Getting a mortgage loan is one of the most important things in the life of an adult which the US education system has failed to teach its students. It allows us to set up our lives without having the money to do so. In this article, I will try to talk you through, step-by-step, getting a fixed interest rate loan for a house, and after you have finished this article, you should know everything you need to know about the loan process.
The Five C’s
The traits that determine whether you are approved for a mortgage loan is Credit, Capacity, Collateral, Capital, and Conditions.
Credit is the most important trait. It measures your history of paying your financial obligation. When you pay all your debts on time, every month, your credit rises, but if you fail to, your credit falls. A credit score of 760 is excellent, and you will struggle to get a loan with a credit score under 630. In addition, if you have very low credit, you will be unable to pay the loans you can’t make, making raising your credit impossible. As a remedy, you might cosign with someone with a higher credit score which will increase the likelihood of approval of the loan.
Capacity is your ability to pay back the loan. It is mainly measured by your Debt to Income Ratio (DTI). Banks determine DTI by taking all necessary spending, like loan payments and rent, and dividing it by the client’s monthly income. The lower the DTI is, the better. Generally, you should try to keep it under 35% which would put you in the top category for loan officers.
Collateral and capital both essentially mean assets. Collateral refers to assets that you ensure your loan with. Capital refers to assets that you can use to help pay the loan. As a result, if you are unable to pay the loan, your collateral might be seized, but putting up collateral is critical to securing a loan.
Conditions are all other external factors. They can include your plan with the money, the amount of money, the economy’s health, and even your history as a customer. These weigh less than the above values.
The first step of actually securing a mortgage loan is the application. While applications vary bank by bank, they all require the same things: your name, phone number, social security number, annual income statement, your bank account balance, and equity. In addition, you will fill out the amount of money you request and the time period you will pay it off over, but these are both subject to change. With the mortgage application, you will also need to pay an application fee, which ranges from zero to several hundreds of dollars for house loans, dependent on the bank.
All this information will go to a loan officer. Their job is to check the accuracy of all the submitted information by going over your pay stubs, loan payments, bank statements for the last 60 days, and 2-years worth of tax returns, all provided by the applicant. As loan officers earn a commission on loans, they often support the applicant when in negotiation with the underwriter.
The underwriter is the “gatekeeper” of the loan. They decide who gets approved and who gets denied. They decide based on the 5 C’s, which includes credit. For the underwriter to check your credit, they will need to contact credit agencies, which costs money. The bank charges you the fee, which is usually around $25.
To preserve his or her impartiality and thus profitability for the bank, you will not be able to speak with your underwriter. Instead, your loan officer will try to convince the underwriter, as he earns a commission. But, his or her ability to change the outcome of the review process is very limited. The underwriter judiciously reviews the raw documents and values and makes the decision.
Negotiation is a misnomer as in reality, your power to affect the deal is very limited unless you are a serious investor who can bring significant business, in which case you can leverage the future loans you will make.
Firstly, the interest rate is heavily reliant on your credit. If your credit is high, it is low, and if your credit is low, it is high. Additionally, the length of the mortgage loan and amount affects the interest rate. The larger the length and amount are, the more you pay. As an aside, you may get offered the option of a percent buy. A percent buy is the option to pay money at the start of the loan to lower the percent interest. While it depends on your situation, if you plan on paying it over 4 years, you should take the option. From the values above, a formula is used to calculate the obligatory monthly payments. There is no leeway in negotiating this.
While you determine the general length of the loan, the amount loaned is based on your down payment and the appraisal of the house. The required down payment depends in large part on how many houses you already own. On your first house, with assistance from the government, you may not have to put any down. On your primary residence, you will usually have to put down 10 to 15 percent of the house’s value. For investment houses, you will usually have to put down 20 to 30 percent. The value of the house is not determined in negotiations. Rather, it is decided by the appraisal process. The bank will arrange for a third-party appraisal company to decide on the value of the house. The cost of the appraising is charged to the person seeking the loan and usually is around $1,000.
Another significant cost is the escrow payment. Essentially, it is money taken from you when you get the loan to pay for future expenses. Most commonly, banks will take half a years worth of property tax and insurance. The reason banks do this is to ensure your irresponsibility doesn’t cost the bank any missed payments.
The greatest and least known cost is hiring a title company. Title companies make sure the current owner of a house is legally allowed to sell it. This is necessary because sometimes a house will be tied up in legal disputes and other people may have a legitimate claim against it, called a lien. Usually hiring a third-party company, which is required by banks, will cost 0.5 percent of the house’s value.
Loan Disclosure Document
All these terms and costs will come to you in a loan disclosure document, which you must sign to move forward. It is not legally binding, but it may be used as a record of the agreement. After signing this document, the official legally-binding loan document will be drawn up. The bank may charge up to $1,000 as an origination fee for drafting the documents. You may back out of the loan as long as you haven’t signed the loan document, only losing the money paid in fees and possibly earnest money – a small amount of money paid to the house seller to reserve the house.
Additionally, all fees — except for the credit check fee, the appraisal fee, and the application fee — will be collected when you sign the mortgage loan document. After paying the fees, signing the loan document, and transferring the down payment to the title company, you will then own the house. The bank will transfer the mortgage loan directly to the title company. The title company will send it to the house seller after taking its share. As a side note, the fees must be paid in cash unless you take some legal, but very uncommon steps.
Mortgages and loans in general are complicated and take a lot of work. You should expect it to take around 45 days and cost close to $3,000 in fees, but it is all worth it if you use the money wisely. However, if you invest poorly or take loans from unsavory sources like payday loans or subprime loans, they may ruin your life. NEVER take money from these loan sharks. Their predatory interest rates will destroy your financial situation for possibly many years. I hope this article has given you more clarity into the world of mortgages.
About the author
I write about economics, technology, and markets. I am a freshman at the University of Washington.
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