Home Loan Tips: Everything You Need to Know About Home Mortgage Loans
Buying a home is going to be one of the biggest purchases that most people will ever make. Most mortgages are for 15 or even 30 years and you’re financing hundreds of thousands of dollars over that time frame. You want to learn everything you possibly can to not only make yourself look like a great candidate to lenders, but also so you can save as much money as possible. Spend some time reading up on everything you need to know about home mortgages and catch the home loan tips at the end that can save you tens of thousands of dollars.
WHAT ARE HOME MORTGAGE LOANS?
Mortgages, or home loans, are secured loans that are funded by financial institutions that allow borrowers to purchase property or real estate, typically a home. Since this is a secured loan, the house is used as collateral and will become the property of the financial institution should the borrower not be able to make payments and defaults on their loan. However, once the mortgage is paid in full, ownership of the house transfers to the borrower.
TYPES OF HOME LOANS
Fixed Rate Mortgage
As the name implies, a fixed rate mortgage is a home loan that has a fixed interest rate for the entire life of the loan. This is the simplest type of mortgage since you’ll have the same payment month in and month out for 15, 20, or 30 years or however long you’re paying off your mortgage.
This type of home loan is the easiest to shop around for because you know precisely how much your monthly payments will be as well as how much the mortgage will actually cost you. You’ll be able to see how much of a difference that a shorter loan and different interest rates affect the overall cost of the loan. This will grant you the foresight you need to plan out your budget and finances to determine which financial institution is giving you the best deal and how it’ll affect your monthly budget.
Adjustable Rate Mortgage
This type of home loan is one that has a variable interest rate that can, and probably will, change throughout the life of your loan. This is a double edged sword before you might get lucky and see your interest rate decrease which would translate to a lower monthly bill, but it can also increase and cost you more money each month.
Interest rates usually change every 2 -3 years and there’s really no telling what the market will look like 5 / 10 / 15 years from now. There could be another market crash or we could see interest rates spike and that could spell disaster for you.
You can’t get a second mortgage without having one first so as you can imagine, these aren’t for buying property. Second mortgages are loans that are taken out against the equity you’ve built paying off your mortgage and added to your original mortgage. These loans are typically taken out for large home improvement projects or paying for a child’s college education.
Refinancing your mortgage can be a great way to lower your monthly payments by finding a lower interest rate at a different lender. The great thing about the refinancing process is that A) you can change loan types, i.e. from adjustable to fixed rate, B) lenders desperately want your business and are willing to give you lower interest rates, and C) some lenders will let you borrow on top of your loan so you can fund a home improvement project by refinancing your loan.
PREPARING TO APPLY FOR A MORTGAGE
Applying for a home loan is one of the lengthiest legal processes you will ever go through and it requires a mountain of paperwork to complete. Before you get started, you’ll need to know what will be required so you can get all of your financial ducks in a row to make this process as painless as possible. Don’t be fooled by the 4 headlines below. This is a long process.
Credit & Income Check
Before this process kicks off, lenders will want to verify that you’re a good candidate for one of their mortgages and that means an in depth credit and income check. These are vitally important factors in your ability to qualify for a loan so if your credit is not in good standing, focus on re-building it first because you will be denied. If you’re lucky enough to be approved with poor credit, you’ll have a higher interest rate than other borrowers which will cost you tens of thousands of dollars over the life of your loan.
Naturally, your income is very important as well, but not just your net income. Your employment history is taken into account as well. You may be earning a great living, but if you just got the job or you’ve had half a dozen jobs in the last 9 months, you may be labeled as a high risk borrower. They may look at you as not having stable employment since it’s possible that you could lose that job or you quit it and jump to a new one in a few months.
Debt to Income Ratio
Just because you have a good job with a large income doesn’t mean that you have a lot of money. This is why lenders look at your debt to income ratio. Lenders will audit the total amount of outstanding debts, including the potential mortgage, you have and compare that against your income to see how much money you actually have. Pulling down $100,000 a year is great, but if you have $150,000 in outstanding debt from student loans, a car payment, and multiple maxed out credit cards, the likelihood of lender being willing to put a mortgage on top of that is incredibly slim.
Loan to Value Ratio
A mortgage’s loan to value ratio is all about calculating risk to the lender. The less you borrow when compared to the value of the property you’re looking to buy lessens the risk to the lender. This is why it’s so important to put a large down payment on your property. This not only shows the lender that you’re serious about buying, but that you’re financially responsible and a lower risk than other buyers.
Lenders will not approve a loan you can’t afford. They don’t want you to miss payments, default on the loan, and cause the house to go into foreclosure. To put it bluntly, they make more money if you pay off the loan for the full 15 or 30 year term. This is one reason why pre-approved are so popular and successful. Lenders “pre-approve” you for a loan up to a certain amount so you have a price ceiling when looking for a new home. However, you aren’t guaranteed to be approved for this loan.
Regardless, a good rule of thumb to use when you’re looking at houses is that your mortgage should be less than 28% of your monthly income or roughly equal to 2 1/2 years of income. If you stay under that amount, you shouldn’t have any problem paying your home loan.
Where to Get Your Home Loan
When it comes to getting a mortgage, you don’t have too many options, but that isn’t necessarily a bad thing. You’re about to finance hundreds of thousands of dollars over 15 years or more. You want to go through an institution that not only has extensive experience in home loans, but also one that will still be in business when you pay off your mortgage. No matter where you end up getting a home loan from, be sure to shop around as much as possible to find the best deal.
If you already have a checking and / or savings account through a specific bank, chances are good that they also offer home loans. An added bonus to this is that if you’re already in good standing with your bank, you can typically negotiate a better deal on your mortgage. However, banks can have a limited number of options when it comes to home loans that may not be in your favor and you may have to jump through a lot of hoops. This can slow down the overall process which can cause you to miss out on the house of your dreams if the timing doesn’t match up with the seller.
What’s a non-bank lender? Good question. These lenders are companies like Quicken Loans, PennyMac, LoanDepot, and others that offer loans to borrowers that banks and credit unions deem to be too high risk. Banks are out to protect themselves first and foremost so if you have less than stellar credit or a blemish on your credit report from 5 years ago, you’ll probably be declined. Non-bank lenders have more lenient lending criteria than banks and you may have better luck with them.
There’s nothing wrong with asking a wealthy family member, business partner, or friend of the family if you can borrow money to buy a house. While not everyone has this option available to them, getting a private lender to finance your home loan can net you a lower interest rate and free up a lot of the red tape that comes along with buying a home.
Home Buying Process
Purchasing a house is one of the longest processes you’ll ever be a part of. Even when it goes smoothly with zero hiccups and perfect coordination, the process can take weeks or months. This is why it’s so important to have all of your financial ducks in a row so you can act quickly when it comes time to move on a house.
Getting pre-approved for a mortgage will let you know how much you’re able to spend on a new home. This will either help you narrow down your choices into a specific price range or let you know that you need to go back to the drawing board to improve your financial standing before taking the next step. Getting pre-approved is easy. All you have to do is send some standard financial information to your lender to verify your financial standing and they’ll let you know how much they’re willing to let you borrow.
Shop for Your Home
With your pre-approval amount in hand, you now know the price range of your new home. .. At this point, you can either find a realtor and use them as a resource or you can do your own shopping through websites like Realtor.com, Zillow.com, or Remax.com to get started. Regardless of which way you go, you will need a realtor to handle the contacting & negotiating with the seller as well as the paperwork when it comes time to make an offer and, hopefully, close on your new home.
Make an Offer
Once you’ve found the home you want, it’s time to make an offer. You may offer the asking price for the home or you may offer less depending on a variety of factors, i.e. condition of the home, state of the neighborhood, how long the house has been on the market, how it stacks up against similar properties in the area, etc. Regardless of how your offer stacks up against their asking price, your realtor will extend it to the seller. If they accept, the house will go into escrow so you can start taking care of the paperwork and legal side of buying a home.
Have the Home Inspected & Appraised
Houses are expensive. You want to make sure that your new house doesn’t have black mold, structural damage, or any other type of hidden damage that can end up costing your thousands of dollars to fix a few years from now. Getting the house inspected will help uncover any problem areas so both you and the seller can review them before moving forward. If there are areas that need to be fixed, you can renegotiate your offer to be contingent on the areas being fixed or having the asking price reduced to cover the cost of repairs. (We recommend the former.)
After the home is inspected, your lender will have the house appraised to make sure that the asking price is a fair market value for the property. An independent third party will evaluate the property and come back with their unbiased evaluation of the home. This is another opportunity for you to renegotiate your offer if the appraisal is lower than the asking price.
Secure Your Home Loan
Once both parties agree on a price, it’s time to get the actual home loan. Since you’ve already been pre-approved by your lender, you’ll need to choose which type of home loan you want to go with and how you want to structure the payments. Some buyers prefer to a shorter loan to pay it off as quickly as possible where others prefer a longer loan with lower monthly payments. Which route you go is up to you and your current financial standing, but it’s always a wise idea to pay off your mortgage as quickly as you can.
You’re in the home stretch. Closing on a home is where all of the paperwork is signed and you’ll sign your name more times than you think is possible, but when you’re done, you’re done.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.