the income and debt you disclose and that the bank discovers, they’ll produce a figure called your debt-to-income ratio. Based on this number and the mortgage program you use, along with your down payment and credit score, they’ll ultimately figure out just how much they’re willing to lend.
Loan to Value (LTV). The ratio of a loan amount to the value of the asset it’s being used to purchase. Lenders often refer to a borrower’s LTV in order to assess the risk involved in entering a loan agreement with that borrower.
Financial Dos and Don'ts When Shopping for a Home
Once you have all this information to your lender and they’ve come back with an approval amount, it’s time to get to shopping! Keep in mind that from this moment forward, you cannot -- under any circumstances -- do anything to change your financial situation, including your credit report, the stash in your savings accounts or even the way you use your checking in any significant way.
Too many buyers have lost their loans during the second round of financial information verification that takes place a few days before closing with most lenders.
Don’t take out a new line of credit to buy new curtains for your new house, because you’ll be left with some fancy rods and no place to hang them. Don’t go on a spree and spend everything in your savings account on new furniture or you’ll be sitting on it in the parking lot. Don’t get mad at your boss and storm out. Everything needs to just ride gently until your home is completely closed and all the documents are signed.
Finally, if you have an idea of the loan amount you are interested in borrowing and want to see what your monthly payments would look like with different interest rates, don't be afraid to give the home.loans mortgage calculator a try!