Home Loans

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Who Gets a Mortgage?

Mortgages are a way to buy a home without having all the cash up front. Most people who buy a home do so with a mortgage. A mortgage is a necessity if you can’t pay the full cost of a home out of pocket. There are some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off. For example, investors sometimes mortgage properties to free up funds for other investments. Mortgages also offer a tax shelter, tax incentives, and allow you to strengthen your credit.

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How Does a Mortgage Loan Work?

When you get a mortgage, your lender gives you a set amount of money to buy the home. You agree to pay back your loan – with interest – over a period of several years. You don’t fully own the home until the mortgage is paid off. The interest rate is determined by two things: current market rates and the level of risk the lender takes to lend you money. You can’t control current market rates, but you can have some control over how the lender views you as a borrower. The higher your credit score and the fewer red flags you have on your credit report, the more you’ll look like a responsible lender. In the same sense, the lower your DTI, the more money you’ll have available to make your mortgage payment. These all show the lender you are less of a risk, which will benefit you by lowering your interest rate.

Getting Pre-Approval

Pre-approval is a very important stage of confirming your creditworthiness without having a purchase contract in place. This is different from being “Pre-Qualified” which is a faster and less reliable status. You will complete a mortgage application and the lender will verify the information you provide. They’ll also perform a credit check. If you’re pre-approved, you’ll receive a pre-approval letter, which is an offer (but not a commitment) to lend you a specific amount, typically good for 90 days. Not only will a Pre-Approval letter allow you to make offers, it will also give you and your realtor the ability to tour homes and also provide you with the critical information about your affordability range so you can feel confident about the types of homes you look at and the type of offers you would feel comfortable making.

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What Information do I need to provide for Pre-Approval?

While the below list gives you an idea of what documents you’ll typically be asked to provide, some loans have more moving parts than others and additional documentation may be required.

  • Last 2 years of signed federal tax returns (all pages, all schedules)
  • Last 2 years of W-2s and/or 1099s
  • Last 2 months of pay stubs that show your most recent income
  • Last 2 months of bank statements (all numbered pages)
  • Credit Check (reach out if you’d like some essential tips on improving your credit score)
  • Down Payment Amount and Desired Mortgage Amount
  • Any financial gift contributions (financial support from family members)

Costs to Consider

Types of Loans

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Mortgage Breakdown

As homebuyers begin searching for a home, one of the most frequent questions they ask themselves early on is, “What can I afford?” Answering that question involves far more than just the price of a home. Beyond the amount borrowed and the term of the loan, the main components that determine your monthly mortgage payment are the principal, interest, taxes and insurance (PITI). 

Principal & interest (P&I) + taxes (T) + insurance (I) = PITI

 

Principal

The principal is the repayment of your loan amount (the amount of money that is borrowed for a mortgage). The principal amount owed goes down when borrowers make regular payments, so long as it is not an interest only loan. This is the portion of the payment that is used to reduce the balance you owe. It may be obvious, but the larger the balance, the higher the mortgage payment.

Interest

Lenders charge interest on a mortgage as a cost of lending you money. Your mortgage interest rate determines the amount of interest you pay, along with the principal, or loan balance, for the term of your mortgage. Mortgage interest rates determine your monthly payments over the life of the loan. There is a direct correlation between the interest rate and the size of your payment—lower rates result in lower payments.

Taxes

Whenever you obtain a mortgage, state, and local governments enforce a mortgage recording tax to document the loan transaction. This fee is separate from mortgage interest and other annual property taxes. Since it is state-imposed, the mortgage recording tax must be paid to the government when you register a mortgage.

Insurance

This can include homeowner’s insurance (property insurance, plus flood insurance, and private mortgage insurance, if applicable). Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Only borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Your specific mortgage and the property you purchase could include other factors that affect what you owe each month. Ask your loan officer for more details on your monthly mortgage payment breakdown.

Actionable Steps to Maximize your Loan

Applying for a mortgage is never simple, but it’s even trickier when you don’t know what to expect. If you’re preparing to buy a house for the first time, you can make the process easier on yourself by learning as much as you can ahead of time, before you’ve found your dream house. Knowing what to expect allows you to plan ahead and improve your chances of getting a mortgage with favorable terms.

​​​​​​​Know your Budget​​​​​​​

If you want to qualify for a mortgage on your first try, it’s important to know how big of a loan you can reasonably afford. Lender’s figure this out by looking at your debt-to-income ratio (DTI): the percentage of your income that you’re spending each month to pay your debts, among other things.​​​​​​​

Improve Your Debt-to-Income Ratio​​​​​​​

When applying for a pre-qualification, if you are told that you won’t qualify for a big enough loan to afford a house in your area, you can take steps to improve your DTI before you start house shopping. There are two ways to do this: 

1. Increase Your Income. You’ll qualify for a bigger home loan if you make more money. Start thinking about how you can get a promotion, move to a higher-paying job, work more hours at your current job, or start an income-generating side business. 

2. Reduce Your Debt. Making more money isn’t always an option. For most people, it’s easier to improve their DTI by paying down other debts, such as credit cards, student loans, or auto loans.

Save Up for a Down Payment

If you have no other debts to pay off and you can’t increase your income, your best option is to shrink the size of the home loan you need. The easiest way to do this is to save up a bigger down payment. As a bonus, if you can manage a down payment of at least 20 percent, you won’t need private mortgage insurance, which will lower your monthly payment.

Boost Your Credit Score​​​​​​​

When you apply for a mortgage, having a good credit score is a huge advantage. It will allow you to qualify for a better interest rate, saving you thousands of dollars over the life of your loan.

​​​​​​​Know Your Loan Options​​​​​​​

Before you start shopping for a mortgage, learn about the different loan options available to you and what they have to offer. Here are a few things to look into:

-  The difference between fixed-rate and adjustable-rate

- FHA and VA home loans

- Special programs for first-time homebuyers in your state

- Factors that affect your interest rate, like loan term and points

- Types of fees you may need to pay on a home loan

Find the Right Lender

Once you know what you want in a home loan, it’s time to start looking for a lender. I am happy to help you navigate this critical step. There are four important things to look for in a mortgage lender: 

1. A good understanding of the mortgage business. The lender should know all about the different loan options you researched above, as well as any special rules that apply in your local area. 

2. A good overall reputation and performance track record. You want to make sure your client can handle important deadlines and does not have a record of making escrows fall through. 

3. A competitive advantage in the offer process. A good lender can help you make the most competitive terms of your offer by being able to handle a shorter escrow and shorter (or waived) contingency periods.

4. A good deal. This means more than just the interest rate – look at the combination of interest rate, points, and other fees to see which lender can give you the most bang for your buck.

Get Your Paperwork in Order

Once you’ve found the right loan and the right lender, the last thing to do is gather together the documents you’ll need to apply for a mortgage. For starters, most lenders will expect to see your pay stubs from the past month, your tax returns from the past two years, and a few months’ worth of bank statements. Other important documents include credit card and loan statements and proof of your assets, such as retirement funds and other investments

The Process

Loan Terminology

APPRAISAL

An appraisal is a written report, produced for the lender, that estimates the value of a property. The loan amount must not exceed a specific percentage of the appraised value. The appraisal typically occurs once your loan file has been prepared with all required documents, you’ve chosen your loan program, your rate lock preferences have been established and the inspection has taken place.

APR

Annual percentage rate (APR) is the interest rate you’ll pay for your loan on an annual basis plus any additional lender fees. You’ll usually see APR expressed as a percentage.

PRINCIPAL

Your principal balance is the amount that you take out in a loan. For example, if you buy a home with a $150,000 loan from your lender, your principal balance is $150,000.



TERM

Your mortgage term is the number of years you’ll pay on your loan before you fully own your home.

PRE-APPROVAL

A preapproval is a document that tells you how much you can afford to take out in a home loan. Preapproval is the first step in getting a mortgage.

DOWN PAYMENT

Your down payment is the initial equity you will hold on the property once you close. Everything outside of your down payment will be money you borrow from the lender. You’ll usually see your down payment listed as a percentage of the purchase price of the home.

TITLE

A title is proof that you own a home. Your title includes a physical description of your property, the names of anyone who owns the property, and any liens on the home.

 

HOME INSPECTION

An inspection tells you about specific problems in the home. An inspector will walk around the home you want to buy and test things like the heating and cooling system, light switches, and appliances. I will help present you with options so you know exactly what you’re getting into with the property you are in escrow for while you still have the opportunity to back out of escrow with your deposit returned.

 

ESCROW

An escrow company holds money and documents between parties. As a neutral third party, the escrow company helps facilitate the homebuying and selling process in a professional manner that protects everybody involved. This is the period where inspections occur, loans are approved, appraisals are ordered, the seller gets paid, and the buyer gets formal ownership of the home.

Download this Comprehensive Home Loan Guide from a Recommended Lender

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Work With Andy

My expertise and skills, combined with one-of-a-kind resources, reputation, and access to discerning clients and agents that the Compass global brand provides, are powerful advantages that help you successfully sell or purchase luxury properties. I look forward to connecting with you.

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