- Posted by: steve
- Category: mortgage checklist
10 Questions You Need to Ask About Your Residential Mortgage. Everything from pre-approval, best rates, to signing the mortgage. Read more.
Are you tired of renting? Are you thinking about applying for a residential mortgage?
If so, you’re not alone. Consider a few recent statistics:
- 560,000 homes sold in the US in 2016.
- 66% of first-time buyers are millennials.
- In 2016, the median selling price of an American home was $227,000.
Whether you’re a millennial buying your first house or a baby boomer seeking a retirement property, there’s a lot to know about home mortgages.
What should you do before you apply for a residential mortgage? What types of mortgages are available? And what important things should you consider before you sign a contract?
Read on for everything you need to know about your residential mortgage.
What Is a Residential Mortgage?
First of all, let’s define exactly what a mortgage is. Here’s a breakdown of the basic terms:
- A residential mortgage is a loan received to buy a house or property.
- The loan gets secured by a lien on the property.
- The borrower, or homeowner, repays the loan over a specified amount of time.
- The borrower also pays interest for the duration of the loan.
- Under most circumstances, a residential mortgage is tax-deductible.
If any of this is unclear, don’t worry. We’ll discuss these terms in more detail later.
Things to Do Before You Apply
Are you ready to start house-hunting? Before you do, here are five things you should do first.
Make a Monthly Housing Budget
Before you apply for a residential mortgage, you first need to make sure you can afford it.
Start by making a list of your monthly take-home pay and other expenses, such as car payments and credit cards. Once you calculate how much extra you’re left with each month, work down from that figure to determine your housing budget.
Experts recommend spending no more than 28% of your monthly income on a residential mortgage.
Some people have the means to take on slightly more debt than this, perhaps up to 35%. Those with tighter budgets should aim to keep their debt-to-income ratio as low as possible.
Don’t forget to factor in your APR (interest rate), closing costs, and real estate taxes. If you need help, use our mortgage payment calculator.
Save As Much As Possible
Unless a wealthy benefactor left you a large sum of money, you’re going to need some savings before you apply for a residential mortgage.
If you haven’t already, create and stick to a savings plan. You’ll need enough in the bank to cover your down-payment (up to 20% of the purchase price). And don’t forget the closing costs, which easily add several thousand dollars.
The more money you can save between now and closing day, the better. Extra money in the bank also gives you a cushion for unexpected emergencies.
Ensure Your Credit Report Is Accurate
Your credit reports showcase how responsibly you’ve borrowed and repaid money in the past.
Each of the three credit report bureaus (Experian, Equifax, and TransUnion) gives you a three-digit score. Lenders look at these scores to determine what kind of loan you’re eligible for and how much interest to assign.
With today’s constant threat of identity theft and security breaches, it’s vital to check your credit reports for accuracy. If you find any false or incorrect information, correct it immediately.
Check Your Credit Score
While you’re checking your credit reports, take note of your scores, as well.
Before approving you for a residential mortgage, lenders will use these scores for risk-assessment. Generally, the higher your credit score, the better your chance of getting approved for a mortgage. You’re also likely to qualify for a lower interest rate.
How do lenders determine a “good” credit score?
- Anything above 750 is excellent.
- Anything above 600 should enable you to qualify for a residential mortgage.
- Anything below 600 will raise red flags and make approval more difficult.
Keep in mind that these numbers are just a starting point for lenders evaluating your credit history.
Research the Housing Market
Before you begin shopping, research the housing market in your area (or the area you’re moving to).
Here are a few things to look for:
- Is it a buyers’ market or a sellers’ market?
- How much inventory is available?
- What’s the median price range for homes in the area?
- How competitive is the current market?
- Are homes selling quickly, or are they sitting there?
The answers to these questions give you insight into what kind of leverage you have as a buyer.
For example, a quick search in Palm Beach County reveals a May 2017 median home selling price of $335,000. This is up almost 8% from 2016.
Understanding the Terms
Before we discuss different types of mortgages, let’s define some residential mortgage terms.
- Appraisal: A written document stating the value of the property.
- Closing: A meeting where the lender, seller, and homebuyer complete the sale and mortgage process.
- Closing costs: The money paid at closing to the lender (usually 2%-6% of the mortgage amount).
- Down payment: The amount the buyer pays upfront to make up the difference between the mortgage amount and the purchase price (usually 20%).
- Equity: The difference between your home’s fair market value of your home and what you currently owe on your mortgage.
- Interest rate: The annual interest on your loan (based on a percentage of 100).
- Lock-in: A lender’s guarantee that your interest rate won’t change for a specific period of time.
- Origination fee: The fee your lender charges to process the loan.
- Points: An amount paid to the lender at closing to lower your interest rate (1 point = 1% of the loan amount).
- Pre-approval: Based on your mortgage application, you are pre-approved for a certain loan amount.
- Principal: The amount of debt (excluding interest) left on a loan.
- Private mortgage insurance (PMI): Usually required if your down payment is less than 20%. (Other financing options may be available).
- Term: The period of time for your loan (10, 15, 20, or 30 years).
- Title: The official document that states you own the property.
Types of Mortgages Available
Now that you’ve done your research and your finances are in order, let’s talk about the different loans for a residential mortgage.
Fixed-Rate vs. Adjustable Rate
All residential mortgage loans fall into one of these two categories. How are they similar, and what makes them different?
A fixed-rate loan keeps the same interest rate for the entire duration of the loan term. This means your mortgage payment will be exactly the same every month, year after year. This is true whether your term is 10 years, 30 years, or somewhere in between.
An adjustable rate mortgage loan (ARM) has an interest rate that changes over time. These loans usually start out at a lower rate than a fixed-term loan and get adjusted annually. Because of economic uncertainty, your interest rate and monthly payments may increase over time.
Government-Insured vs. Conventional Loans
A conventional mortgage loan isn’t guaranteed or insured in any way by the federal government. In most cases, these loans come with fixed terms and rates.
There are three types of government-insured loans available. These include:
FHA loans are available to all types of borrowers, including first-time buyers. In the event that the borrower defaults (fails to pay), the government insures the lender against resulting losses.
An advantage of this program is that it allows a down payment as low as 3.5%. The disadvantage is that you’ll have to buy mortgage insurance, which will increase your monthly payments.
You can learn more about FHA residential mortgage loans here.
Miltary service members and their families can qualify for loans through the US Department of Veterans Affairs.
Like the FHA program, the federal government backs all VA loans. This means the VA will reimburse the lender in the case of borrower default.
A major advantage of the VA program is that borrowers may receive 100% financing for their new home. If they qualify, they don’t have to supply any down payment.
You can learn more about VA mortgage loans here.
The third type of federal-backed mortgage loan is a US Department of Agriculture (USDA) loan. This loan is for rural borrowers who meet certain income requirements.
To qualify, borrowers must have steady low or modest income and be unable to qualify for other types of home loans.
To determine if you’re eligible for a USDA home loan, click here.
10 Questions to Ask Your Mortgage Lender
By now, you’re familiar with mortgage terminology and different types of home loans. You’re gaining a clearer picture of how to proceed with securing your own residential mortgage.
Before you sign anything, be sure to ask your mortgage lender these important questions.
1. What’s the Interest Rate?
Based on the loan amount and your credit score, your lender will offer you an interest rate. The lower the interest rate, the lower your monthly payments.
If you’re unhappy with the interest rate offered to you, focus on improving your credit so you can qualify for a lower rate in the future.
2. What Are My Monthly Mortgage Payments?
Make certain you can afford your monthly payments, especially with taxes and insurance included.
Also be sure to keep in mind any short or long-term financial goals you may have. Your mortgage payments should still allow you to save money and work towards other goals.
3. Is My Loan Fixed-Rate or Adjustable?
If you’re not planning to live in your home long-term, a hybrid ARM with an initial fixed-rate period might be your best choice. This type of loan usually has lower interest rates than fixed-rate mortgages.
If you’re considering an ARM, make sure you understand exactly when and how much the rate will change. Recalculate the highest possible monthly payment to ensure you can still afford it.
4. What Fees Must I Pay?
There are several one-time fees (also called points) due at closing. For each point you pay, your lender will deduct 1% off your interest rate.
If it suits your needs, you can ask about the option of zero closing fees in exchange for a higher interest rate.
5. Are There Any Pre-Payment Penalties?
We don’t often think of getting penalized for paying something early. With some mortgage loans, though, that’s exactly what can happen.
If you have savings set aside to pay off the principal early, you could face a pre-payment penalty. Ask your lender if any such penalty applies to your loan.
6. When and How Can I Lock in the Interest Rate?
For an upfront fee, your lender might be able to lock in your interest rate for a set period of time.
That way, if rates increase in the future, yours will remain the same.
7. What Are the Qualifying Guidelines?
Every type of loan has different underwriting guidelines.
Common loan requirements include:
- Money for the down payment and closing costs
- Proof of income
- Savings of up to six months of mortgage payments
If you have any questions about your qualifications, talk to your lender.
8. What Is the Minimum Down Payment?
As outlined above, different loans require different down payment amounts.
Conventional loans usually require a 20% down payment, but an FHA loan might come with a down payment of only 3.5%. A few mortgage programs, such as the VA loan, may not require a down payment at all.
9. Do I Need to Buy Mortgage Insurance?
If you put down less than 20% on your home, your lender may require you to buy mortgage insurance. You’ll need to keep this until your loan-to-value ratio (LTV) is less than 80%.
Mortgage insurance can be an expensive addition to your loan, so make sure it’s necessary before you buy it.
10. Do I Qualify For Any Other Type of Loan?
If you want to do a little comparison shopping, start with your current lender. He or she is already familiar with your financial situation and can outline other
He or she is already familiar with your financial situation and can outline other loan programs you may qualify for.
Buying a home may seem complicated at first. Understanding how a residential mortgage works makes the process easier.
At New Florida Mortgage, we’re dedicated to making the home-buying process as easy as possible.
If you’re looking for a home in Palm Beach County, we invite you to contact us to learn more about how you can obtain a residential mortgage.