Sheryl Simon's Blog
If you’re in the market to purchase a home, it can be a confusing process. Interest rates, types of loans and what may apply to you can all sound like a foreign language. It’s always best to have some background knowledge before going to see a mortgage broker to make sure you’re on the same page. Although there are many components to the process, one of the main elements that directly affects you is the type of loan you qualify for. Here’s a quick guide:
You may want to build a home on a specific piece of land. Most banks offer up to 85% of the price of the land for residential and investment purposes.
These loans finance the purchase of a new residential property or home from previous owners. There are many categories: fixed-rate, adjustable-rate, conventional, jumbo, FHA, VA, USDA and bridge. Each one has elements that mortgage brokers use to determine whether you would be a good candidate for that type of loan.
If you’re looking to construct your home from the ground up, this is the type of loan you will be considered for. The loan and application process is a little different from a standard home purchase loan. If you want the loan to be included as a part of the total price of the house, the land should have been bought within a year.
Even if you’re purchasing a home, you may decide you need to expand it. These types of loans work differently if you are purchasing the home, so working with a mortgage broker will provide more insight.
These four loan options may directly impact your decision and ability to purchase. When considering the type of loan you are seeking, you should also think about where you want to live and how long you plan to stay there. Each specific type of mortgage loan may require different amounts for a down payment, have different standards, require mortgage insurance and interest.
The type of mortgage loan and interest rate will also affect your monthly payment. A mortgage broker should be able to help choose wisely to save money in a number of areas. The most important thing to remember when searching for a home loan: they are not one size fits all. Every home loan is dependent on your current circumstances, credit rating and income level.
Everything may sound confusing right now, but you have a good foundation to work from. As your mortgage broker walks you through the process, you'll be able to identify those loans that may be mentioned without feeling like you're lost. Being educated on what's out there can also help ask the right questions. Although a mortgage broker is designed to help you get the loan you want, they also want to make money too. Working with one that appreciates your knowledge (even if limited) is key. Good luck!
Owning a home can be an amazing experience. But interest from your mortgage accumulates over time, leaving you to seemingly pay an arm and a leg to finance your home. But while you may think that paying off your mortgage early is a great idea, that isn’t always the case.
You May Have Other Debt
Paying off your mortgage early can save you on interest costs, but you more than likely have other debt to deal with. If you have other debts — like car loans, student loans or credit card debt — then these should be paid off first. Try to focus on your debts with higher interest rates; these tend to be associated with credit cards. After you’ve paid those debts off, then moving on to pay off your mortgage could be a good choice.
You Don’t Want to Go Broke
Paying off your mortgage may sound great and all, but you must consider all of your expenses, including possible emergencies. Saving on interest is very tempting, but it shouldn’t come at the expense of your emergency fund. You never know when something serious will happen, so do your best to set aside some cash. If you have hefty savings and all of your expenses are accounted for every month, then you can move on to paying off your mortgage early.
Consider Your Future
Many people try to pay as much as they can towards their mortgage, only to find out that they used up all of their money. While they have some big expenses and big life changes that cost money, now they have to save up in order to cover those costs. That being said, it’s best to think about your future before paying more towards your mortgage. Are you planning on having kids? Thinking of going back to school? With how frequent life changes, you never know when you could use money down the road. While it might seem like a great plan to throw money at your mortgage payment, think about your life goals and how your finances fit in that equation.
It Can Be Beneficial
Although we’ve made some points above that suggest that you shouldn’t pay off your mortgage early, it can still be very beneficial to do so. Let’s say your household is doing very well with finances and money is pouring in quickly. If your other debts and finances are taken care of, then paying off your mortgage early can help you save on interest; the larger amount you pay, the more you’ll save on interest. However, this can be a tough choice. Be sure to consider the points mentioned above before paying this loan off early.
Buying your first home can be stressful enough without worrying about whether or not your mortgage loan pre-approval is going to go through. You may not be prepared for the mountains of paperwork that you'll need to submit before a lender gives you the thumbs' up. That's why it's such a good idea to know the requirements before you narrow down your home search.
Here are the top items your mortgage broker or lender will need in order to pre-approve you for a loan.
1. Proof of Income
W2 employees will need paystubs, IRS 1040 forms, and copies of their W2 form for the last two years.
For self-employed individuals, and small business owners, the burden of proof is higher. In additon to 1099 MISC forms, you may need to submit a letter from your accountant stating that your business is still active and a profit and loss sheet.
2. Asset Information
In addition to the regular taxable income you are bringing in, the lender will want to see proof of other assets, including savings, investment accounts, and written documentation of a family member's intent to gift you money.
These assets will let the lender know if you can afford a down payment, pay for the closing costs on the loan, and have enough cash reserves to afford the transition into homeownership.
3. Employment Verification
Lenders want to know not just that you are employed but also that you are stably employed. Thus, they request a letter from your employer to verify your employment status and the salary you're earning.
Self-employed individuals will need to submit at least two years of their complete 1040 forms in lieu of this verification process.
4. Credit Information
Before they will pre-approve a loan, the lender makes a hard inquiry into your credit. You will need a credit score of at least 620 to qualify for a conventional mortgage loan or a Federal Housing Administration Loan with zero percent down. The government may approve borrowers for an FHA loan with a score between 580 and 620 if they are able to make a sizable down payment.
In order to qualify for the lowest interest rates available — typically the ones you see advertised — you must have a credit score of at least 760. In some cases, it is worthwhile to defer applying for pre-approval until you can raise your credit score. Why? A lower interest rate can save you tens of thousands of dollars over the life of the mortgage.
5. Personal Information
Finally, the lender will want to verify your identity by requesting copies of your driver's license, social security number, and signature.
Thinking of buying a home in the near future? You're going to need a preapproval. This tells real estate agents that you're serious about the home-buying process, and it alerts sellers that you're a solid, low-risk candidate. Preapprovals aren't always easy to score, however. And if you're someone who's had a few credit issues in the past, you may need to improve your credit score before your dream of home-ownership becomes reality.
Here's a checklist of best practices for prepping your credit to gain a preapproval:
Check Your Credit Reports
Before you ever approach a lender for a home loan preapproval, make sure you know what's on your credit reports. You're entitled to one free credit report each year from each of the three different reporting agencies:
Order credit reports for yourself and for anyone who will be a co-applicant on your home loan, and then scour your reports for inaccuracies.
File Immediate Disputes Over Inaccuracies
Any discrepancies you find should be reported immediately. It's an easy process of reporting the issue to the credit bureau and waiting while they go back to the creditor to verify what you've claimed. In most instances, the inaccuracy will be removed within a week or two, though you may have to produce receipts as proof of payment.
Contact Creditors to Offer Settlements
Make a list of old, unpaid debts that are valid and set aside the funds to pay them off, one by one. If you have cash-in-hand, call creditors and ask them to settle for a portion of the balance in cash. Some may be willing to work with you, others may not. But it never hurts to ask.
Pay Current Bills On Time
Stay current on existing accounts. Make sure everything is paid on time, from credit cards to car payments, to ensure you don't lose points on your overall score while you're working toward credit restoration.
Pay Down Your Debt-to-Income Ratio
Your debt-to-income ratio is an indicator of how responsibly you use your credit. The lower your ratio, the easier it will be to obtain a preapproval. Pay down big balances. The more credit you're able to free up, the more attractive you'll look to potential lenders. Prepping your credit to gain a preapproval is surprisingly easy, but it requires the funds necessary to pay off outstanding debts and to pay down current balances.
Start early if you suspect there are items on your credit report that require fixing, and be patient as things circle back around. Credit repair is not an overnight fix, but with steady progress, it won't be long until you have a preapproval for your new dream home.
Whether you’re a first time homebuyer or a seasoned homeowner, the terminology of mortgages can be confusing. Since buying a home is such a huge financial decision, you’re also going to want to make sure you understand every step of the process and all of the conditions and fees along the way.
In this article, we’re going to explain some of the common terms you might come across when applying for a home loan, be it online or over the phone. By learning the basic meaning of these terms you’ll feel more confident and prepared going into the application process.
We’ll cover the acronyms, like APRs and ARMs, and the scary sounding terms like “amortization” so that you know everything you need to about the terminology of home loans.
ARM and FRM, or adjustable rate vs fixed rate mortgages. Lenders make their money by charging you interest on your home loan that you pay back over the length of your loan period. Adjustable rate mortgages or ARMs are loans that have interest rates which change over the lifespan of your loan. You may start off at a low, “introductory rate” and later start paying higher amounts depending on the predetermined rate index. Fixed rate mortgages, on the other hand, remain at the same rate throughout the life of the loan. However, refinancing on your loan allows you to receive a different interest rate later down the road.
Amortization. It sounds like a medieval torture technique, but in reality amortization is the process of making your life easier by setting up a fixed repayment schedule. This schedule includes both the interest and the principal loan balance, allowing you to understand how long and how much money will go toward repaying your mortgage.
Equity. Simply state, your equity is the the amount of the home you have paid off. In a sense, it’s the amount of the home that you really own. Your equity increases as you make payments, and having equity can help you buy a new home, or see a return on investment with your current home if the home increases in value.
Assumption and assumability. It isn’t the title of a Jane Austen novel. It’s all about the process of a mortgage changing hands. An assumable mortgage can be transferred to a new buyer, and assumption is the actual transfer of the loan. Assuming a loan can be financially beneficial if the home as increased in value since the mortgage was created.
Escrow. There are a lot of legal implications that come along with buying a home. An escrow is designed to make sure the loan process runs smoothly. It acts as a holding tank for your documents, payments, as well as property taxes and insurance. An escrow performs an important function in the home buying process, and, as a result, charges you a percentage of the home for its services.
Origination fee. Basically a fancy way of saying “processing fee,” the origination covers the cost of processing your mortgage application. It’s one of the many “closing costs” you’ll encounter when buying a home and accounts for all of the legwork your loan officer does to make your mortgage a reality--running credit reports, reviewing income history, and so on.