When financing your home, there will be some prep work that is necessary no matter which type of loan you decide on. The prep work can ensure you also get the best terms possible for your financing. This includes things like tax returns and proof of income, but we will cover more of what is needed below.
Getting the Best Rates for You
There are three things that almost every bank is going to look for. The first will be your credit, which will basically consist of a report of the various debts and loans you’ve taken on and history of said transactions. This can include cars, utilities, paying of fees, rental history and more. Not all credit is born equal, however. If you took on a $100,000 loan and paid it on time for 7 years, that is obviously going to help you a lot more than say, a loan on a phone from a cell company. We go into this more in our article about raising your credit.
They will also look for your ability to pay off the debt, mainly by looking at your income, but also your assets and capital gains. This is called the debt to income ratio. The final thing they will look at is the property itself, as most mortgages include a clause that, in the case of failure to make your payments, the lender will seize ownership of the property. Because of this, part of what they base the terms off is the loan amount to the value of the property, the type of property, the inherent worth of said property.
The next thing you will need to do to prepare for getting the mortgage is getting together all of your documents that they will want to see. This includes pay stubs, any tax return information, 401k and asset info, outstanding debt, but for the most part the lender will let you know what is needed.
Types of Loans Explained
There are several things you need to consider when picking out a loan type. A loan isn’t just strictly one of these, but can apply to several of these categories, such as being a fixed-rate government backed.
The first is fixed rate vs adjustable-rate, commonly known as ARM. Fixed rates loan do not change interest rates at any point. So you will know what you can expect to pay each month. An adjustable-rate rate mortgage loan will have an initial rate, but after a certain amount of time you can expect it to make a scheduled increase at certain intervals.
Another difference is jumbo vs conforming. The difference is conforming loans follow the guidelines put out by Fannie Mae and Freddie Mac. The underwriting guidelines loans that must follow to be insured by the two agencies, include size of loan, credit, assets, income etc.). Jumbo loans generally are loans that exceed a set amount, that the two aforementioned government monetary agencies will buy.
There are also government-backed loans vs conventional loans. Government-backed includes FHA loans, VA loans, and USDA loans. VA loans are for military veterans, and can pay for all of your home. USDA loans are for rural residents who meet the requirements covered in the link, related to income mainly, and may make only slightly above the area median. FHA loans are for anyone, and the FHA will cover the lender’s loan in case of borrower not meetings the terms of the loan. The main advantage is a low down-payment of 3.5%. The disadvantage is you will need to buy mortgage insurance which may raise your monthly rate.
We hope this has been helpful in getting you moving in the right direction. Let us know if you have any questions, we’d be happy to help.