Buying Your Own Home: What is a Mortgage Loan and How do you Apply for One?
Why Should You Think About Home Ownership?
Rethinking the Entire Idea of Home Ownership
Deciding to invest in a home is one of the biggest decisions of your life. With rising prices and escalating costs of living, renting always appears to be a more appealing option than buying. Very often, the cost of a home can sound overwhelming but if you understand how a mortgage works, you are less likely to feel intimidated by the process.
According to Forbes Magazine, Jed Kolko, Chief Economist of Trulia suggests buying a home is still cheaper than renting one.
Here are some valid reasons to buy a home rather than rent one:
- You can always explore the market for a good deal. Never stop with just one quote. Jeremy Grantham, Fund Manager at GMO, predicts that mortgage rates are on their way down and customers should take full advantage of the fact. Even small, seemingly insignificant discounts on the interest rates can add upto a sizable saving.
At this point, it’s important to mention that a good credit rating makes it easier to procure a mortgage loan at competitive interest rates as the lender is more confident of getting their money back.
- You have the opportunity to use your mortgage payments to save on taxes. It’s possible to deduct your mortgage interest or your real estate taxes from your income. Of course, the difference is more evident when your mortgage amount is larger, this way your tax deduction is more noticeable.
- You can sell your home for a tidy profit at a later date when the boom starts; something that you cannot hope to do with renting property. Your property becomes a valuable asset.
The trick here is that you should never stop with one quote. Collect multiple quotes and make a detailed comparison between lenders before signing on the dotted line.
What Exactly is a Mortgage Loan and Why do you Need One?
What is a Mortgage Loan?
A mortgage loan is a sum of money that allows you to purchase a home or property. The lender allows the applicant to borrow a certain amount of money that needs to be repaid over a stipulated time period at a specific rate of interest. In the event that the borrower fails to pay up the amount, the lending institution has the legal right to foreclose on the property.
It’s not everyone who can afford to buy a home with ready money unless you happen to be extremely wealthy. Most of us can probably afford to put down a ‘deposit’ or ‘upfront payment’ and pay the rest of the money in the form of a loan that runs over several years. A mortgage loan prevents the purchaser from having to pay up the entire cost at one shot.
In the event that you are planning to sell your current home and purchase a new one, a mortgage loan is useful to refinance your new home. Once you have repaid the principal sum plus the interest fully, you own the property ‘free and clear’ (without further debt to the mortgage lender).Mortgage loans are frequently referred to as ‘claims against property’ and ‘liens against property’.
What Documents do you Need for a Mortgage Loan?
How to Apply for a Mortgage
It can be overwhelming to handle all the paperwork related to the procurement of a mortgage loan. First-time home buyers feel more comfortable when they know what to expect and the information helps navigate the process in a smooth and hassle-free manner.
Deciding on the Budget
Decide how much you need to pay as down payment for your home. In order to do this, you must first decide on the house that you want to buy. To make it simpler and more practical, calculate your budget and the amount that you can afford to pay as mortgage installments. You can now go ahead and look for a suitable property that fits within your budget
Once you decide on the home, visit your lender or call them. You will be given a preliminary form to fill out details including your name, names of co-borrowers if any (homes can be bought jointly by spouses or partners), address, contact etc.
This is called a ‘prequalification process’. In order to prequalify, it’s crucial to have a respectable credit history. Your credit rating plays an important role in determining the amount and type of home loan that you qualify for. Mortgage lenders are seeking business and are happy to lend their money at interest. But a low credit score can reduce your chances of gaining access to competitive mortgage interest rates.
In the event that you have bad credit or do not have your credit history handy, you can consider consulting a home education counselor who will help you understand your options.
A home education counselor or housing counseling resources can help you:
ü Evaluate your spending budget and affordability
ü Explore different types of mortgage loans available
ü Understand debt repayment options
The documentation required for mortgage loans is extensive. Nowadays, lenders would want to see all the details of your financial history including a list of assets, employment details, income etc.
Documents required to apply for a mortgage loan include:
Paycheck stubs refer to verified copies of your paycheck. Employees that get paid by their companies electronically (the salary is wired into their bank account) can gain access to stubs very easily through websites that print them. For others, you may have to request your company to provide you with verified salary statements.
Mortgage lenders typically require paycheck stubs for two months.
Bank, Investment and Tax documentation
US-based borrowers must also supply a copy of the W-2 document. The W-2 is a federal tax form that states the amount of taxes deducted from the salary of an employee.
Lenders will also require bank and investment statements for one month. For borrowers who want a ‘jumbo loan’ (you want full underwriting for the loan), the lending institution may ask for bank and investment statements for the last 3 months.
Self-employed borrowers may also be asked to provide full and complete copies of their tax returns. As a matter of fact, it has become the norm for lenders to request all borrowers to provide tax returns to reduce the chances of loan fraud.
Profit and Loss Statement
This is particularly relevant to self-employed professionals. In the past, business owners could often avail of mortgage loans without providing the profit and loss statement. This is no longer true; you have to provide a detailed financial statement for the current year, especially if it’s already past mid-year. ‘Stated Income’ is no longer an accepted term in mortgage application forms.
Income from Rentals
If you plan to rent out your current property or already receive rent on other properties, you may need to provide copies of the rental agreement, proof of rent (receipts, bank statements) as well as canceled rent checks. Sometimes, a professional appraisal of the borrower’s current properties may be required and the borrower is expected to pay appraisal costs.
If you receive the down payment as a gift from a relative, spouse or parent, you may have to provide what’s called a ‘gift letter’. The gift letter should specify that the down payment is a gift and not a loan. Some lenders may also request for the bank statements of the person giving the gift as well as the recipient who receives the gift amount. You may have to submit copies of canceled checks.
If you are currently renting a home, you may be asked to provide canceled rent checks for the last 12 months. The objective is to verify your reliability and financial veracity as a borrower. If you have been divorced in the past, you may be asked to provide copies of your divorce decree. Similarly, if you plan to use your child’s support to pay off your mortgage, you may need to submit proof of your child’s income.
Other important documents may include bankruptcy discharge documents (evidence that bankruptcy charges were cleared and that you are now solvent). If you have a negative credit score or bad reviews on your credit history, you may need to provide documentation in order to explain the anomalies.
Tips to Increase your Chances of Mortgage Loan Approval
- Ensure that you provide clean, legible copies of all documents. Avoid erasing or whiting out information as this may appear suspicious to the lender
- Even if there are blank pages in your submission, make sure they are included. For example, if your tax returns say ‘page one of five’, include all five pages even if page three is blank
- Avoid postponing the process of document procurement. Once you have been prequalified for the loan, try and put together all the required documents as soon as you are able.
This is because lenders require current and updated documents. For example, if you delay getting the documents, your paycheck stub may be outdated and you may need to apply for current ones
Mortgage loans allow you to purchase a home or property without having to pay up the entire amount at one shot. You can work out a convenient spending plan with your lender. A spending plan may involve monthly, quarterly, half-yearly or annual payments.
It’s important to lock in competitive interest rates when you negotiate the mortgage payments. Mortgage interest rates are notorious for fluctuation; they are impacted by shifting dynamics in the property market as well as by the general state of the economy. This is why it’s a good idea to ‘fix’ the interest rate at the time you start to fill out your application. This way you gain benefit of a competitive rate even if the market slumps in the long run.
On the other hand, if you feel that the rates are expected to decrease during the year, you may to want to wait until you lock in the rates. Mortgage rates must be locked in before the closing documents are prepared.