There are several different types of mortgages available for home purchase. Below is a brief overview:
Fixed-Rate Mortgage: The interest rate is set for the full length of the loan. Because the monthly cost of fixed-rate mortgages stays the same each month, it is easier to plan a budget.
Adjustable Rate Mortgage: Otherwise known as an ARM, an Adjustable Rate Mortgage usually starts with a lower initial interest rate than a Fixed-Rate Mortgage. Once the set initial payment period has expired (often from 1 to 10 years), the monthly payment amount changes. However, ARM mortgages feature an adjustment “cap” which limits the interest rate increase. This is an important feature as it can help protect ARM consumers from experiencing too large an increase in their monthly payment. ARM mortgages are particularly attractive if the home purchaser does not expect to live in a particular home for a long period of time, or for those who expect their income to increase over the course of the mortgage loan.
Mortgages are most commonly set for a period of 30 years, but may also be for periods of 15 years, 20 years or 25 years. The sooner a home buyer repays a mortgage, the greater the interest payment savings. However, a 30 year mortgage will ordinarily incur a lower monthly payment than a 15 year mortgage.
Home buyers need to take into account several considerations before deciding upon a particular mortgage, such as:
- Current Budget
- Long-term spending patterns
- Expected income over the course of the mortgage loan
- Expected period of time in the new home
Once you have decided upon a particular mortgage to apply for, you will need to provide the mortgage lender with the following:
Employment Information: Details of all your employers for at least the past 2 years.
W-2s: Copies of your W-2s for at least the last 2 years. You may also provide additional information on social security, pension, interest/dividends, rental income and child support or alimony.
Pay Stubs: Pay stubs that cover the 30-day period before the date of your mortgage application.
Federal Income Tax Returns: If you are self-employed, or if more than 25% of your income comes from commission, overtime or bonuses, you may need to provide complete copies of the Federal Income Tax Returns that you filed for the last 2 years.
Bank Statements: You may be required to provide statements from all of your accounts including checking, savings, mutual funds, money markets, certificates of deposits, 401(k), and retirement accounts for the last two months. These items are used to verify the exact amount of cash you have available for your down payment and any other costs incurred with the purchase of your new home.
Debts: You will be asked to provide all information in relation to credit accounts – loans, credit cards, child support and any other payments you make each month.
Once You Have Submitted all the Necessary Paperwork…how will your application be assessed?
A variety of factors are involved in the approval of a mortgage application:
Income: Mortgage lenders will usually use your gross income to determine the monthly mortgage payment you can afford. This may also include overtime pay and commissions and should take into account child support or alimony.
How much mortgage can you afford? Mortgage lenders will usually stipulate that your total monthly mortgage payment (principal, interest, property taxes, mortgage insurance, hazard insurance/homeowner’s policy and homeowner association costs if applicable) are no more than between 28% and 33% of your monthly gross income.
What about your debt? Do you have a car loan, student loans, credit card debt, child support, alimony or other expenses to consider? Mortgage lenders will usually stipulate that the total of all such monthly expenses does not exceed 38% of your gross monthly income.
Credit History: This is very important. Before even applying for a mortgage everyone should have checked their credit history to ensure that all the information listed on their report is accurate. (Go to the Credit Management area of the site to find further information on this.) In order to be approved for a mortgage, lenders will usually require a satisfactory record of paying bills on time.
Employment History: Mortgage lenders will look more favorably upon mortgage applicants whose incomes have steadily increased over the past several years. In addition, mortgage lenders may look for consistency – applicants who have worked in a similar field for a substantial amount of time are likely to be looked upon as less of a ‘risk’ than those who have moved from career to career. As already mentioned, mortgage lenders will verify your employment status and may require additional information on your employment history.
Property Appraisal: The property you wish to purchase will be appraised to determine its true value. The appraisal is based in part upon the home’s condition and relative home prices in similar areas in order to confirm that the property is worth what the purchaser is willing to pay for it.
Costs and Fees Associated With Getting a Mortgage:
Down Payment: When you take out a mortgage, many purchasers are required to provide a ‘down payment’. This is often between 10% and 20% of the total house price. However, the amount required for a down payment varies depending on the type of mortgage chosen, the purchase price of the property and the applicant’s financial situation.
Mortgage Insurance: If your down payment is less than 20% of the home purchase price, the purchaser will probably be required to pay some form of mortgage insurance. Mortgage Insurance allows the home purchaser to buy a home with a lower down payment than the lender would otherwise require.
Closing Costs: These are the costs incurred for processing the mortgage and transferring the property ownership from the seller to the buyer. Closing costs can range from 3% to 5% of the loan amount. Closing costs may be affected by where the property is located, the mortgage chosen and the closing date. It may be possible in certain situations to add the closing costs to the mortgage. Here is an overview of what makes up closing costs:
- Origination Fees – the costs of processing the mortgage (including property appraisal and survey).
- Items paid in advance – such as first year mortgage insurance premium, first year hazard insurance premium and first year flood or earthquake insurance premiums, etc.
- Escrow Account – this is an account held by the lender into which the home buyer usually pays for city/county property taxes, mortgage insurance, hazard insurance and flood or earthquake insurance, etc.
- Title Insurance Charges
- Recording and Transfer Charges
- Attorney’s Fees
