Most people dream of owning a house. It makes more economic sense in the long term and there is plenty you can do with the money that you save when you finally move from a lease to a full home ownership.
But getting there can seem like a stretch for someone attempting to access a mortgage for the first time.
Is it really this hard or are we blinded by what we don’t know about mortgage financing? We’ll go with the latter, this is because when you finally get down to the details and the small pieces of the puzzle start to come together, everything becomes so much clearer.
You can now articulate what didn’t make sense before and you will understand how the process works from start to bottom. This article is meant to answer any questions you may have on mortgage finance acquisition and simplify the process for you.
What Mortgage Programs are Available?
Mortgage loans come in a wide range of options. Your choice will depend on how big you want the loan to be, how flexible you want the repayment to be, and how long you want the loan period to be. Let’s look at the broad categories below:
Conventional versus Government-Insured Mortgage
These types of mortgage loans are exactly what the names depict. Conventional loans are the regular loans where the onus of paying off the loan is on you and you alone.
Government-insured mortgages are guaranteed by the federal government as a way of protecting the lender in the event that you default. They come in different types, with the most common ones being Federal Housing Administration (FHA) mortgages, US Department of Agriculture (USDA) mortgages and the US Department of Veterans Affairs (VA) loans.
FHA mortgages are open to anyone and attract a low down-payment of only 3.5%. USDA loans are managed by the Rural Housing Service and are only available to rural residents who fulfill certain income requirements. The VA mortgage offers 100% financing and is open to military officers and their families.
The FHA also offers a sister program, the Streamlined-K mortgage loan, where the borrower can access an additional loan to fix up the home. Once you access a Streamlined-K mortgage, it is combined with the original FHA mortgage and rolled into one loan.
The biggest disadvantage of government-sponsored mortgages like the FHA is that you have to pay for the mortgage insurance, which increases your monthly loan payments.
Fixed Rate versus Adjustable Rate Mortgages
Fixed-rate mortgages attract the same interest rate throughout their duration. The biggest advantage of this type of loan is that you know exactly what your loan repayment obligations are for the entire loan period: It’s the same amount each month.
Adjustable-rate mortgages are different in that the interest rate changes from year to year. Usually, this mortgage attracts a fixed a rate for the first few years but switches to an adjustable rate for the latter part of the loan payment.
Conforming versus Jumbo Mortgage
Conforming loans are loans whose size falls within the guidelines outlined by Fannie and Freddie, the two institutions authorized to buy and sell mortgage-backed securities.
Jumbo loans are those loans which exceed the loan limits set by Fannie and Freddie. In other words, they’re the opposite of conforming loans.
Jumbo mortgage loans attract higher interests because they’re considered high risk. They also demand a much higher down payment.
Swing loans are issued when a homeowner puts their home on the market, wants financing to buy another home, but hasn’t found a buyer for the first home yet. The lender gives you the financing and uses the house on sale as security.
Under reverse mortgages, the lender makes monthly payments to the homeowner instead of the homeowner paying the lender. It is only available for individuals above 62 years, who have adequate equity.
If you don’t feel confident about making a decision on which mortgage to choose, talk to a mortgage expert for guidance. It may save you from making a mistake that you spend years paying for.
Applying for the Mortgage
Pre-qualification and Loan application
Once you’ve chosen the type of mortgage you want, send in your loan application. This process entails providing the lender with your personal information, the estimated value of the home you’re buying and specific loan amount you’d like to borrow.
Note that before you can send in your application, the lender has to assess whether you qualify for the loan. This step is referred to as the pre-qualification and involves gathering information about your income, debt, and willingness to pay off the loan. They then use this information to determine the maximum loan amount you can borrow
The next step involves the lender sending you the loan estimate, which is basically a document detailing all the important information about the loan. It states the interest rate, monthly payments, total loan cost, estimates of tax and insurance costs, any penalties you may be charged and why, and if the interest rate will change in future.
The intention of the Loan Estimate is to explain the terms of the loan and is meant to help you decide whether you want to go forward with the loan or not.
Indicate your intent to proceed with the loan
If you choose to proceed with the loan, communicate the same to the borrower within 10 days. If you take longer than 10 days, the borrower may have to prepare another Loan Estimate with revised terms to reflect the market changes that have likely occurred within this period.
When the lender receives your confirmation, they begin processing your loan. This is a thorough process that involves scrutiny into the credit report, home appraisal and title report. The lender verifies your banking history and follows up on things that may need additional action.
The lender will then request you to submit additional documents such as Rental Agreements, W-2 forms if you’re employed, tax reports for the immediate two-year period if you’re self-employed, etc.
An appraisal on the property is done to determine the value.
The underwriter then decides whether to reject the loan, approve the loan, or suspend it until the borrower provides further documentation or information.
Now that you know what to expect when taking a mortgage, you can make an informed decision on which mortgage to choose.