Getting a Mortgage
A Mortgage loan allows people to buy homes they cannot afford to pay for in cash. Getting a Mortgage requires an extensive application process and a review of your financial ability to repay the loan. Read on Mortgage Lenders Boise to learn more about mortgages.
During the loan term, your lender holds a lien on the property and collects taxes and homeowner’s insurance payments as part of your monthly mortgage payment.
A mortgage is a loan from a bank or other lender that allows you to buy a house without having all the cash upfront. The lender takes a security interest in your home to cover the amount you borrow, and you make payments on the loan over time.
The word “mortgage” comes from old French and Latin terms meaning “death pledge.” It means that when you purchase a home with a mortgage, your lender has the right to seize the property (foreclose on it) if you don’t make your payments.
When you get a mortgage, your lender will examine your financial records to see how much money they are willing to lend you. They will also check your credit to make sure there are no red flags in your report. If the lender approves you for a mortgage, they will give you an amortization schedule that shows you how your monthly payment is applied to principal and interest.
To qualify for a mortgage, you must have enough income to afford the loan plus your monthly housing expenses. You’ll also need to save a substantial down payment–ideally, 10-20% of the home’s purchase price. The lender will verify your income using tax returns, pay stubs and employment documents, as well as confirm all of the assets and debts you list on your application.
In addition to the principal and interest on your mortgage, you may be required to pay for a property tax and homeowners insurance premium. The lender will typically collect these payments along with your monthly mortgage payment and put them in an escrow account. When the tax and insurance bills are due, the lender will pay them on your behalf.
There are several different types of mortgages, all designed to help potential homeowners who may not have enough cash saved up to purchase a home outright. Among the most popular are conventional thirty-year fixed-rate mortgages and adjustable-rate mortgages (ARMs). Another common type of mortgage is the reverse mortgage, which is designed for homeowners age 62 or older. These mortgages allow homeowners to convert some of the equity in their homes into cash, but they require that borrowers pay back any accumulated interest and fees once they move out or pass away.
Conventional mortgages can be obtained from banks, credit unions, mortgage-specific lenders or through unaffiliated mortgage brokers. The mortgage loan process is rigorous and requires that borrowers undergo a thorough underwriting review to ensure they can afford the debt. Borrowers must also meet minimum requirements that include a high debt-to-income ratio, high credit score and sufficient income to pay the mortgage over time.
FHA loans are designed to increase homeownership by lowering the minimum down payment and credit score requirements. The Federal Housing Administration also sets other guidelines, such as maximum loan limits and minimum debt-to-income ratios that lenders must meet in order to offer these mortgages. Other government-backed mortgages, including those offered by the USDA and U.S. Department of Veterans Affairs, are often more flexible than conventional mortgages. They have more relaxed minimum credit requirements, higher debt-to-income ratios and larger loan limits than conforming mortgages, but they also carry slightly different borrowing costs than conventional mortgages.
Nonconforming mortgages include jumbo loans and other mortgages that don’t fit into other categories, such as those backed by Fannie Mae and Freddie Mac. While these mortgages have the same rules and standards as conventional mortgages, they’re primarily designed for borrowers who don’t qualify for a conforming loan because of their income or credit scores.
Getting a mortgage is one of the biggest financial decisions you’ll make. That’s why it’s important to do your research and prepare before you start shopping.
Most financial institutions offer mortgages, including big banks, credit unions and specialized lenders that only do home loans. It’s a good idea to compare lenders and choose one that offers a combination of low rates, fees and service. You can also work with a mortgage broker to help you find the right lender.
Once you’ve found a lender, you’ll be asked to provide supporting documents like pay stubs, tax returns and bank statements to verify your income, assets and debt. Your credit score and debt-to-income ratio (DTI) will be evaluated as well. The DTI is a measurement of your ability to repay your mortgage and other monthly debt payments. The CFPB recommends that your DTI be no more than 43% of your monthly take-home pay.
Your mortgage lender will also set up an escrow account to collect your property taxes and homeowners insurance each month. These funds will be used to pay these bills when they’re due. Your lender will use an amortization schedule to show you how each payment is applied to the principal and interest on your mortgage.
As you pay off your mortgage, you build equity in your home. When the mortgage is paid in full, the lender no longer has a security interest in the home and you can transfer ownership of your home to another owner.
Refinancing is a process that allows homeowners to change aspects of their mortgage. It may include changing the interest rate or loan term, and can also be used to change the number of payments required per year. Many people choose to refinance when interest rates are low, as this can lead to lower monthly payments and overall savings. However, refinancing isn’t the right move for everyone.
If you have a great credit score and income, a mortgage refinance could save you money on your monthly payments and over the life of your mortgage. This is especially true if you are currently paying an adjustable-rate mortgage (ARM) and would like to switch to a fixed-rate mortgage before the initial rate expires.
Refinancing could also be a good idea if your mortgage loan terms have expired and you would like to extend the duration of your mortgage. Keep in mind, however, that extending your mortgage term typically means paying more in interest over the lifetime of the loan.
Other reasons to consider refinancing your mortgage include consolidating debt, addressing home improvement costs and adding or removing someone from the mortgage. If you are considering refinancing your mortgage, it’s important to shop around and get multiple quotes. There are many online mortgage comparison sites, and it’s also a good idea to talk to lenders directly to compare rates and terms.
Refinancing your mortgage can also be a great opportunity to switch from an FHA loan to a conventional loan, which can help you avoid private mortgage insurance (PMI). This is particularly a smart move if you have enough equity built up in your home and are looking to eliminate the PMI payment requirement.
Mortgage lenders personalize interest rates for each applicant based on their credit history and other financial details. You can save money by shopping around and getting pre-approved for a mortgage with multiple lenders before applying. When you shop, be sure to use our mortgage rate table to compare rates from local and national lenders.
Your debt-to-income ratio is one of the most important factors for lenders in determining your mortgage eligibility. Keeping your debt-to-income ratio low can help you get approved for a higher loan amount, which will allow you to save money in the long run by paying off your mortgage sooner.
A low debt-to-income ratio also translates into lower housing expenses in the form of reduced mortgage insurance premiums (PMI) and lower property tax payments. You can lower your debt-to-income ratio by maintaining a steady job and paying off high-interest debts, such as credit cards.
Buying mortgage points, sometimes called discount points, at closing can help you qualify for a lower interest rate. Each point is equal to 1% of your loan amount. You’ll have to pay for the points upfront, but they can save you thousands in interest over the life of your mortgage.
Another way to save on your mortgage is to make additional payments toward the principal balance of your loan. When you add extra payments, your loan servicer will re-amortize your mortgage to reflect the change. The additional payments will go toward your principal, not interest, which means that you’ll build equity faster and ultimately pay off your mortgage loan more quickly.
When you’re making additional mortgage payments, be sure to set aside enough money for your down payment and closing costs as well. Closing costs can add up to about 3% – 6% of your home purchase price. Putting a larger down payment down can reduce your mortgage term and save you thousands in interest charges and PMI fees over the life of your loan.