MORTGAGE PROCESS
Take a look at you! You're on your way to purchasing your next home! It's time to get serious now. If you're going the mortgage road, you'll need a preapproval letter to prove home sellers you're serious.
What is a Preapproval Letter?
To begin, don't mix up prequalified and preapproved. After a brief talk about your wages, properties, and down payment, a lender will prequalify you to buy a home. Preapproval, on the other hand, would necessarily require a little more effort.
Your financial information will be checked by a lender, and your loan will be submitted for preliminary underwriting. When you start looking for a house, you'll be glad you put in the extra effort. A preapproval letter demonstrates to sellers that you are a committed buyer who is willing to move forward.
Consider this scenario: a seller who is willing to sell scans through buyer offers and learns that you have already been preapproved for a mortgage. They'll be relieved and assured that you're able to complete the transaction—with having no ifs, ands, or buts. Furthermore, because the information is already in the lender's system, being preapproved expedites the loan process—a significant benefit in a competitive market.
Get Preapproved?
It's understandable that having a mortgage lender investigate your finances isn't your idea of fun. However, if you collect all of the necessary paperwork before meeting with a lender, the process would be a breeze. This is what your lender would require:
Identification
Driver’s license or U.S. passport
Social Security card or number
A copy of the front and back of your permanent resident card (if you aren’t a U.S. citizen)
Credit history
Income
Employment verification (proof of status and yearly salary)
Pay stubs covering the last 30 days
W-2 forms from the last two years
Proof of any additional income
Personal or Company Federal Income Tax Returns from the previous two years, including all pages and schedules
Assets
Bank statements that show you have enough money to cover the down payment and closing costs.
A letter stating that your down payment is a gift rather than an IOU (if a family member or friend is helping you pay for your down payment)
For asset accounts such as your 401(k), IRA, bond accounts, and mutual funds, the most recent quarterly statements are available.
What Is A Mortgage?
Now that we've gotten the preapproval part out of the way, how about the mortgage itself? When you take out a mortgage, you'll be repaying a lender for more than just the amount you borrowed. There are plenty of other costs included in the monthly bill.
Here's a rundown of what's included in a monthly mortgage payment to help you understand what you'll really be paying for each month:
The Principal. This is the initial amount borrowed from your lender to purchase a home. When you make house payments, it's the most important thing to get done quickly.
The Interest. Lenders are interested in allowing you to borrow money because they benefit from the money they lend you by charging an interest rate, which is measured as a percentage of the principal.
The Property taxes. Property taxes help local governments pay for items like schools, law enforcement, fire departments, and apparently doing pothole repairs.
The Homeowner’s insurance. Homeowner's insurance raises your monthly mortgage premium by a few dollars. However, paying for premiums would be much less costly than buying all of your possessions out of pocket if your home were to flood or burn down.
The Private mortgage insurance (PMI). PMI is a premium you pay on top of your mortgage if your down payment is less than 20%. Its purpose is to prevent your lender “not you” from losing money if you default on your loan.
A monthly homeowners association (HOA) fee may be required in addition to your mortgage payment. HOA fees are used to maintain and upgrade the community. If you purchase a home in a community with a HOA, you immediately become a member and will be required to pay the HOA fee and maintain your home to HOA requirements in order to support the community's overall property value improve.
As a reminder, if your overall monthly mortgage payment exceeds 25% of your take-home pay, it's a sign that you're not ready to purchase a house yet—or that you need to find a cheaper house or save a larger down payment to make the numbers work.
Mortgage Option?
Let's look at the different forms of mortgages now. Obtaining a mortgage is no simple task. A poor decision here could jeopardize your other financial goals or even lead to bankruptcy or foreclosure. That's why choosing the right mortgage is crucial! It's easier to find a home you enjoy that you can pay off quickly if you set boundaries up front.
A 15-year fixed-rate traditional loan is a type of mortgage it’s highly suggest. The following are the primary reasons why it is the highly suggested:
Assists you in getting out of debt quicker. As opposed to a 30-year contract, a 15-year term puts you on track to pay off your mortgage in half the time.
Thousands (if not hundreds of thousands) of dollars in interest fees are saved. A 15-year mortgage has a higher monthly payment than a 30-year mortgage, but a greater portion of the payment goes toward principal reduction (the portion that actually pays back your loan, as opposed to interest fees).
A fixed-rate loan guarantees the interest rate for the duration of the loan. As a result, you'll never pay a higher interest rate on your mortgage than when you first took it out.
Types Of Mortgage?
30-year Mortgage. Mortgage term is 30 years. It's tempting to select a 30-year mortgage term because the monthly payments are lower than a 15-year mortgage. However, the drawback with 30-year mortgages is that the interest rate will be higher, and you'll have to make payments for 30 years. It all depends on your financial condition and the home you want to buy. Choosing between a 15-year and a 30-year mortgage.
ARM loan (Adjustable Rate Mortgage. For the first few years, this option has a lower interest rate (and monthly payment). However, the lender bears the possibility of higher interest rates in the future. When the interest rate rises, your monthly payment will become unaffordable. Although you will begin with a low interest rate, it is possible that it will increase. Upwards. Upwards!
FHA loan (Federal Housing Administration). Yes, you can buy a home with as little as 3.5 percent down with an FHA loan.
VA loan (U.S. Department of Veterans Affairs). A VA loan allows veterans to buy a home with no money down! However, if you buy a home with no money down and the housing market changes, you might end up owing more than the home's market value—yikes!
USDA loan (U.S. Department of Agriculture). A USDA loan is intended to assist people who can't afford to purchase a home right now but want to get into one with no money down. However, with all the additional interest payments, that will crush your budget over time! Furthermore, if you can't afford to put some money down on a property, you're not in a good position to deal with upkeep and all the other unforeseen costs that come with homeownership.
When you're ready to move forward with your mortgage preapproval and want to partner with a lender who relates to the same values you do.