Financing a Home For Your First Mortgage

Are you in the process of purchasing your first home? If so, do you understand the ins and outs of the mortgage application process? There is no doubt that buying your first home is an exciting, yet nerve-wracking time. There is so much to consider; therefore, it is easy to wonder whether you are making the right decision or not. The good news is that there is plenty of help available for first-time home buyers. All you need to do is ask!

financing a home for the first time

 

What is a Mortgage?

In a nutshell, a mortgage is a long-term loan that has been designed to allow the borrower to pay for his new home. Fox Business explains further: “when you set out to purchase a home, no one expects you to have, say, $500,000 in cash. So that’s where a mortgage comes in: You borrow the extra money that you need to buy your chosen home, agreeing to pay it back in the coming years.

Because the mortgage loan amount is usually very high, the financial institution needs to be sure that you will repay the loan. Furthermore, you will notice that the lender will never lend you more than the value of the property, and he will take the house as collateral for the loan until the loan is paid off. Then you own the home “free and clear”!

Requirements to Apply For a Mortgage

Furthermore, the lender or financial institution needs to be sure that you will repay the loan, so they require certain documents to be attached to the mortgage application. This information will be used to calculate and assess your risk portfolio.

Depending on how high your risk portfolio is when the lender considers your application, he will either approve your application or turn down your application as the risk that you will default on the loan repayments is too high. Should your application be successful, the lender will then consider what interest rate to offer you; thus, a high-interest rate equates to a higher risk and vice versa.

To help you put the relevant documentation together, here is a list of what you need to attach to your mortgage application:

  • Credit

The mortgage lender will pull your credit and determine your FICO scores. However, you are entitled to request a copy of your credit score and your credit history yourself. In a nutshell, your credit score determines your creditworthiness. Your credit score needs to meet certain requirements to qualify for a particular mortgage product, depending on whether you are getting an FHA loan, a conventional loan, etc.

  • Income

The bank needs a copy of your latest paycheck stubs. You will be required to provide the last 30 days payslip. You will also need to present your previous two years of personal tax returns, along with all W2s and 1099s associated with your return. If you are self-employed, you will need to provide your last two years business and personal tax returns. Lenders will also ask for a copy of your current financial or profit and loss statement.

  • Total Debts

Not only does the bank want to know how much you earn every month, but it also wants to know what your monthly expenses are, and how much money you have available to cover the monthly loan repayments. It goes without saying that if your total costs do not allow you to repay your mortgage, your loan application will be unsuccessful.

  • Assets

The type of mortgage you want will determine the amount of down payment required to qualify for such. Most financial institutions expect at least a down payment of 10-20% of the sales price. The only exception to this rule is if you apply for an FHA-insured loan or another particular loan program.

To avoid paying Private Mortgage Insurance (PMI), it is a good idea to put down a 20% deposit. Otherwise, you will have to take out an expensive insurance to protect the lender in case of a foreclosure.

Determine Your Budget

You need to determine what your maximum budget is. In other words, how much house can you afford to buy? For example, it is pointless applying for a house that is double the price you can afford. The bank will just turn down your loan application if you cannot prove that you can afford to repay the mortgage you need to take out to buy the property.

Getting pre-qualified by a mortgage lender will take care of the uncertainty on how much you can afford. It is, therefore, highly recommended that you get pre-qualified, if not pre-approved by a lender, before you start shopping for a house.

by nico2me