Unless you’re paying cash for your new home, you’ll want to secure a home mortgage loan to cover the sale price of the property you choose. We’ve put together some information to help you understand the home mortgage process before you move forward to apply for a loan.
🏡 What is a Home Mortgage Loan?
A home mortgage loan is used to purchase a house or other residential property. Typically, mortgage loans are provided by a bank, credit union, or mortgage loan office. The financial institution loans you the amount needed to cover the cost of the property. In return, you pay them back with monthly payments that include interest on the original loan amount. Interest rates vary depending on factors such as your credit score, current interest rates, and duration of the loan.
💡 Different Types of Mortgage Loans
When it comes to mortgage loans, you’ll find there are different options. Most mortgage loans will require a down payment equal to 20% of the asking price of the home. However, in some cases you can get approval for a loan that requires a lower down payment.
Loan durations vary. The longer the length of repayment time, they lower your monthly payment. If you want a lower loan duration, you’ll pay more monthly. Which option you choose depends on the cost of the home, your financial situation, and your future goals.
There are other loans that are based on specific criteria. Loans of this type include VA Loans, FHA Loans, and USDA Rural Housing Loans. Down payments are typically low on VA and FHA loans. The USDA Rural Housing Loan has no down payment, but this type of loan is restricted to specific areas. FHA Loans are available for those with a lower credit score. VA Loans are only available to those who are military veterans.
When it comes to interest rates, there are two different types of loans that can be considered. You may have an option to choose between a variable rate or a fixed rate loan.
☑️ Variable vs. Fixed Rate Mortgages
A variable rate, or adjustable rate, loan allows you to pay back the loan and interest at current rates. Choosing this rate means that your monthly mortgage payment changes according to the interest rate going up or coming down. Many people choose this if an initial interest rate offered if extremely low. If your budget is flexible, this may be an option for you.
A fixed rate mortgage loan is given with a rate that is locked in at the beginning of the loan. With this type of loan, the interest rate may be increased after a period of year, but there is a cap on the increase. If you prefer that your monthly payments remain consistent, this is the best option.
✍️ How to Apply for a Home Mortgage Loan
Before you apply for a mortgage loan, you’ll want to get a copy of your credit report from each of the three credit agencies. Experian, TransUnion, and Equifax are required to provide you with a free report once a year due to the Fair Credit Act. Check for errors and past due accounts.
Next, you’ll gather all the paperwork needed to apply for and secure the loan. Doing this ahead of time will make the process move along a bit smoother. Items you’ll want to have on hand include a couple months of pay stubs, information on investments, past tax returns, any information on recent purchases, and proof of current residence. The bank or lender you choose may have different criteria before approval, so it’s a good idea to call ahead and know what to bring with you.
✔️ Getting Pre-Approved for a Mortgage Loan
It’s a good idea to get pre-approved for a mortgage loan before you begin searching for a home. This approval is beneficial for letting you know how much you can afford. Knowing what price range to search in will save you time and money.
A pre-approval is not the same as a pre-qualification. A pre-qualification simply gives you a general idea that you may be approved for a loan. An actual mortgage loan pre-approval gives you a definite answer of approval based on information provided and lets you know exactly how much the lender is willing to give you at that time.
There is usually a time limit on a pre-approval but having this in hand may gain you favor with sellers when it comes to a multiple offer situation on the home you’re trying to purchase.