How to Get a Mortgage: Steps in the Process
Owning a home is not just an emotionally fulfilling experience but also a financially gratifying one. Being able to own a home has a multitude of advantages. This makes millions of people purchase a home instead of renting.
Owning a house will allow you to acquire something in exchange for the monthly payment that you are making. Unlike renting, buying a house will be more gratifying since the property will be yours forever. Your family can inherit the property, which is not possible if you are only renting a house.
Making modifications and improvements on your property will be possible. Getting involved in the community where you are residing is also achievable when you own a home.
Purchasing a house will be advantageous in regards to financial decisions and opportunities that you will encounter. Your net worth will increase as time goes by since the value of your home increases. The mortgage that you are paying will be well worth every penny you spend every month since it helps with your overall finances. Your mortgage might seem like a continuous obligation but it will provide you with gratification that you will be thankful for once your ordeal of paying dues is done.
But, what is mortgage anyway? Why is mortgage needed when buying a house?
Mortgage is a type of loan wherein the lender, often a bank or financial institution, will lend money to the borrower to allow the latter to purchase a house. This is to allow individuals and companies to make purchases of properties without paying the full amount of the property being bought.
The title of the property will be legally transferred to the purchaser once the mortgage payment is done. This is to provide the lender security or assurance that the borrower will pay for the money that they loaned to purchase property. The collateral of the mortgage will be the real estate that is being purchased by the borrower itself.
Of course, the payment for the borrowed money should be done during or before a specified due date. Payments are scheduled to make it easier for borrowers to pay their mortgage through staggered method. Interest, of course, is accumulated over time.
The type of interest accumulation, whether the interest is calculated beforehand or the interest will be calculated in real-time, will be based on the type of mortgage a customer will choose. There are also other fees that borrowers should pay for. Taxes and insurance fees are some of the fees that homebuyers should take into consideration when applying for a mortgage loan. Here are all the topics this article will cover.
- How Does a Mortgage Work?
- Process of Obtaining a Mortgage
- Different Types of Home Loans
- Costs of Getting a Mortgage
- How Much Mortgage Do I Qualify for?
- What is a Mortgage Amortization Table?
- How to Calculate Your Mortgage Payment
- How to Get Pre-Approved for a Mortgage
- How to Get a Mortgage Loan with Bad Credit
- What is PITI in Relation to a Mortgage?
- How to Shop for and Choose a Mortgage Lender
- How Long Does it Take to Pay Off My Mortgage?
- How is the Mortgage Interest Calculated?
- How Much of My Mortgage Payment is Interest?
- How Much Mortgage Interest Can I Deduct?
- How do Mortgage Points Work?
- How much is a Mortgage on a $200,000 House?
- How Does a Second Mortgage Work?
- How Often Can You Refinance Your Mortgage?
- How to Remove a Cosigner from a Mortgage without Refinancing
- How to Avoid Mortgage Insurance
- How Fast Can I Pay Off My Mortgage?
- How Long After Bankruptcy Can I Get a Mortgage?
- How Does a Reverse Mortgage Work?
- How to Lower My Mortgage Payments?
- How Many Mortgage Payments Can I Miss Before Foreclosure?
How Does a Mortgage Work?
There are different types of mortgages. How they work will depend on the type of mortgage a homebuyer will choose. But basically, mortgages work the same way. A person who borrowed money will sign documents that prove that a financial institution lent them money to buy a property. The contract also states that the property or house is being used as collateral. This way, when the borrower is not capable of paying the mortgage anymore and defaults the mortgage loan, the lender will take ownership over the collateral. The borrower will need to move out of the house since they lost ownership over it due to inability to pay. This is called foreclosure.
When a house is foreclosed, the creditor will sell the house to another party. This will clear the mortgage debt and will ensure that the lender will not have losses over the mortgage transaction. Due to this reason, it is important for homebuyers to ensure that the type of mortgage they are getting is compatible with their income and lifestyle. It will prevent foreclosures and problems in regards to maintaining the purchased property. This will also help borrowers to pay for their mortgage loan more quickly.
Process of Obtaining a Mortgage
Obtaining a mortgage loan is naturally intimidating if you are doing it for the first time. Even individuals who have done it before can also feel scared, especially if their first home loan was foreclosed.
Since the process is usually confusing, homebuyers might find it difficult and puzzling to get a mortgage loan on their own. Familiarizing yourself with the steps in obtaining a mortgage loan is important so that you won’t experience these difficulties. It will be easier for you to choose which mortgage loan types you should get when you are acquainted with mortgage loan processes.
The first step that you should take when getting a mortgage loan is doing your own research. You should learn about the types of mortgage loans so that you can effectively shop around. Knowing more about mortgage loan types will enable you to choose the best ones that will go well with your lifestyle as well as your income.
This might be the most laborious step in getting a mortgage loan since you are in the first step and you are not knowledgeable about this type of loan yet. Hence, it would be best to lengthen your patience and ask a lot of questions to satisfy your queries. Ask as many questions as you can and learn more about home loans as much as possible as this is also considered a life-long commitment.
Once you are familiar with the types of mortgages that are available in your state, you should determine which among these are applicable to you. There are mortgage loan types that are not for certain groups of people since the requirements of classifications needed are not compatible with the borrower.
Determine which types of loans you can afford and which ones you know you will be approved at. It will save you a lot of time and money since you won’t have to apply for a loan type that you have very low chances of approval.
Try to get pre-approval so that you can easily purchase a home. You need to calculate the amount of money you can allocate for monthly payments before applying for pre-approval, however, to ensure that you can afford the loan that you are getting.
- Loan application
If you are decided on the property that you want to buy and you already have a signed purchase contract, you can now apply for the loan itself. Make it a point to answer the questions clearly, particularly ones that are related to your income and assets. Your other debts should also be assessed to ensure that your ability to pay is calculated and established. It will make it easier for the lender to evaluate your capacity to pay, which will make the loan application process quicker.
- Loan processing
After submitting your loan application, a loan processor will evaluate your current financial situation. Your credit score will also be reviewed to ensure that you are a good payer and you have the willingness and capacity to pay a loan.
This is highly important as this will establish the decision of the loan processor whether they will approve your loan or not. Hence, before filing a loan application, you should make sure that your credit score is reviewed and you have made effort to increase it and make it suitable for the qualifications needed in your mortgage loan. Improving your credit score does not need to be difficult with the help of this article.
Once the processing is done, the loan underwriter will review your application as well as the assessment of the loan processor. The approval of your mortgage loan will be decided by the underwriter.
Though this process takes about 72 hours only, it is one of the most vital steps as this determines whether your application will be accepted. Hence, make effort in providing all the information needed by the underwriter. Never submit documents that are incomplete to avoid issues with your application.
If the loan underwriter approves your loan application, you will be sent a letter of commitment. This is to ensure that you understand the terms of the loan. Included, of course, are the terms of the loan and the amount of the property that you want to purchase.
You will be given a certain period of time to answer the letter to let the agency know that you are willing to accept the terms and sign the contract or letter. Do not forget to sign the letter and make the mortgage lender aware of your commitment to the contract. This will ensure that you are dedicated in getting the loan and paying for it in the near future.
If you fail to sign the commitment letter, your loan application will be dismissed and you might need to apply to a different mortgage company after this.
- Loan closing
Loan closing is the formal meeting of the home buyer and the seller to allow for contract signing. All the necessary papers that the buyer and the seller should sign are presented in this formal meeting. This is to avoid confusion. It also closes the transaction.
The closing fees will be shouldered by you, the buyer. So, make sure that you have allotted budget for the closing fees. This often amounts to 5% of the total value of the house that you are purchasing.
Aside from the down payment itself, you should have the money for this to keep your efforts from going in vain. This is because the loan will not push through if the closing fees are not paid in full.
Mortgage loans should undergo all the steps above to ensure that the transaction is legal. Even though the time it will take for the homebuyer to complete the processes is rather long, it will be all worth it since the validity and legality of the transaction is proven. This is not only for the protection of the lender but also for your protection since you are assured that you are getting a mortgage loan from a trusted and well-established company. This will also guarantee that your future monthly amortization payments are credited appropriately and the property will be rightfully and legally yours after you have finished all payments necessary.
How Long Does Mortgage Underwriting Take?
Usually, mortgage underwriting is done within 72 hours only. Upon the submission of the mortgage application, the underwriter will process and evaluate your application and approve it within 3 days.
It will take a week before the underwriting process is completed once you have submitted all the requirements or documents needed for the loan application.
Different Types of Home Loans
There are basically 3 options when getting a home loan: the fixed and adjustable rate, the government-insured and conventional loan and the jumbo and conforming loan. Under these 3 options are a total of 7 types of loans. Depending on your income and ability to pay for the mortgage, you can choose among these options.
- Fixed-Rate and Adjustable-Rate Mortgage Loans
When contemplating what type of mortgage loan to get, it is important to familiarize yourself with the first two types so that you can determine the type of interest that you are paying.
- Fixed-rate mortgage loan
Fixed-rate mortgage loans are a type of loan wherein the interest rate is fixed for the entire payment schedule. The amount that you will pay for the rest of the loan will be the same since the interest rate is the same.
This is advantageous if the current performance of the housing market is not so good and the interest rates are low during the time of your loan application and approval. When the interest rates increase in the near future, you won’t have to worry because your interest rate is fixed and it will not increase.
- Adjustable-rate mortgage loan
Adjustable-rate mortgage loans, on the other hand, are loans with interest rates changing based on the current performance of the market. The interest rate is not fixed and is calculated based on the schedule of your mortgage payments. The usual calculation of interest is done on a yearly basis for this kind of mortgage loan. There are also adjustable-rate mortgage loans that are calculated every 3 or 5 years.
This can be advantageous if the interest rate will get lower and lower as time goes on. But if the interest rates keep getting higher as time goes by, the amount that you will pay for the mortgage loan will balloon, which can greatly affect your finances in the long run.
- Government-Insured Mortgage Loans
- FHA mortgage loan
FHA (Federal Housing Administration) mortgage loan is under the Department of Housing and Urban Development (HUD), which is a federal government department. This type of loan is government insured which means that the lender is guaranteed by the federal government to be reimbursed when the borrower has defaulted.
One of the main advantages of this kind of mortgage loan is that borrowers pay only 3.5% for the down payment to purchase a house. Compared to the usual 5% to 20% down payment, FHA mortgage loan is a better option for homebuyers that cannot afford higher down payments. The process of approving loans is also more lenient since the lender is insured by the government. The lender won’t have to worry if the borrower defaults since they will get paid no matter what.
- VA mortgage loan
VA (Veteran Affairs) mortgage loans are under the U.S. Department of Veterans. This type of mortgage loan is also government insured and is targeted to homebuyers that are in the military service.
Aside from being government insured, another advantage of this mortgage loan type is that borrowers do not have to pay for a down payment when purchasing a home. Since the loan amount can be 100% of the total price of the property, homebuyers can purchase a house without spending money on the down payment.
- USDA/RHS mortgage loan
USDA (United States Department of Agriculture) mortgage loans, also called RHS (Rural Housing Service) mortgage loans, are government insured housing loans that are offered to borrowers from rural areas. This type of loan is applicable to homebuyers that are earning modest but steady income.
The income of the borrowers should not exceed 115% of the adjusted median income in the area they are in. Hence, borrowers will have to determine the median income in their area to verify if they are qualified for this program prior to application.
- Conforming and Jumbo Loans
Conforming and jumbo loans are more focused on the size of the loan that you are going to get. These should be familiarized as well to ensure that you are aware of the obligations that you will have when buying a house.
- Conforming mortgage loan
For conforming mortgage loans, the underwriting guidelines are based on Fannie Mae or Freddie Mac, which are government-controlled corporations. These corporations purchase properties or mortgages from lenders and then sell them to the investors in Wall Street.
- Jumbo loan
Jumbo loans, as the name implies, are mortgage loans with prices that are too big. The risk to the lender is higher since the size of the loan is larger. This requires the borrowers to have better credit score and better income to be able to avail this kind of mortgage loan.
Fixed-Rate Mortgages Pros and Cons
Fixed-rate mortgage loans are often seen as advantageous since the interest rate is fixed and won’t be affected if the market affects the on-going interest rate of house loans. However, there are also disadvantages to this kind of mortgage loan.
As stated above, one of the main advantages of fixed-rate mortgage loan is its unchanging interest rate. This means that even when the interest rates increase overtime, the amount that the borrower will pay for their mortgage will be the same. There will be no changes or increases in their payment since the interest is fixed and cannot be increased due to the performance of the housing market.
Another advantage of this loan type is that the homebuyer is able to calculate how much they are going to pay during the duration of the loan. This means that the borrowers won’t have to feel uncertain about their finances since they are sure that their payments are set.
There are, of course, disadvantages in choosing this type of mortgage loan. Since the interest rate is fixed, the market performance won’t affect the interest rate for the rest of the mortgage’s duration. This means that when the current interest rate on house loans decreases, the amount of the interest will not change. This can be disadvantageous to homebuyers who are hoping to have their interest rate reduced from time to time.
Variable-Rate Mortgage Pros and Cons
Variable or adjustable-rate mortgage loans also have pros and cons. Depending on the goal of the homebuyers, the advantages and disadvantages of this loan type may prove to be helpful.
Since the interest rate of adjustable-rate loan type varies according to the performance of the market, homeowners can have the chance to pay lower mortgage payments when the interest rate is adjusted to be lower for a certain year.
Another thing that makes this loan type advantageous is that that first 3 or 5 years of the loan has a lower interest rate than the fixed-rate one. For families who are planning on staying in the house for a short period of time, they can take advantage of the lower interest rate before moving out. This saves families money since they won’t have to pay a higher fixed interest rate.
One of the disadvantages of this loan type is that the predictability of the payments will be gone. Since the interest rate on the loan will be adjusted after a few years, the amount that the homebuyer will have to pay will vary and it may increase. This is a drawback since there can be times that the adjusted payment is higher than the initial ones. It can put a strain on the finances of the homeowners, which might force them to forfeit the house if they are unable to make payments in due time.
Costs of Getting a Mortgage
When getting a mortgage loan, homebuyers are often thinking only about the cost of the monthly mortgage fees. Though this is partly true since the monthly payment to be made is quite important to consider, the other costs of getting a mortgage should be considered as well. This is to allow you to calculate how much you should save up before you apply for a home loan. It will be advantageous since you can pay for the fees and other expenses right away. It will also enable you to choose mortgage loan types that will be cheaper or easier to pay in the long run.
- Down payment
The first thing that you should save up for is the down payment. If you are going to get a mortgage loan from a private financial institution or a bank, you will need to pay at least 20% of the total property price as down payment. This will let the lenders know that you have the financial capacity to pay for the loan. Check out this guide on saving money for a down payment.
The higher the down payment is, the lower the monthly amortization will be. Since you have already paid about 20% of the total cost of the house, you are proven to be less of a risk to lenders. You will not be included in the category of borrowers that need to pay for private mortgage insurance (PMI). This means that your monthly payments will be lower.
If you choose to pay a lower down payment, you might need to pay for PMI fees. The interest rate of the mortgage payment will also increase since your total balance will be bigger. Hence, if you can afford it, pay at least 20% for the down payment.
- Closing costs
Closing costs include the processing fees needed to finalize the mortgage and purchasing of your new home. You should be reminded that upon the closing of the transaction, you should pay for such costs. Recurring closing costs include insurance and taxes, which are often added to the total monthly amortization costs.
Due to this reason, you should add the recurring costs to the total monthly amortization that you need to pay for the duration of your loan. Doing so will not leave you clueless about the computation of your mortgage dues.
- Insurances, taxes and other fees
If your monthly mortgage does not yet include the insurance and taxes of your property, you should handle the payments on your own. This means that aside from paying your amortization, you should also allot a budget for these dues.
If the lender already included in these fees on the monthly amortization costs, you will need to pay for these to their office. For instances when the insurance and taxes should be paid in bulk – a year’s worth of payments for the first year of the loan – you should be prepared to pay the lender the full amount of the expenses. This way, the lender can put the funds and escrow and pay the fees when they are due.
- Monthly amortization
Of course, the total cost of the monthly amortization should be calculated properly. Keep in mind that there can be recurring fees that you need to pay along with the principal amount of your loan and the corresponding interest. Hence, make sure that you have already cleared these up so that you can accurately calculate how much you have to pay on a regular basis.
Even though the exact amount of monthly amortization will be given to you while you are processing your mortgage loan, you should still be vigilant in computing your monthly dues to avoid committing to loans and terms that you cannot afford in the long run.
How Much Mortgage Do I Qualify for?
Knowing how much you can afford when buying a house is important as this will determine whether you can pay for your loan or not. It would be best to determine how much you can spend on paying your monthly amortization fee, as well as the initial costs, to avoid biting off more than you can chew.
To determine how much you can afford to buy a house, you should not only rely on the formula of the lending companies. You should learn to calculate how much you can spare every month to avoid getting loans that you can barely pay. We’ve compiled a list of ways for you to save, should you need it.
- Get a lower loan than you can afford.
When applying for a loan, determine how much the financial institution will approve. Get the biggest amount but do not settle on that option. Determine whether the monthly payments for that loan will be easy to pay or not. If the total amount of monthly amortization, including recurring expenses, is a bit hard to pay, you might want to select a lower loan amount. This will allow you to have legroom, which will prevent you from going broke every time you pay for your mortgage. This will also ensure that you can pay for all the fees that you need to pay regularly and not have lapses, which can be a big problem once these accumulate.
- Determine your net income.
When getting a home loan, do not calculate your gross income alone. It is better to use your net income so that you can be sure that you can spare 28% of your income for your mortgage fees. This dispensable percentage of your income should not go lower than 28% or you will find it hard to manage your finances in the long run.
This is particularly true if your have other debts to pay such as credit cards and car loans. Once the fees accumulate, the amount that you will need to pay up can be overwhelming.
Be reminded that your net income is the amount that you can spend or the amount that you have received after paying taxes and other fees that are deducted from your gross income. Do not confuse the two since you might accidentally think that your dispensable income is bigger than it really is. This will lead you to believe that you can get a bigger loan than you can actually afford, which can ultimately lead to defaulting your mortgage loan.
What is a Mortgage Amortization Table?
A mortgage amortization table is the table showing the schedule of your monthly payments for the loan. It includes the principal amount as well as the interest rate that you need to pay up. This is helpful in tracking your progress and in ensuring that you are paying your dues on time.
For adjustable-rate loan types, the first year of the amortization is calculated. Since the adjustment of the interest rate is calculated every year or every few years, the mortgage amortization table for this is updated every time the interest rate is adjusted.
Included in a mortgage amortization table are the taxes and insurance fees that you also need to pay. These recurring charges are often paid on a monthly basis. Hence, it would be best to have these included on your mortgage amortization table so that the total amount of your dues is easily seen. It will prevent confusion and will keep you from missing payments on these additional fees.
How to Calculate Your Mortgage Payment
Calculating your mortgage payment can help you determine how much you need to set aside on a monthly basis to avoid lapses on your monthly dues. The calculation will be based on the type of loan that you have acquired as well as the additional fees that are included in the amortization. If the insurance and taxes are included in your payment, you should include these on your calculation as well.
To calculate your monthly dues for the principal amount and the interest alone, divide the principal amount into the number of months it will take you to pay the loan itself. You should also do the same with the interest. The sum of the two figures will be your monthly amortization fee.
How to Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage can be intimidating. Since you need to be trustworthy enough for the lender to promise you that you can loan up to a certain amount, you should ensure that your eagerness and ability to pay is shown to the lender.
- Credit score
You can increase your chances of getting pre-approval by starting off with your credit score. Since this is the first thing that lenders look into when determining your ability and willingness to pay debt, you should ensure that your credit score is appealing.
Check the banks where you have debts to guarantee that your credit score is appealing to the lender. If there are errors in your account, have them corrected. If your credit score is not qualified for pre-approval, you should start paying up some of your debts to improve your credit score.
- Income information
Of course, your income should also be presented when applying for pre-approval. Make it a point to have your pay stubs updated and accumulated so that you can show them to the assessor. Your taxes should also be documented to show the legitimacy of your employment.
If you have other sources of income, it would be best to include proof of your income from these as well. Have your income documented to make it easier for the assessor to determine how much you are making on a monthly basis. This will increase your chances of getting a pre-approved mortgage, which will entitle you to get a more expensive house.
- Asset information
If you have bank accounts, investments and other properties, you should have the documents of these prepared when applying for pre-approval. The money that you receive can also be documented to prove that you have other assets or sources of funds that you can use to pay for your monthly mortgage fees. There should be proof that the money that you have received is not a form of loan or debt. This way, it will be considered as additional income instead of liability.
This will increase your chances of approval since you can prove that aside from your main source of income, you also have other sources to get funds to pay for your home loan.
- Personal information
For verification purposes, you need to manage your identification as well. Bring IDs that will prove who you really are, which is important since you cannot get approval unless you prove that you are the one applying for the loan and presenting the documents.
Driver’s license is the most commonly used ID for this kind of transactions so it would be best to have it ready when meeting with your mortgage lender.
Your credit score and information will be pulled up by the assessor so you won’t have to bring a copy of these documents. Just make it a point that the information in your documents is accurate to avoid conflicts and issues with your application. Once that is done, the decision will depend on the underwriter, which is out of your control.
How Long Does a Mortgage Pre-Approval Last?
Mortgage pre-approval does not take long. As long as you have submitted all of the required documents, the process can take as quickly as one hour. Some pre-approval applications take only one day to get approved.
If you are aiming to apply for pre-approval on multiple institutions, you can do so. Just make sure that you are consistent so that you will not be viewed as an entity that is trying to get as many loans as possible.
How to Get a Mortgage Loan with Bad Credit
Do not get alarmed if you have bad credit and are planning on applying for a home loan. There are ways on how to improve your credit score so that you can still apply for a mortgage loan even when your credit score is not g0od. There are also ways on how to apply to specific institutions that accept applications from homebuyers with credit scores that are a bit low.
- Improve your credit score.
Trying to improve your credit score will greatly help in getting your home loan approved. Even if you cannot fully close your debts, you should update your payments so that your credit score will be better.
- Update your monthly payments on bills.
You should also pay your bills on time as these are also factors that affect your credit score and approval rating. By proving that you are willing to pay your dues, your credit score will be updated which will help when assessors of lenders access your credit score for evaluation.
It is advised that you ensure that your bills are paid on time within the last 12 months prior to your loan application. This includes your monthly rent and other utilities.
- Get the right types of loans
FHA loans are the most common types of mortgage loans that are availed by homebuyers with low credit scores. Since this type of loan is backed by the government, lenders are more lenient in approving applications for home loans.
Thus, it would be best for you to choose to apply to government-insured loans than those that are managed by independent companies. Aside from getting a higher chance of approval, you can also get assistance from government agencies as well.
What is PITI in Relation to a Mortgage?
PITI stands for principal, interest, taxes and insurance. These are the fees that a homebuyer should pay on a monthly basis, which compose the overall monthly amortization fee. A homebuyer should know how much their PITI will be so that they can calculate if they can afford the home loan that they are applying for.
Lenders make sure that a borrower can pay their dues even when their income was interrupted by requiring homebuyers to provide seasoned assets, which is usually equal to 2 months of the total PITI. This way, the lender can still receive payments for the amortization fees even when the borrower is currently having financial difficulties. Hence, it is important to determine how much you can deposit on a bank as seasoned assets to get a higher chance of loan approval.
For instance, if the PITI is equivalent to $1,000 per month, the seasoned asset paid to the mortgage lender in advance should be at least $2,000.
How to Shop for and Choose a Mortgage Lender
Shopping around for mortgage lenders is not really difficult but it can take a lot of time and effort. Since you will be committed to this financial institution for a long time, you would want to ensure that you are working with a company that you are comfortable with.
The way the company handles their clients and the policies they are implementing when approving loan applications should also be considered before you decide to send in your application. The way the company handles foreclosures and other issues with loans should also be considered. Even if you don’t think that you are going to miss payments in the future, it would be best to research about these circumstances to guarantee that you can request for assistance when you find it hard to pay your dues.
Considering that your credit score is already updated and you are already familiar with the requirements and the fees that a home loan application and processing will incur, it is time to shop around for mortgage lenders.
- Compare mortgage rates.
One of the best things that you can do when shopping for mortgage lenders is to ask about the fees of all the lenders that you can find and compare them with one another. This way, you can clearly see which ones are offering affordable fees.
Do not be in a hurry when comparing mortgage lenders as this will allow you to get the lowest interest rates and the best deals that you can get. Take note of all the things that you think will be useful to you and base your assessments to these.
Do not fall into deals that seem too good to be true. Beware of low fees that seem suspicious. If you think that a fee or interest rate is too low, you should ask why it is so. If the mortgage lender is not able to give you concrete and clear explanations, you might want to continue looking for a better financial institution.
- Know what questions to ask.
Knowing what you should ask from lenders will allow you to appropriately compare the services of various financial institutions. This will also help you determine if the terms implemented in the loans are appropriate and acceptable for you.
Make a list of questions to ask the mortgage lenders that you want to apply loans to. This will allow you to compare their answers effectively. Since you are asking the same questions, you can have criteria that will help you decide which among the mortgage lenders the best is and which ones you should avoid transacting with. Of course, you need to ask the questions in the same manner to avoid biases.
- Ask for professional advice.
Asking for professional advice will also help in choosing the right lender for you. Since professionals are quite knowledgeable and are able to provide recommendations without being biased, it is a good step to take.
Just make sure that you are dealing with professional advisers who are not connected to any financial institution that they can favor. They might suggest a certain company because they can gain something from their recommendation. This is not a good practice since it can mislead consumers.
Shopping for mortgage lenders can be exhausting. You might find it difficult to choose among the multitude of lenders in your city. But, do not be hasty and take your time in selecting the best company for you. This will ensure that you are in good hands and will get all the assistance that you will need in regards to your loan.
How to Shop for a Mortgage without Hurting Your Credit
The amount of loan applications you send to financial institution can have an effect on your credit score. If you have applied for multiple loans, your credit score can be negatively affected. This is not always the case, though, since some assessors will view your applications or inquiries as one if the interval is less than 48 days. Since it is obvious that you are shopping around for a house or mortgage lender, you won’t be viewed as an individual with too many credit obligations.
Hence, make it a point to make your inquiries close to each other. This way, you can shop around for mortgage without affecting your credit score. It would also help to be consistent on the type or amount of loan that you are applying for so that it will be obvious that you are aiming for a single loan and are just shopping around for the best deal.
How Long Does it Take to Pay Off My Mortgage?
Depending on your ability to pay, the duration of your mortgage can last from a few years up to 30 years. If you were able to pay a big down payment, the duration of your loan can be shortened since your balance is smaller.
The amount that you pay on a monthly basis will also determine how long it will take for you to pay off your mortgage. If you choose to pay the minimum amount on a monthly basis, it will take you around 30 years to pay off your loan. But if you are able to make bigger payments, your balance will be easier to pay since your payments slash off a big part of your overall loan balance.
How is the Mortgage Interest Calculated?
Mortgage interests are calculated by calculating the interest rate on the remaining balance of the loan. Since most mortgage lenders calculate interest on a yearly basis, the interest is divided by 12 months. For example, if the outstanding balance is $200,000, with an interest rate of 5% per annum, the monthly interest rate is 0.00416 per month. This equals to $10,000 interest per year or $833.33per month.
Adjustable-rate mortgage loans can be harder to calculate since the interest rate is not fixed. The lender will have to wait for the current interest average before they can determine the actual interest of their loan. This is only advantageous if the interest rate is lower than the fixed-rate loans.
How Much of My Mortgage Payment is Interest?
Mostly, for the first year of the loan, 90% of your mortgage payment is for the interest alone. The remaining 10% will be paid to the principal balance of your loan. As your mortgage matures, the calculations change. Hence, by the end of your mortgage, 90% of your payments will be for the principal amount of the loan and the remaining 10% will go to the interest.
This can vary depending on the policies of the mortgage lender that you choose. Different mortgage lenders have different policies on how they divide the payment of the borrower.
How Much Mortgage Interest Can I Deduct?
For your first and second mortgage loans, you can deduct a maximum of $1,000,000 in mortgage loans from your tax payments. Once that amount is exceeded, your mortgage payments will no longer be tax deductible.
For married couples who are filing separately for tax deduction, the maximum amount is $500,000.
How do Mortgage Points Work?
Mortgage points are discount points that enable you to lower the interest rate of your loan. This will make it easier for you to pay for monthly amortization fee since the monthly fees are reduced, thanks to discounted interest rates. You will have to pay for these mortgage points during the closing of your mortgage loan so that the calculations of your loan interest can be adjusted. Your payments should be directly paid to the lender.
One discount point is equivalent to 1% of the loan amount. This means that one mortgage point of a $200,000 loan amount is equivalent to $2,000. The higher your points are, the lower your interest rate will be.
How much is a Mortgage on a $200,000 House?
The mortgage for a $200,000 house will depend on the type of loan you are getting. If your loan allows you to pay only 3% ($6,000) of the total price of the property, your mortgage will be $194,000. If you will pay at least 20% for the down payment, which is $40,000, the mortgage will be $160,000 only.
The monthly amortization will depend on the number of years the loan will be paid. For a 30-year mortgage loan, the monthly amortization will be lower since the loaned amount and interest are divided into 360 months. This does not mean that the overall paid amount is smaller as well. Since the interest will accumulate, the longer that loan is, the larger the total interest will be.
How Long Does it Take to Get a Mortgage?
From the day you have started processing your mortgage application to the approval of the underwriter assessing your loan application; it usually takes about 4-8 weeks. The process might take longer if you are going to include the days you will spend in assessing your credit score. Depending on your progress, the entire loan application may take a few weeks more to be completed.
How Does a Second Mortgage Work?
A second mortgage is a kind of loan that you can get by using your home as equity. But, only the percentage of the home that you have already paid for can be used as your security. This means that if you have only paid 50% of your $200,000 mortgage so far, your security will amount to $100,000 only.
Homeowners who need a large amount of money use second mortgage since they are not forced to pay the loaned amount in full. Since they will be having 2 mortgages in their home, they can pay the loan little by little. Some homeowners use second mortgage to afford renovations or home extensions, which can sometimes cause financial strain on the family.
How Often Can You Refinance Your Mortgage?
Though there is no real limit on how frequently you can refinance your home, it is advised that an interval of 6 months in between every time you do it. This is mostly applicable to cash-out refinancing of mortgages. As for refinancing to obtain better terms and interest rates, there is actually no restriction.
You can apply for refinancing as frequently as you like. This is highly applicable to those who are looking for ways on how to save money on interest rates. This is not always the case, though. There are times when the fees paid for refinancing cost more than the targeted savings of the borrower. This increases the expenses of the homebuyer instead of reducing their monthly dues. Hence, it would be best to take your time and calculate everything before you have your mortgage refinanced.
How Much Does it Cost to Refinance a Mortgage?
Refinancing a mortgage is not entirely cheap. You will need to pay for appraisal fees, title fees, escrow fees, credit fees, lender fees and insurance and taxes before you can have your mortgage refinanced. For a mortgage of $200,000, you can expect to pay around $3,000 for refinancing. Hence, it would be best to only refinance your home if you can get a lower interest rate. This way, the amount that you will spend on processing your mortgage refinancing will pay itself through the savings that you will incur for the lower interest rate of your new loan.
It was advised that a 2% decrease in interest rate should be your basis in refinancing your house. If you cannot save at least 2% interest, you should not bother refinancing as this will only lead to more expenses. Since you need to spend around $3,000 for the refinancing fees, you need to make sure that what you will spend can pay for itself over a course of a few months. If the savings is less than what you have spent for refinancing, you are just adding to your mortgage loan burden.
However, nowadays, some experts recommend that you can refinance if you can save at least 1% on interest. Since it will be quite hard to look for lower interest rates, grabbing the opportunity to refinance when the rate is 1% lower is worth it.
How to Remove a Cosigner from a Mortgage without Refinancing
There is a way you can remove a cosigner from your mortgage without refinancing. Even though it is common knowledge for borrowers to refinance their mortgage to remove a cosigner from the mortgage, it is not always true. There are mortgage lenders that will allow a borrower to remove their cosigner from the mortgage without refinancing. This is not a common occurrence but it happens, especially when the cosigners are married and have separated.
- Inform the lender.
Of course, the first thing that you should do when removing a cosigner from your mortgage is to inform your cosigner and the lender. It would be best to do it in person rather than via phone call since this is not a common request. It will also be easier for you to explain your reasons for removing your cosigner, which will make things flow more smoothly. Because lenders will need to hear your reasons and evaluate the situation before making a final decision, you need to go to their office in person to explain your reasons.
Provide your mortgage lender with all the information that they might need to determine whether your request should be granted or not. If you have a divorce decree, you would want to bring it with you when meeting with your lender. This way, you can present it while stating your reason for the removal. Of course, this is applicable for married couples that have separated and one of the parties wants to continue the mortgage without the other.
- Provide information about your finances.
You need to check and make sure that your mortgage loan is qualified for novation. Since you will be paying the mortgage fees on your own, you need to ensure that you are capable of paying your dues as well. Your mortgage lender will not approve your request unless they are sure that you are capable of paying the loan on your own. Because you will be the sole entity responsible for the loan, the lender will need to guarantee that you can bear the responsibility alone.
Hence, review your finances and provide all the information that your lender might need to prove that you are qualified for the assumption of the mortgage loan. Pay your bills on time and settle debts that can affect your credit score. Have your financial information ready so that the assessment will be easier and quicker. This will hasten the approval as well.
- Sign a mortgage novation or assumption contract.
After the approval of the underwriter, you should sign a mortgage novation to prove that your cosigner was removed from the loan and you alone will be paying the mortgage fees.
This contract will prove that your cosigner was removed from the contract and they cannot pay for the mortgage anymore. Their right over the property is also forfeited and they cannot claim the property as partly their own, especially after the loan has been fully paid by you.
- Sign a new deed.
When removing a cosigner from a mortgage, you need to ensure that they are also removed from the deed. This way, you will be the sole owner of the property once it is paid off. Hence, make it a point that you will sign a new deed before closing the transaction and making your new amortization payments.
How to Avoid Mortgage Insurance
Avoiding mortgage insurance is not as complex as it sounds. If you can prove that you are capable and willing to pay your mortgage loan, you can get a loan that does not include mortgage insurance. You should pay at least 20% of the total amount of the property price as down payment; it is as simple as that.
Since mortgage insurance is applicable to borrowers who have a higher chance of defaulting, you need to make sure that your finances are stable and organized before applying for a mortgage loan. This way, the assessor will see your ability to pay on time. Your willingness to pay also matters since it will establish that you are not a risky borrower and the lender won’t need insurance in case you default your mortgage.
Check your credit score before shopping around and applying for a mortgage loan. This way, you can be seen as someone who has their finances under control, which will boost the confidence of the lender in lending you money to purchase a house. You should also organize and present your assets and other sources of income properly to the assessor. This offers the same effect of capability and willingness to pay your loans.
Paying existing debts and updating your bills will also help in evading mortgage insurance. Since you are seen as a willing and capable buyer and borrower, you don’t have to have insurance on your loan.
How Fast Can I Pay Off My Mortgage?
Making prepayments on your mortgage loan will allow you to pay off your entire mortgage. Although this can be quite advantageous for those who can pay off their loan sooner to save on interest, most financial institutions will only allow the borrower to pay 20% of the total loan amount per year. This means that the payment of the borrower cannot exceed 20% of the total mortgage loan. Hence, if you have a $200,000 mortgage loan, you can only pay $40,000 per year to avoid paying prepayment fees.
Due to this reason, you can pay your entire loan as fast as 5 years only. This will enable the lender to gain something from the transaction since they will charge you an interest rate during those 5 years. And if you decide to pay for the mortgage loan as soon as possible, you need to pay a prepayment fee.
How to Pay Off Your Mortgage Faster
Paying off your mortgage faster is possible if you are going to make advance payments. Paying mortgage fees that are bigger than what the lender required is also possible. Since the extra payments are often paid to the principal amount of the mortgage loan, the overall balance will be reduced.
Hence, it would be best to make advance or bigger payments for your mortgage so that you can reduce the amount of years it will take for you to fully pay your mortgage. But, you cannot pay the entire amount of your mortgage in less than 5 years. Since there is a rule stating that homebuyers can only pay a maximum of 20% of the total loan amount in a year, you cannot pay your mortgage loan in less than 5 years. If you wish to do so, you need to pay for a prepayment fee.
How to Pay Off a 15-Year Mortgage in 7 Years
Paying off a 15-year mortgage in 7 years is not hard if you have the money. You can simply call your mortgage lender and ask them how much you should pay on a monthly basis so that your 15-year mortgage will be paid in just 7 years. There are plans, such as making bi-weekly payments that will enable you to cut the mortgage duration in half. This will not only make your free from debt early on but will also allow you to save more money since you are reducing your interest on your loan.
You can also calculate the amount that you need to pay on a monthly basis on your own. You just need to determine how much you owe as well as the interest rate applied to your loan. Calculate how much you need to pay in 7 years by dividing your entire loan by 7 years or 84 months.
How Long After Bankruptcy Can I Get a Mortgage?
You need to wait for at least 2 years before you can get a mortgage after a bankruptcy. Make it a point to take a look at the bankruptcy discharge date, and not the filing date, to get an accurate calculation. Since the filing date and the discharge date are not the same, you need to be careful in noting these as these will determine when you are qualified to apply for a mortgage loan.
If you happen to file for a mortgage loan application before the span of 2 years, your application will be turned down. This can set drawbacks on your financial plans since the money that you have spent in processing your documents will be in vain. Hence, you need to be careful in calculating the days when filing for a mortgage loan for the first time after your bankruptcy discharge.
How Does a Reverse Mortgage Work?
Reverse mortgage is a type of mortgage applicable only to older homeowners – 62 years old and beyond. It is a type of loan that allows older homeowners to turn their equity into cash. The lender will pay the borrower their equity as a loan so that the borrower can use the cash for various uses. It is like selling the house back to the lender. The borrower also won’t have to pay for monthly mortgage fees.
After the borrower has passed on, the lender has the right to sell the house as payment for the reverse mortgage loan. This means that the payment for reverse mortgage can only be done when the homeowners has passed away.
How Much Equity Do I Need for a Reverse Mortgage?
Typically, reverse mortgages are equal to 50% of the home’s total value. This means that a homeowner should have paid at least half of the home’s total value before they can apply for a reverse mortgage loan.
Borrowers can convert as much as 80% of the total property price to cash. Hence, if the borrower has already paid 80% of their loan, they can convert it all into cash when applying for a reverse mortgage loan. It is important to note that the closing costs of the house will be covered by the borrower. This means that the equity left to the lender should equate to amount that will be used for the closing. This usually equates to around 5% of the total house cost or value.
How to Lower My Mortgage Payments?
The best way to lower your mortgage payments is to pay a higher down payment upon purchase. Since the loan amount will be smaller, the monthly payments of your mortgage will be smaller as well. The interest that you need to pay will be reduced as well since you are reducing the total amount that you are going to borrow from your mortgage lender.
Avoiding mortgage insurance will also lower your monthly mortgage payments. Since you won’t have to pay for insurance, your monthly payments will be reduced. This is only possible if you have paid for a larger down payment upon purchase as well. Since you are showing that you are not a risky borrower and you have a very small chance of defaulting your loan, your lender will see you as a trustworthy borrower and won’t require you to have your mortgage insured.
How Many Mortgage Payments Can I Miss Before Foreclosure?
Missing mortgage payments can be frightening since it signals that your home can be foreclosed in the near future. But, it will take at least 3 months of missed payments before your mortgage lender will send you a notification that your house will be foreclosed if you do not take action immediately. There are also circumstances when you can miss mortgage payments up to 4 times before your house is foreclosed.
- First missed payment
When you missed payment for the first time, you will be given by your lender a grace period of fifteen days. During this grace period, you can pay for monthly mortgage fee without being considered delinquent.
If you fail to send in your payment after the grace period, you will be charged a late fee which is around 2% to 5% of your monthly mortgage fee. Your delinquency will be noted and processed to allow the lender to track the status of your mortgage.
- Second missed payment
The second month you miss your mortgage payment your mortgage lender will contact you and inquire why you have been missing payments. Your account is already considered at default and the lender will be more aggressive in following up with the payments.
Make it a point to answer their calls and explain yourself so that you will not appear to be evading your responsibilities. Explain your situation and assure them that you are finding ways on how to update your mortgage payments as soon as possible.
- Third missed payment
When you miss the third payment of your loan, a demand letter will be sent to you, requiring you to settle your account within 30 days. Though you can still make arrangements with your lender, you are in the brink of foreclosure unless you settle your dues.
You will also have to pay the fees incurred due to your missed payments, which can add to your overall loan balance. Foreclosure proceedings will begin once you were not able to pay your dues after 30 days upon receipt of the demand letter.
- Fourth missed payment
If you still can’t pay your dues on the fourth month, the foreclosure process will be underway. You will not only pay the delinquency fees, you also need to pay the fees of the legal counsel that will make arrangements with you due to your delinquency. This will continually add up to your dues and overall loan balance, which can be overwhelming to pay.
If you can make out an arrangement with your mortgage lender, do your best to comply with these arrangements to avoid having your home foreclosed.
During the foreclosure process, you can stay at your house. But, the process of foreclosure is on its way and the mortgage lender is already making arrangements to sell your house to a different party.
You will be sent a Notice of Default at first. During this time, you will be given another 90 days to settle your dues. If you still cannot pay the fees, a copy of Notice of Sale will be sent to you to let you know that your house will be put up for sale. The house will be put on auction to allow interested parties to bid on the property. This will be done 21 days after you have received the Notice of Sale. Once the house is sold, you are required to move out to allow the new owner to move in.
You should try not to miss payments so that you won’t have to worry about your property being foreclosed. Making payments on time will also increase the trust of your mortgage lender to you, which will provide you with advantages since you are not seen as a borrower with a high risk of defaulting your mortgage loan.
Due to this reason, it would be best to review your finances first before jumping on a mortgage loan offered presented to you. Do not get a loan that will make it hard for you to have legroom since future circumstances are uncertain and there may come a time when you won’t be able to pay high mortgage fees. It is best to choose a mortgage loan that is only a quarter of your net income. This should be your maximum percentage to avoid missing loan payments.
As you know by now, a mortgage is a massive responsibility. Hopefully, this article has given you the knowledge required to ensure that you’ll be making the right decision.