What Is A Mortgage & The Basic Requirements
Buying a home is an exciting prospect and most people tend to focus on choosing the type of home they want along with the location and other amenities. However, there is an important element that exists in most home sales and that is the mortgage. Whenever someone purchases a home and they don't pay the full price in cash, they have to obtain financing. This type of financing is a mortgage loan. When a mortgage is used to buy a home, the property becomes collateral. If a borrower fails to repay the mortgage at the agreed upon terms, the bank or lending company has the right to take over possession of the property. Therefore, it's very important that borrowers choose a mortgage that will fit into their budget.
A mortgage is paid back in the form of monthly payments that consist of the interest and the principal. The principal is repayment of the original amount borrowed, which reduces the balance each month a payment is made. The interest is the cost of borrowing the principal amount of the mortgage loan.
A monthly mortgage payment usually includes taxes, insurance, interest, and the principal. Taxes are remitted to local governments as a percentage of the value of the property. These tax amounts can vary based on where the borrower lives and are usually reassessed on an annual basis. The insurance payments go toward mortgage and hazard insurance. The property mortgage insurance (PMI) protects the lender from loss incurred if a borrower defaults, whereas hazard insurance protects both the borrower and the lender from property losses. The funds may be held in escrow or the lender may collect the taxes and the insurance. PMI typically is not required if 20% or more is put down on the home. As long as the borrower is not behind on payments, PMI payments are automatically terminated when either the borrower is at the midway point of their loan, or when the loan-to-value (LTV) reaches 78%. A borrower can request cancellation when the LTV reaches 80%.
Prior to searching for a home, it is best for a borrower to know how much they qualify for, which will determine the price range of the home they want to purchase. A borrower should also take into account how much their budget can comfortably afford. This will dictate the type of mortgage and terms that best suits their situation.
Applying For A Mortgage:
When applying for a mortgage the lender will look at and ask for the following information:
The first thing a borrower should do before going to their bank or a mortgage company is to acquire a copy of their credit report. The most influential determinant when applying and getting approved for a mortgage loan is credit. The higher the borrower's credit score is, the easier it is to get approved for a mortgage. It also will determine the mortgage rate. Good credit means a lower interest rate on the loan. Currently, buyers can get a mortgage loan with a credit score as low as 580 (or lower). However, a credit score of 740 or more should qualify a buyer for the best mortgage (interest) rates available from most lenders.
Employment History & Sources Of Income:
The ability to pay is one of the primary decisions in considering a loan application for approval. All information regarding income and employment history must be submitted. This information includes:
• Employer’s name, address, borrower’s job title, time on the job, bonuses, average overtime, salary, and students may be required to provide transcripts.
• Two years of W-2 forms and most recent paycheck stubs, (if you receive a paycheck).
• For the self-employed, financial statements for two years and all tax forms must be provided, including a profit and loss statement for the current year.
• A VOE or Verification of Employment form may be sent to the current employer.
• Employment History - If there are gaps in employment history, there must be a written explanation. While lenders usually only verify the borrower's current employment situation, they may want to confirm previous employment details. This practice is normal for borrowers who have not been at their current company for at least two years. Also, if a borrower has less than (2) years continuous employment, some lenders will take in consideration that the borrower’s current job is in a similar industry, field or type of work. A change in employment status from the time the loan application was filled out to when it is reviewed prior to closing on the home could have a significant impact on whether the borrower's application gets approved.
Other Documents Needed:
When applying for a mortgage the lender will also ask for the following information:
• Most recent federal tax return, and possibly the last two tax returns
• A complete list of your debts, such as credit cards, student loans, car loans and child support payments, along with minimum monthly payments and balances (if any)
• List of assets, including bank statements, mutual fund statements, real estate and automobile titles, brokerage statements and records of other investments or assets (if any)
• Canceled checks for your rent or mortgage payments (if any)
• The home purchase contract (once a property is selected and under contract)
• An Appraisal - The lender receives an appraisal of the property. The appraisal determines the market value of the home, which is used as collateral for the loan. (The borrower is charged a fee for the appraisal service and it is usually included in the closing costs.
Other Documents That May Be Required Depending On The Situation:
• Profit and loss statements or 1099 forms, if you own a business
•Proof that a gift isn't a loan - If you receive a cash gift or grant toward your down payment, you'll have to provide a letter from the giver that declares that the gift isn't a loan. The lender might even want a canceled check and the giver's bank statement.
• A lease agreement, if you're renting out your former home.
• Proof of rental property income - if your income includes rents from investment property, (it needs to show up on your tax return. Canceled rent checks and bank statements showing those deposits might be OK if the property was purchased in the current calendar year)
• Proof of a child's age if child support is counted as income.
• Bankruptcy discharge papers.
•A copy of a divorce decree might be requested in some cases.
Once the application is completed, the lender will review the application and decide whether to deny or approve it. If approved, the last step in the process is the meeting in which documentation is completed and the deal is closed. If denied, the prospective borrower should talk to the lender in order to devise a plan and find out why the application was denied. By law, the prospective borrower should receive a disclosure statement from the lender in writing that states why the application was turned down.