Purchasing a home is often associated with “The American Dream”. A three-bedroom, two-bathroom house, with a white picket fence, and an Elm Tree-lined street. But before reaching this dream, a mortgage may be in order.
Applying for a mortgage isn’t the hard part—it’s gathering the required documentation, getting finances in order, and deciding on the appropriate type of loan that can get tricky. Here are a few items to consider before the mortgage can be approved.
When it comes to getting clients pre-approved for a home loan, sometimes the hardest part is collecting all of the required documents. It can be helpful to provide a full list upfront and set a deadline to get all paperwork in. This can help shorten an oftentimes drawn-out process.
Documents verifying income, employment status, tax returns, tax documents like a W-2 form, lists of any assets and active debts, and any other important financial details.
Having a solid financial background is critical when it comes to a mortgage. Several fees and large down payments may be required when it comes time to close the loan, so it is important to ensure the potential home buyer can cover these costs.
The credit score is largely used to determine if a client is a qualified candidate for a loan. If a buyer does have a low credit score, it is a good recommendation that they take steps to increase the score before buying.
If the loan does allow for a low credit score, the interest rates are likely to be higher, and the terms more strict. A good score to aim for is at least 700.
The amount earned via yearly salary, tips, commissions, and any bonus pay will all count towards the gross income. Not only is the yearly total important, but consistency is key.
A commission-based job may make things tricky when reviewing an applicant’s wages. A reliable monthly income will qualify a buyer for a mortgage with lower interest rates with better terms.
It is important to compare the yearly income to the yearly debts. An online mortgage calculator is a great.
Any current debts that are owed should be a red flag when it comes to providing a home mortgage to clients. What is the debt for? What is the outstanding balance? How long has this lien been active?
Although debts are not a deal-breaker, they should be looked at carefully so you can determine if the client can handle another monthly payment.
There are several additional costs associated with a mortgage other than the required down payment, most of which will be paid on closing day. Lender fees vary from company to company, but a good rule of thumb is to estimate approximately a half-percent of the total loan amount.
Additionally, the buyer may be responsible for inspections, appraisals, property surveys, and additional fees from the title company.
It is safe to set aside around three percent of the loan amount for total closing costs.
The type of loan that the buyer qualifies for will make a big difference on the property he can purchase, as well as how much will be required for a down payment.
A Federal Housing Administration (FHA) loan is insured by a government program. An FHA loan is often associated with low down payments, low closing costs, and can be qualified for fairly easily.
For a home to qualify for an FHA loan, certain safety and security standards must be met. If a home needs significant repairs, an FHA 203K loan might be appropriate.
This loan allows for up to $35,000 of the total loan amount to be applied to repairs after the home has closed. The repairs must be complete in a set amount of time and be approved by the lender.
A Veteran’s Assistance (VA) loan is available for veterans, military personnel, and some spouses with a zero-dollar down payment requirement.
Single-family homes, condos, modular homes, and occasionally manufactured homes may be purchased with a VA loan. Vacant land will not qualify for this type of loan unless there is some sort of immediate plan for a house to be added.
All homes must pass a VA appraiser and meet safety and security regulations.
A United States Department of Agriculture (USDA) loan is another zero-down payment option for homebuyers. This type of loan has income limits that vary from County to County.
USDA loans are typically for rural home-buyers who are unable to qualify for other types of traditional loans. The home that is purchased must meet safety and security guidelines, just like the FHA and VA loans.
Conventional loans are money lent directly from the lender, without the government’s involvement. These loans will require a moderate-to-high credit score and a down payment of anywhere from 3 – 10%.
Homebuyers will either qualify for a fixed interest rate, where the rate stays the same for the entire duration of the loan, or an adjustable rate, which will change throughout the loan.
The advantage of conventional loans is that they will generally provide better interest rates, and there are fewer restrictions on the type of property that may be purchased.