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The Ultimate Guide to Mortgage Loans

Purchasing a new home can be an exciting milestone in someone’s life. However, from putting in an application to saving up for a down payment, there are a lot of steps involved in getting a mortgage approved. Homebuyers may want to educate themselves on the process in order to avoid any unexpected surprises and maintain the momentum of any progress.

How are Mortgage Applications Reviewed?

When purchasing a new home, there is a step-by-step mortgage process. Before they even submit an application for a mortgage, homebuyers will have to put forth a lot of preparation. First, buyers should check their credit scores and ensure that it’s at a good place where they can get approved for a loan, specifically looking at factors such as payment history, debt-to-income ratio, and credit utilization rate. Buyers should also get a copy of their credit report and thoroughly check it for discrepancies. 

Though requirements may vary from lender to lender, applicants will generally need to gather the following documentation to present to the mortgage company:

  • Contact information
  • Proof of address
  • Government-issued ID
  • Proof of employment
  • Proof of income
  • Rental history
  • Credit report

What Does an Underwriter Look At?

Underwriters are an integral part of how mortgages are approved. After a homebuyer turns in their mortgage application, it is the underwriter’s job to examine it and make sure it aligns with the loan’s criteria. An underwriter will also examine the applicant’s finances, the value of the home, and the down payment. 

The following are a number of aspects that an underwriter examines:

Ability to Repay the Loan

The ability-to-repay rule is the determination a mortgage lender makes as to whether a potential borrower is capable of being able to pay off a loan they provide. An underwriter will evaluate this based on the homebuyer’s credit history, income, assets, employment, and expenses. They can also create a qualified mortgage, a type of loan with “stable features,” to follow this guideline.

Likelihood to Repay the Loan

A borrower’s likelihood of repaying a loan is largely determined by a person’s credit score and history. This is a means that many lenders use to evaluate the likelihood of someone repaying a loan—the higher the score, the better the likelihood, in the lender’s eyes, that the loan will be repaid. Factors like payment history and credit-utilization rate play a large factor.

The Value of the Home

As part of the process, an underwriter can have an appraisal done of the property to make sure the value aligns with how much the lender is offering. The appraiser will evaluate the property and place a value on it. The underwriter will then compare that to the loan amount. If the value is much lower than the loan, the application may get deferred.

The Source and Amount of the Down Payment

A down payment typically makes up between 3% to 20% of a person’s mortgage and can help lower their interest rate as well as minimum monthly payments. However, the source of a potential borrower’s down payment matters to underwriters. Borrowers can provide a down payment from their savings, gifts from family or friends, down payment assistance programs, home equity, etc.

Already Owning a Home Provides More Options

Mortgage rates have been at record lows due to the COVID-19 pandemic, but rates are beginning to rise once more. However, because the housing market is extremely competitive and the supply chain is causing issues for the construction of new homes, prices are up. Already owning a property, however, can give homebuyers an advantage.

Home Equity Loans

Home equity loans, also known as second mortgages, are a way for homeowners to utilize the equity they’ve built with their homes. Keep in mind that when an individual takes out a second mortgage, they are using their home as collateral on the loan. Also, when a person borrows against their home, they’re decreasing the equity they’ve built. To obtain a home equity loan, borrowers will need to follow home equity loan requirements.

Refinancing

Refinancing a home is a way for homeowners to potentially lower their interest rates, change their terms, and decrease their minimum monthly payments. With mortgage refinancing, a homeowner is essentially replacing their current loan with a new one. Because the homeowner is getting a new loan, they’ll still be responsible for paying closing costs, typically 2% to 6% of the loan. To learn more, read more

Exploring Adjustable vs Fixed Rate

When choosing a mortgage loan, potential borrowers will need to look at fixed-rate vs adjustable-rate mortgages. Fixed rates mean that a borrower’s monthly payments will remain the same throughout the entirety of the loan. Adjustable rates change throughout the life of the loan and can rise and fall along with the market. Fixed rates can allow borrowers to better budget for their mortgage payments while adjustable rates allow for more flexibility.  

Buying Your First Home

If you are about to buy your first property, there are just so many things that have to be done. That’s not to mention that it’s normally one of the costlier purchases most people make in their lives. It can seem as though a mistake could be extremely costly.

It’s normal and healthy to be a bit anxious about major life changes, such as buying a home. However, buying a home, for some people, can be a lot easier if they understand the mechanics of entering the real estate market. In our guide for first-time homebuyers you will find some additional support when making that leap.

Fixed-Rate or Adjustable-Rate Mortgages

If you are comparing mortgage options, you will come across these two primary types of mortgages. Fixed-rate mortgages are more common, but there is also a competitive marketplace for adjustable-rate mortgages. Understanding the difference between fixed-rate and adjustable-rate can go a long way in helping your decision-making. Your choice of mortgage type will determine the consistency of your interest rates and how much you end up needing to pay in interest. While the mortgage marketplace has plenty of both, knowing how each mortgage type can fit your needs might be important.

Worried about bad credit affecting your ability to get a loan? Getting a Home Equity Loan with Bad Credit is possible. Read more to understand how bad credit affects the borrowing process.