Whether you are planning to expand your business and need additional cash or dream of having a new house but you don’t have the money to pay in full, a mortgage loan is a cheaper alternative to take. It is ideal that you have a credit score of 720 and over so you can have the best rate under a mortgage credit. In addition, you must have a stable source of income to assure its payment. These two factors will seal your loan application’s approval. The terms of mortgage loans vary ranging from 10 to 30 years. In buying a property under a home mortgage, the lender usually requires a down payment from 3% to 20% which becomes your equity.
A mortgage loan falls under the category of secured loans. In short, you need to have an asset that you put up as collateral to the lender. The security is normally in the form or real properties. The loan contract is covered by a promissory note and a deed of mortgage over the property offered as collateral.
Types of Mortgage Loans
There are several different types of mortgage loans worldwide. Here are two groupings of the more common types of loans available.
Based on interest charges
- Fixed-Interest Mortgage – this type of loan is great for individuals or couples who have a steady monthly income. The word fixed-interest speaks for itself. With a fixed-interest mortgage loan, you can expect to pay a stable interest rate throughout the whole life of the loan. The amount you pay is also split into equal months for the whole duration or life of the loan your acquired. So if you are taking a 30-year loan, you divide the total amount to 360 months for your monthly installments.
- Interest-Only Loan – great for young couples who think their income will increase in a couple of years. With Interest-Only loan, you’ll be paying for the interest only over a span of years you’ve chosen. For example, you think that your income will increase after 5 years, then you can get a five-year fixed 30-year loan. Basically, you’ll only be paying the interest for 5 years. When it resets, you’ll need to pay for the principal along with the interest. This type of mortgage loan isn’t ideal for individuals who are having a hard time financially. It’s not also good for couples with a relatively flat salary. Or else, they’ll have difficulties in paying off their debts.
- Adjustable-Rate Mortgage – similar to interest-only loan, you have the option to adjust the rate of your loan. In fact, it can be change every year. Unlike with the other types of mortgage loans though, they are quite difficult to find.
Based on source of the loan
- Conventional mortgage-these are the home mortgages offered by the traditional market that require down payment of 15-20%. Although the down payment is quite big, it will be your equity over the property and it will reduce the loan amount hence, your monthly installment would be lower also. Your capacity to put up a bigger down payment will also convince the lender that you have the funds to meet your regular installments.
- FHA or VA mortgage-these are guaranteed home mortgages by the Federal Housing Administration or Veterans Administration that need small down payment of 3% only. The requirements are not too strict and in case the borrower fails to pay the loan, it is the FHA or VA who will pay the account. Lenders prefer to finance these due to this assurance of payment.
Choosing the Best Mortgage Loan Type
Just like with anything, you need to have an idea on what you really need before you get a mortgage loan. When it comes to choosing the best mortgage loan type, there are several factors that you need to consider. Among these are interest rates, closing charges, and duration period of the loan.
Mortgage Loan Application Process
The application process is similar to most of the secured loans where you need to present a clean title to an asset. As usual, your credit scores from the three credit bureaus and evidence of your proof of income are the normal requirements. Aside from these, other lenders will require you to produce other documents. Discuss with your lender what you need and they’ll tell you what you have to submit. Initially, you’ll get a pre qualification approval prior to your final filing of application. You can discuss this in person or by online inquiry. Your discussion would revolve around your income which includes all other incomes like child support, your assets, down payment, debt to income ratio which should not exceed 28% of your mortgage payments or 36% of your total payables over your income.
What Does It Look Like? What’s Involved?
As mentioned above, you need to provide an asset in order for the credit company to approve your mortgage loan application. Other documents should also be provided. Although this may sound like a difficult task, most of the documents aren’t that hard to provide. In fact, the only difficult paper to show is the title of your real property. You need a clean title in order to pass the application process.
You can Apply Online
Similar to any type of loan, a mortgage loan can be acquired online. All you need is find the right credit institution that would finance your loan. You can make your choice among several reputable online companies when you search the internet. It’s important that you put some time into it so you can have the best lending terms.
How Credit Score Affects Approval
Your credit score is always a major factor in your mortgage loan approval. A higher score would definitely reap you good benefits in terms of interest rate and lower down payment. Although you can still negotiate a mortgage loan though with low credit score, the lender is not compromising when it comes to interest provision.
Mortgage Application Checklist
Prior to your application, you need to prepare yourself along with the documents. One way of doing it smoothly is by preparing a checklist. The list is drawn from the following topics.
- Down payment – ask your lender the required down payment. FHA loans require 3.5% down payment if your credit score is lower than 580. Conventional loans ask for 10-20%.
- Total debts – how much is your total indebtedness including your proposed mortgage? The average debt to income ration that lenders require is only 36%. You should comply with this or else, your application is in peril.
- Credit history – what about your credit scores with credit bureaus, do you have them and did review their entries. A score of 720 and over will give you the best benefits while 620 and below the sub prime rates.
- Your job history – have you not changed jobs for the past 2 years? Is it a promotion or pay increase? These are factors that will determine your loan application.
Mortgage loan is a long term credit that you’ll have to bear for the next 30 years. If your credit history and capacity to pay are not really convincing, the terms could be just heavy for you to carry. The down payment is likewise tied in some instances to these two. It is then necessary that you have done a good study before negotiating this loan. Give it your best time so that things would be in proper order when your payments start.