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For many Americans, obtaining a mortgage is the key to home ownership. By 2014 the number of house sales was estimated to be 5.85 million. Additionally, that same year there was an average of 1.2 million housing starts in the United States. Sales of new single-family houses in April 2015 were at a seasonally adjusted annual rate of 517,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.8 percent (±15.8%)* above the revised March rate of 484,000 and is 26.1 percent (±15.4%) above the April 2014 estimate of 410,000. However a home mortgage loan comes with both advantages and disadvantages, and it could benefit a prospective homeowner to learn the basics about home mortgage loans and what to expect.
Before You Pursue a Mortgage for Your Home, Know the Pros and the Cons
Obtaining a mortgage for your house brings financial benefits to the table. You can work on building a real estate asset, and reap the benefits of possible tax breaks. Real estate taxes and mortgage interest are deductible which will reduce the amount of taxable income that you have. Additionally, houses have a tendency to increase in value over time, and owning a home and paying your mortgage on time is a good way to build on an investment.
A potential con is the fact that if you have unplanned financial troubles and can not pay your mortgage per your lending agreement, you could be facing foreclosure. Some lenders may try to work with you so that you can restructure payments, but others will not, and they have every legal right to foreclose on your home. If you end up facing foreclosure, you don’t have many options. You could attempt to file for bankruptcy, refinance your loan or sell the property.
Good to Know Before Applying for a Mortgage
- Mortgage rates are subject to rapid change. There is a common misconception that mortgage rates are static. However, mortgage rates can rise and fall during the day the same way that bonds, stocks and other financial investments do as well. Therefore, be forewarned that a quote you receive in the morning may be subject to changing if you try to lock in that same afternoon.
- APR stands for “annual percentage rate.” This is a tool to estimate mortgage costs. For example, along with interest you must account for closing costs, upfront origination fees and mortgage points that you pay to get a full understanding of your loan. The APR takes all of these costs into consideration to give you a better opportunity to compare different lenders.
- Different lenders can charge different fees and rates. Lenders can charge different rates for your home mortgage loan. Additionally, they may charge different amounts for services like credit checks, title insurance and appraisals. It would be wise to compare notes with different lenders for the lowest fees and the best rate.
- Even if you are having difficulties paying your mortgage, refinancing may be an option for you. During the American finance crisis, homeowners were put in a position where they owed more money on their mortgages than their homes were worth. However, the Home Affordable Refinance Program (HARP) has helped homeowners refinance their mortgages even though they were not current on their loans. There are different rules depending on if your loan is backed by Freddie Mac, Fannie Mae, or the Federal Housing Administration.
What to Expect When You Are Applying for a Home Mortgage Loan
When you first meet with a mortgage lender, it might feel intimidating. You will be asked a good amount of questions by the lender because they will want to help you obtain a mortgage. Although it can seem like your lender wants to know just about everything about you, the end goal is to obtain a monthly payment for you that you can afford without being a burden. Here is what your lender and underwriter may ask about:
Household income and your average expenses. Lenders will look at the total amount of your income but also how you earn it. So bonuses, overtime and commissions are important, especially if they make up a large portion of your income. Because they vary from year to year, your lender will want to know how reliable these additional pieces of income are. Also, your lender will look into the relationship between your expenses and the amount of money that you make. Typically you want your fixed housing expenses to be twenty eight percent or lower of your overall monthly income. Long term debts are also a consideration, for example an old college loan or a car loan.
Have These Handy When You First Speak with a Lender about a Home Mortgage Loan
- Bring statements bout your income. Bring documentation of your salary, employment status and any bonuses you have received. Bringing alone your most recent pay stub and last years W-2 forms are a good idea. Bring documents to support any other regular income your receive such as alimony or child support.
- You will want to supply your lender with evidence of job stability. Although having two years at your current job will be a help, this isn’t a set in stone requirement. This is particularly true if you have changed jobs but remained in the same line of work, or if you have received an advancement or a raise in income.
- Bring a copy of your credit score, as this will be an indication of how likely it is that you will repay your debt from your mortgage.
- You should bring up to date statements for the bank accounts that you have, as well as show your lender your current balance for both checking and savings. It will help to provide a statement that illustrates an up to date indication of the market value of any investments you have, like deposits, stocks or bonds. Provide your lender with your interest in retirement funds, and life insurance policies, and proof of value of large pieces of personal property like cars.
- Present information on the debt that you owe. Bring balances and account numbers for your current loans and your debts, like credit card balances or car loans.
Information that an Underwriter will Evaluate
Although your lender and underwriter utilized most of the same information, the underwriter will evaluate the information differently. It is her job to calculate your ability to pay (or your income), your willingness to pay (or your credit history) and the property you are thinking about buying. Underwriters analyze these risks and may ask themselves these questions:
- Does this person have enough income to repay their loan? The ratio to shoot for is 28% payment to income and 36% debt to income.
- Does this person have a stable income, both from month to month and annually?
- Has this person been working at their current position and in the same market for enough time? There will typically be a two year minimum.
- Can they verify their income?
- Does this person have a good credit score? (Generally a score of six hundred and eighty or higher will be considered a good credit score.)
- Does this person have any late payments, collection proceedings or a bankruptcy? If they do, can they provide a reasonable explanation for these occurrences?
- How big are this person’s monthly debts? Are they excessive?
- Has this person maxed out on their credit cards?
- Is the prospective property worth what this person is paying for it?
- Is the property acceptable, and does it meet zoning restrictions and coding requirements?
- How does the property compare to other properties in the region?
Types of Home Mortgages and Their Pros and Cons
A Fixed Rate Mortgage:
With this home mortgage loan, the interest rate will remain the same throughout the entire term, which is typically fifteen, twenty or thirty years. However, if interest rates on average fall, you could find yourself paying a higher rate.
Adjustable Rate Mortgage or Variable Rate Mortgage:
While these mortgages offer a lower initial rate of interest as compared to fixed rate loans, after the beginning period, your rates will fluctuate throughout the life of the loan. So as interest rates rise, so will your loan payments.
Federal Housing Administration Loan:
This allows buyers who ordinarily might not be able to quality for a home loan to get a low down payment. However, the amount of your loan might be limited.
These are loans for active duty personal, veterans that are eligible, and their surviving spouses. Although these loans offer competitive rates, with no or lower down payments, the amount of the loan may be limited.
This is typically a fixed rate loan that ensures lower payments for a fixed period. After an initial period however, the whole balance of the loan is due immediately, presenting a significant risk for some borrowers.
Interest Only Loan:
This is when the borrower pays only the interest on her loan in monthly increments for a fixed period of time. But, after a set period, the balance of the loan will be do, resulting in higher payments, the necessity to pay a lump sum or a need to refinance.
This mortgage lets seniors convert the equity in their houses to cash. An advantage of this is that you do not have to pay back the interest or loan if you live in the house. A disadvantage is that these mortgages are subject to false advertising and aggressive lending.
Advantages of Buying a House over Renting
- Sometimes the owning a house can be less expensive than renting one
- As a homeowner you can control your property and you will be more likely to invest in it wisely and take good care of it.
- You will receive tax advantages, like deductible property taxes and interest.
- You will have the freedom to remodel your home, redecorate or make any improvements you would like to see.
- Being a homeowner will lower the amount of restrictions you must comply with as a renter. You won’t have to abide by as many rules regarding pets, children or the level of noise.
- If you pay your mortgage payments on time, this can increase your credit score.
What to Know Before Buying a Home
Although there may be many advantages to buying a home over renting one, you should consider the following things if you are making a decision as to rent or buy:
- You should know that as well as your mortgage payment, you will also have to pay taxes, maintenance and repair fees and insurance. Additionally, you may have to pay fees from a Homeowner’s Association.
- Your flexibility regarding moving will significantly decrease. After you purchase a home, you won’t have as many options when it comes to working over in another town, for example.
- Home and market prices can fluctuate. Property value is dependent upon when the house was purchased, and whether it is a boom period or a bust period. The property might not increase in value at a rate that you anticipate, which could put you in a position where you do not profit when you sell it.
Ultimately, when you are deciding whether to purchase a home or rent one, you should consider how much you expect your house to increase in value and how long you are planning to stay. Someone who has purchased a house needs to remain in their home for three years minimum to make up the costs, typically. Staying for five years is even more preferable.
Additionally, although you might plan to remain in your home for a long time, you must be able to pay for it. It is highly suggested that you keep your monthly payments at thirty three percent of below your overall monthly income.
Five of the Top Financial Institutions in America
- Bank of America is one of the United State’s top financial institutions. Its headquarters are located in Charlotte, North Carolina.
- TD Bank is a major bank throughout the United States. Its headquarters are stationed in Wilmongton, Delaware.
- JPMorgan Chase is located in Manhattan, in the state of New York.
- Wells Fargo, a major financial institution has its headquarters in San Francisco California.
- The Citibank headquarters is located in New York City, in the state of New York.
Buying a home and obtaining a home mortgage loan is a critical decision that encompasses a range of things to know and necessitates much preparation. If you understand the pros and cons of home ownership, have a good idea of what your finances will look like in the future, and know what type of information will be useful to have handy when you are applying for a loan, you will be able to streamline the long and arduous process of purchasing a home.