Borrowing Better for a Home Loan
Purchasing a home requires much more than just finding the right residence. It also involves finding the right loan, one that best suits your financial situation. The right mortgage not only unlocks the keys to your own place, but all the benefits of homeownership. In this blog, we’ll discuss what kind of mortgages are available in today’s housing market, so you can borrow better.
Assess Your Finances Before You Apply
Buying a home requires a detailed review of your personal finances before you apply for a mortgage. This lets you identify areas that need to be addressed to make the home loan process as smooth as possible. Start with a review of your credit score, income, monthly expenses and current debt to determine how much home you can reasonably afford. According to Bankrate.com, knowing where you stand financially will help you determine what type of mortgage will best fit your needs.
Here are a few key items you’ll need to review when looking at your personal finances:
- Credit Score: Having a high credit score lets you get the best interest rate available when you apply for a mortgage. Your credit score can be the determining factor whether you qualify for a mortgage, so it is important to review your credit history and credit score. Some of the ways you can increase your credit score are by making all your debt payments on time and reducing the balances on your debts, including credit cards. You can get started by receiving a free credit report from each of the U.S. credit bureaus from AnnualCreditReport.com.
- Debt-to-Income Ratio (DTI): Another part of your finances you’ll need to examine is your DTI. Simply put, this is a pulse check on your monthly debt payments against your gross monthly income to assess how much of a lending risk you are. Most mortgage lenders will want your debt to be 28 percent or less of this equation, although some home loans allow more leeway. A good way to lower your DTI is to reduce the amount of money you owe. Consolidating debt into one single loan can help you pay down your debt faster.
- Savings/Cash on Hand: There are various costs associated with buying a home that require payment during the escrow process. These includes a down payment, closing costs, inspection costs and funds upfront for home insurance and property taxes. You’ll also need money for utility connections, moving costs and anything your new home needs inside, such as appliances. Having these funds readily available will make the home-buying process less stressful.
As you can see, it makes sense to get your finances ready long before you buy a home. Doing so makes the process seamless, quicker and more enjoyable. Equally important, it will put you in the best position possible to receive a low interest rate on your home loan from lenders.
Types of Mortgages
There are several types of mortgages available from lenders. Each has its own set of qualifications, limitations and requirements, according to NerdWallet. Let’s look at the main types of home loans available:
- Conventional Loans offer flexible terms of 15, 20 and 30 years and usually requires a higher credit score (620 or more). The downpayment can range from 3% to 20% of the home price, depending on the lender. Conventional loans can have stricter qualifications than government-backed loans. They follow guidelines set by Fannie Mae and Freddie Mac.
- Fixed-Rate Mortgages are ideal for borrowers who plan to remain in their home for the long term. These loans come with 15-, 20- or 30-year terms. The interest rate and monthly payments remain constant over the life of the loan, which makes budgeting easier.
- Adjustable-Rate Mortgages offer a lower fixed rate for an initial period, after which it adjusts periodically based on the current market rate. The lower initial rate is good for homeowners who want to purchase now and expect their income to grow. It is also helpful for buyers who intend to sell the property in just a few years.
- FHA Loans are backed and insured by the Federal Housing Agency. They have lower credit and down payment requirements, such as a credit score of 580 and just 3.5% down payment. These loans are ideal for first-time homebuyers who may not have enough money for a down payment. Private mortgage insurance is required.
- VA Loans are available to veterans, activity-duty military service members and others related to the military. They have competitive interest rates and flexible credit requirements. The main benefit is that no down payment is required because the U.S. Department of Veterans Affairs guarantees the loan.
- Jumbo Loans are essentially conventional loans for homes that exceed the federal threshold for conforming loans. Home prices ranging from $806,000 to $1.2 million fall into this category. Jumbo loans have higher credit score requirements and down payments.
With several loan options to choose from, finding the right mortgage will depend on your unique financial situation. Check with several lenders about their home loan programs so that you can borrow better when it comes time to apply for a mortgage.
Applying for a Mortgage
Once you’ve found the right mortgage lender and loan program, it’s time to apply. Be sure to gather the important documents that you’ll need. Typically, these include personal identification, pay stubs or income statements from the last three months, federal tax forms from the last two years, bank and investment account statements, and proof of down payment funds. You’ll also need to provide the purchase agreement, appraisal and homeowners insurance for the property you plan to purchase.
The lender will use this information to decide your loan amount and interest rate. Keep in mind that interest rates vary by lender. Once your home loan is approved and you’re in escrow, avoid adding any new debt or opening any new credit accounts as they can negatively affect your DTI when it’s time to close or finalize your purchase.
How Travis Credit Union Can Help
Travis Credit Union is focused on your financial wellness, which includes helping you find the right mortgage. Our knowledgeable mortgage loan consultants will go over the entire home loan process and provide you with information about all the loans available to you. You can also get pre-approved for a mortgage, so you’ll know how much home you can afford and the interest rate that you’ll receive. Visit our Home Loan Center to get started today.