As early in the home buying process as possible you should get pre-qualified with a mortgage company. This step involves filling out a pre-qualification form that goes to the mortgage company. Depending on your income and credit history you will get “pre-qualified” for a certain purchase price.
The mortgage company uses the information you provide along with a copy of your credit report to estimate the amount of mortgage you can qualify for. You will then get a pre-approval that lets you know exactly how much home you can purchase. There is no need to bring in documentation at this stage.
You do not need to have a specific property in mind before you start the pre-approval process.
What does the Mortgage Company Look For?
In general, all lenders use the same four basic standards to approve applicants for a mortgage. The lender looks at your income, credit history, savings and the property being purchased. Different mortgage products have varying guidelines within those standards.
Income
Lenders want to know you have a steady income that is sufficient to make the monthly payments. In addition to your primary, secondary, or part-time jobs this income can come from many different sources. Lenders can consider overtime, bonuses and any additional income depending on the source. In most cases, you will need to provide documentation regarding your income.
Credit History
Lenders want to see that you have paid back money you borrowed in the past. They also want to know if you have been prompt or late in making those payments. The lender needs to know if you have filed for bankruptcy or have a record of judgments and collection accounts filed. There are special mortgage products for homebuyers with past credit problems.
If you have a limited or no credit history, some programs can consider nontraditional credit history. You may be able to use paid receipts and canceled checks for rent and utility payments to document a pattern of paying your monthly obligations on time.
Savings
The lender wants to see if you have saved any money that can be used toward the purchase of your home. The savings can be money in a savings account, certificate of deposit or retirement account. Savings are not usually required, but can go a long way toward getting you qualified.
Property
Before you close on you new home your lender will require an appraisal to determine its market value in comparison to similar homes in the neighborhood. Your lender will also look at the type of the property and whether there are additional fees such as homeowner’s association dues. You do not need to have a specific property in mind before you start the pre-approval process.
How Important Is My Credit?
Your credit report is an important consideration to lenders reviewing your financial profile. If you have a history of paying your monthly obligations on time, that’s a signal to a lender that you are likely to make your monthly mortgage payments on time as well. So your credit can be a factor in the kind of mortgage program you may qualify for.
Your credit history can also affect the amount required for a down payment, the amount of money you can borrow in relation to your income, and the interest rate you are offered. But keep in mind that even if you have no established credit history or less-than-perfect credit, there are still loan programs that can help you buy a home.
Mortgage Basics
Unless you have the cash on hand to buy a home, you are going to have to borrow some of the funds required to purchase your new home. Buying a new home is really two separate transactions – the home purchase and the mortgage.
A mortgage is a loan secured by real estate. In other words, in return for the funds necessary to purchase a home, a lender gets your promise to pay back the funds over a certain period at a certain cost. Backing your promise to repay is the property. If you stop making payments the lender will take over ownership of that property. Typically, the repayment of a mortgage occurs through monthly payments.
Keep in mind that your pre-qualification is the first step in the mortgage process. Once you are pre-approved and choose a home the mortgage company will ask you to document your income, assets and other information. The title company will also check for any outstanding judgments or liens filed under your name.
After closing on your new home you get a nice grace period before your first mortgage payment is due. All mortgage payments start on the first day of the month after your first full calendar month. For example if you close on the 15th of January your first mortgage payment is due on March 1st.
Detailed Mortgage Payment Breakdown
Principal + Interest + Taxes + Insurance = PITI (Total Payment)
Principal is the amount of money you borrow based on the sale price of the home. In the early stages of your mortgage term, your monthly payment includes only a small portion that repays your original principal. As you continue to make payments through the years, a greater portion of your payment goes to reduce the principal.
Interest is the cost of borrowing money. In the early stages of your mortgage term, your monthly payment is mostly interest. As you continue to make payments through the years, a smaller portion of your payment goes to interest and more goes to principle.
Taxes are paid by homeowners to local and state governments and are charged as a percentage of the assessed property value. Tax amounts vary depending on where you live.
Insurance offers financial protection in the event of a loss and has two main components that can be included as part of your payment. Homeowner’s or hazard insurance protects you against financial losses on your property as a result of fire, wind, natural disasters or other hazards. Most lenders require you to have a homeowner’s insurance policy on your home because it protects their investment as well as yours.
Mortgage insurance (MI) is required on certain loans to protect the lender against financial losses if the borrower fails to repay the loan. Usually, whenever the down payment is less than 20% of the home’s purchase price, lenders require some type of mortgage insurance. Loans insured by FHA/HUD programs require a mortgage insurance premium (MIP), while VA loans require a funding fee. Conventional loans or those without government backing can be insured with Private Mortgage Insurance (PMI).
The portion of your monthly mortgage payment that covers taxes and insurance is held in a special account by your lender. As these bills are due, the lender forwards payment on your behalf to the local government or insurance company. This process is known as escrow. Using escrow for taxes and insurance is usually required until you have twenty percent equity. Once your mortgage is paid in full, you are still responsible for taxes and hazard insurance.