What Factors do Mortgage Lenders Use During the Loan Process?

A real estate agent with a key. Red roof house.

The purchase of a home is one of the biggest purchases you’ll ever make. As such, securing adequate financing through mortgage lenders to make the purchase is essential for most homeowners. Some consumers are concerned about whether they will be eligible for a mortgage loan.

If you’re not sure whether you’ll be approved, you need to do your research. The more you know about possibilities and resources, the easier it will be to buy a home. You need to understand what a mortgage loan is and how it works. One of the most important things to know is what factors mortgage lenders are looking at.

Getting ready to buy a home is exciting. It can also feel overwhelming as well. There is a lot of information to process. Your primary concern should be finding mortgage lenders who will approve you. Acquiring financing is generally the biggest obstacle to overcome. However, you should be able to find a mortgage loan appropriate for your needs and budget with persistence.

What is Important About Your Finance Status to the Mortgage Lenders

All this information is no doubt helpful. However, what you’re probably most interested in is whether you qualify for a mortgage loan. To determine whether you’ll qualify, you need to know what lenders look at. All mortgage lenders look at certain factors when deciding on a loan application.

Knowing what factors lenders look at helps you to know what to expect. You want to be prepared when you apply. You also don’t want to apply if there is very little chance you’ll be approved. Therefore, you should know that the following six factors help determine your mortgage loan worthiness.

Your Income

Your income is an important factor. The lender wants to see that you’re earning enough to keep up with mortgage payments. You’ll need to provide details on how much you make per year. You’ll also need to provide information on how long you’ve been at the same job.

The lender doesn’t just want to know you’re making money. The lender also wants to know that your income is reliable and will continue throughout the life of your mortgage. If you’ve been at the same job for several years, mortgage lenders consider your income reliable. If you’ve just started your first job, it may be more difficult to be approved.

Your Savings

Mortgage lenders will probably want to know what’s in your savings accounts. Having extensive savings shows that you are financially stable. Not having a lot of money saved up doesn’t necessarily mean you won’t qualify. However, large savings accounts certainly give the lender greater peace of mind. Anyone who is interested in purchasing a home in the near future should start growing their savings.

Your Credit History

Your credit history is one of the number one considerations to consider. Obviously, lenders will not want to lend to you if you’ve defaulted in the recent past. Also, lenders will be less inclined to approve you if you have a history of missing payments.

Lenders want to know that you’re reliable as a borrower. You need to show that through your performance with your credit accounts. You need to start and nurture a strong credit history. If you have never had a credit card or loan before, you have no credit history. Lenders might be less inclined to lend to someone with no credit history than someone with a lower credit score. Having no credit history means mortgage lenders can’t really know what kind of borrower you will be.

Your Down Payment

The larger your down payment, the better it looks to lenders. When you make a large down payment, you’ve got some skin in the game regarding your home purchase. Lenders know that keeping up with payments will be all the more important for you when you’ve already made a significant investment in the property.

Making a larger down payment doesn’t just make you more attractive to lenders. It also minimizes your interest costs. You don’t have to pay interest on your down payment. The more your down payment is, the less of your home purchase price you have to pay interest on.

Your Current Debt Load

Mortgage lenders will want to look into how much you already owe. If you’re currently dealing with a heavy debt load, lenders will consider that taking on more debt is not a good idea. Every debt you have means an additional expense each month.

Lenders don’t just look at the total amount you owe. They also look at how much you owe in relation to how much available credit you have. If all your credit cards are maxed out, then you’re already using most of your available credit. If your debt load is heavy, you might want to take time to pay it down before buying a home.

The Home You’re Buying

Lenders don’t want to lend money for a home purchase that is overpriced. They also don’t want to provide a loan for the purchase of a run-down house. The house you purchase is basically collateral on your loan. The lender will repossess the home if you fail to make payments. However, the lender won’t be able to recuperate the loan money if they can’t sell the property to cover the outstanding loan balance.

Mortgage lenders often want to inspect the home that the borrower is purchasing. They want to make sure that the property is a good investment. Therefore, the home you want to buy could influence the decision lenders to make on offering you a mortgage loan.

Understanding Mortgages

A mortgage loan is much like any other type of loan. It is an agreement where a lender agrees to loan you the money you’ll use to buy a property. You’ll gradually pay the lender back the loan money. As you pay your mortgage loan, you build up equity in your home. Once you finish paying your mortgage, you own your home outright. However, the lender can repossess your property if you fall behind on payments.

You have to pay interest on your mortgage loan. That’s how mortgage lenders make money. The lower the interest rate on the loan, the less expensive it is. You need to understand all your home buying options before taking out a mortgage.

Choosing to take out a mortgage is a big decision. You don’t want to take out a mortgage that is going to be hard on your budget. Your credit will be severely damaged if you default on your mortgage loan. Make sure you plan your budget carefully. While owning a home may be your goal, you still need to protect yourself financially. Be careful you’re not getting in over your head with an excessively large monthly mortgage payment.

Going to a Banker or a Broker?

Both mortgage bankers and brokers offer mortgage loans. If you’re buying a home, you can choose between working with a banker or broker. There are advantages to each method of acquiring a mortgage loan.

Working with a mortgage banker means you go directly to a bank or credit union. Then, you inquire about their available mortgage loan products. You’re only going to be considering mortgages available through that particular financial institution.

When you borrow through a mortgage broker, your broker can analyze your unique situation. Your broker has more resources at his or her disposal than a banker might. The broker can compare mortgage loans from a variety of different financial institutions. This means greater customization of services.

A broker may be able to pinpoint the perfect mortgage for you. However, you’ll have to pay a broker fee if you work with a broker. Borrowing directly from a bank also tends to be a little more reliable and predictable. Mortgage brokers are independent professionals while bankers are working for large and established financial institutions.

Types of Mortgages to Consider

You need to consider mortgage type in addition to considering whether to work with a banker or a broker. Those who buy a home for the first time are often surprised by the variety of mortgages. There are quite a few different types to consider.

Here are some of the basic mortgage types to look into.

Fixed-rate Mortgage

A fixed-rate mortgage is among the most basic mortgage types. With a fixed-rate mortgage, the interest rate doesn’t change throughout the life of the loan. Also, the amount that’s paid on the loan each month doesn’t change. There are options for different term lengths with a fixed-rate mortgage. You can pay off the mortgage in only 10 years. You could also opt for a longer loan term of 30 or 40 years.

Fixed-rate mortgages are especially advantageous if interest rates are low when you purchase your home. This way, you know your interest rate won’t go up with fluctuations in the market.

Adjustable-rate Mortgage

Adjustable-rate mortgages are another common type of mortgage loan. Unlike fixed-rate mortgages, adjustable-rate mortgages experience changes in the interest rate depending on the economy.

There are numerous possible arrangements for an adjustable-rate mortgage. One common option is a 5/1 adjustable-rate mortgage. With this setup, the interest rate will not change until five years have gone by. Afterward, the interest rate can fluctuate with the market.

You need to be careful with adjustable-rate mortgages. If your monthly payment and interest rate gets too high, you could struggle to keep up with payments.

Interest-only Mortgage

When you take out an interest-only mortgage, you focus on paying the interest off right away. You pay the interest on the mortgage off during the first few years. This can help minimize interest costs. Once all the interest is paid, you pay the remaining balance off. This balance is then paid off much like a fixed-rate mortgage would be.

FHA Loans

FHA loans are government-subsidized loans. The Federal Housing Administration guarantees these loans. This makes FHA loans a little easier to qualify for. If you have a low credit score, you might want to look into FHA loans. FHA loans aren’t just more flexible when it comes to credit score. They’re also more flexible regarding income. You might not make enough money to qualify for a traditional loan. However, you might find that you can be approved for an FHA loan thanks to more lax underwriting.

VA Loans

If you are a veteran, you may be able to take advantage of a VA loan. These loans are made available to those who have served in the armed forces. One big advantage of VA loans is that you don’t have to put a down payment on the home. VA loans also generally offer great terms and flexible options.

Balloon

A balloon mortgage arrangement requires you to pay off the interest first. Once the interest is paid, you’ll be expected to pay off the entire principal of the loan.

Subprime Mortgage Loan

If you don’t have the best credit, you’ll be shopping for the subprime mortgage loan market. Mortgage lenders are often willing to lend to those with poor credit. However, they will charge higher interest rates on subprime loans.

Dealing with subprime mortgage loans can be tough. You need to be reasonable and avoid excessive mortgage costs. If you’re looking at subprime offers that are expensive, you might want to wait and improve your credit before buying.

How the Process Works

The process of applying for a mortgage loan is similar to the process of applying for any loan type. The lender will ask you to fill out an application. You’ll provide information about your identity. You’ll also provide information about your employment situation. The lender will want to know how much money you’re making. The lender will ask you for your social security number and run a credit check.

Every lender is a little different. The way mortgage lenders process and evaluate applications varies. Generally, you should know quickly whether you’re approved.

Research and Getting Quotes

You shouldn’t just jump into applying for a mortgage loan right away. There is some important research to do first. This research involves first looking into your options. Evaluate your credit and income situation. Find mortgage lenders who are likely to be willing to work with you.

Some lenders might offer a loan estimate when you’re shopping for a mortgage. This allows you to see how much you can qualify for without actually applying. Once you’ve found some lenders who you think may approve you, it’s time to apply.

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Applying

Filling out mortgage loan applications is generally fairly simple. Most of the information you’re asked on the application will be things you know off the top of your head. Some mortgage lenders allow prospective borrowers to apply online for pre-approval. Others might require a paper application.

When it comes to applying, you’ll generally be looking for pre-approval. Usually, with home shopping, you don’t officially apply until you’ve found a home that you’re interested in buying. You’ll, therefore, seek out pre-approval as an important step in the mortgage loan process.

Closing the Sale

Once you’re pre-approved for a mortgage, you can start home shopping in earnest. Then, you can make an offer on the right home. If your offer is accepted, you’ll take the next steps with your mortgage loan. Your mortgage lender might want to do some research on the property you’re buying.

When you and the seller are ready to close, the mortgage loan funds will go right to the seller. You will probably have to pay closing fees, mortgage insurance premiums, and a commission for the real estate agent in addition to paying for the sale value of your new home.

In Conclusion

Now that you’ve done some research on mortgage loan shopping, it’s time to get started. You should start improving your qualifications for a mortgage loan right away. Focus on the factors mortgage lenders looks at mentioned above. You want to make yourself more attractive as a borrower.

Analyze your financial situation and determine what you need to work on. If you’re carrying a heavy debt load, pay down your debt. If you have missed payments, focus on making all your payment due dates from here on out. Don’t feel discouraged. Your credit score changes over time. In fact, you can bring your credit score up quickly with effort. Patience and persistence pay off. Make sure you choose a mortgage loan offering reasonable terms. Your mortgage loan will affect your finances for years to come. This means you need to stay away from mortgage loans with excessively high-interest rates.

Home Purchase Loans That Will Make You Glad You Purchased

Home purchase loans are a type of mortgage loan used to buy a home. It’s not a loan that is taken out after you buy the home, such as a home equity loan. A borrower can get this loan from a bank, a credit union, or a private source of funds, including the seller who is selling the home.

When Is the Right Time for Home Purchase Loans?

Before you begin the process of purchasing a home, there are some things you want to consider.

Consider your financial situation. You need to be certain that you have a steady income and have a decent amount of money you can use to put toward your down payment. If you choose to buy a home before you are ready, this can be a disaster financially.

Think about the market. You should be on the lookout for a home that will increase in value over time. Consider if it is an up-and-coming neighborhood that you are buying into and the current economic conditions.

Consider your life stage. If you are going to be moving in a year or two then buying a home right now may not be the best plan. You should only buy a home if you are going to be in it for the next five to seven years since there are plenty of expenses related to buying a home.

The Basic Types of Loans

When you are researching home purchase loans, it helps to know your lingo when it comes to mortgages.

Conventional

A conventional loan that has a fixed loan rate is usually a safe bet. The reason is that the payments don’t change over the life of your loan. These loans are available in different year terms, ranging from 10 to 40, but 15 and 30 are the most common types. With a fixed home loan, you can get the best rates for qualified borrowers and there isn’t any mortgage insurance required if you put down 20%. This type of mortgage is worth a thought if you plan to stay in the home for a longer time period, have built a credit history, and have the funds for a down payment. If you aren’t putting down 20% and have private mortgage insurance, you would be able to refinance at a later date in order to stop paying it.

Interest Only

This loan gives you the option during the first five to 10 years to only pay the interest portion of the payment instead of your full payment. You aren’t required to do this but it slows down the repayment time and this can be helpful. After this period, the rest of the loan is paid off just like a conventional one.

With Adjustable Rate

There are many different types of these home purchase loans. The interest rate will change over time throughout the life of the loan. The rate changes are due to the economy and the cost of borrowing money. A common type of loan is a 5/1, where the interest rate will stay the same for five years and then changes for the rest of the loan. An adjustable-rate mortgage can be useful for you if you plan on moving or selling your home in a few years.

FHA and VA loan

This loan is guaranteed by the Federal Housing Administration. These require smaller down payments than some other options. An FHA mortgage has both fixed-rate and adjustable-rate options available and can be useful for someone with a lack of credit history or someone with some credit problems in the past. With these loans, you are paying the mortgage insurance as part of the loan. This insurance protects the lender in case you default on the loan.

VA loans are for veterans and their spouses to buy homes. The Department of Veteran Affairs guarantees them and some don’t require a down payment.

Combo, Ballon and Jumbo loan

The combo loan is when you put down less than 20% and then get another type of loan to pay for the down payment, in order to avoid paying any private mortgage insurance.

With a balloon loan, you would pay interest for a certain period of time. And after this time the total principal amount is paid.

A jumbo loan is too big for the federal government to guarantee. This means that the borrower wouldn’t get the lower interest rate that would be available on smaller loans. A jumbo mortgage may be the right choice for you if you can put down 20%, have good credit, and want to avoid multiple mortgages.

Income and Equity Requirements for Home Purchase Loans

The lender determines home mortgage pricing in two different ways. In addition to checking your FICO score, lenders also calculate the loan-to-value ratio to set the interest rate and the amount of money they will loan to you.

The loan-to-value ratio, or LTV, is the amount of implied equity that is available in the home or collateral being borrowed against. For a home purchase, LTV is decided by dividing the loan amount by the purchase price of the house. The more money you put down with your down payment, the less likely you are going to default on the loan The higher the LTV, the greater the risk of default so lenders charge you more.

The debt service coverage ratio helps the lender determine your ability to pay the mortgage. A lender will divide your monthly income by the mortgage cost to look at the probability that you will default on the mortgage. The greater the ratio for this number, the greater the probability is that you will be able to cover the borrowing cost. And the lender doesn’t take on as big a risk.

It’s important that you include any type of qualifying income you have when you are negotiating with a mortgage lender. Sureties, another income-generating business, or an extra part-time job can make a difference when qualifying for a loan and getting the best rate possible.

Steps to Getting a Home Purchase Loan

There are some different steps of getting home purchase loans that you should be aware of before you begin the process.

Steps to Getting a Home Purchase Loan

1. Review your financial circumstances

Start to pull your credit reports and scores. You can start to use a home affordability calculator to see how much home you can afford. If your credit score is too low or you aren’t able to afford a home in your market, you will need to spend some more time-saving.

2. Decide which mortgage type is right

With so many different mortgage types, you need to consider which one is best for your financial situation. Do you want a 15-year or 30-year mortgage? Do you have a down payment large enough for a conventional loan or do you need to rely on an FHA loan? Are there mortgage options where you could avoid mortgage insurance? Mortgage loan shopping is an important part of the process so be sure not to skip it

3. Get pre-approval before you start house hunting

Once you have a preapproval letter in hand it’s easier to shop for homes in that price range. Home sellers will take you more seriously if you are already preapproved

4. Make an offer on the prospective home during this time

You will have to make an earnest money deposit to show your commitment

5. Get a home inspection

Once the offer is accepted you want to pay for a home inspection to ensure the home is ready to live in and to identify any repairs the seller should complete before the sale moves forward. At this point, you will also fill out a formal mortgage application

6. Work with the underwriting team

The application goes to the next stage, which involves verifying documentation before you get final approval. The underwriting team will ask for updated paperwork so you want to be quick in your response in order to prevent any delays. The lender will also order an appraisal to confirm the home value is enough for the loan amount. You get the closing disclosure three days before your scheduled closing date

7. Start saving

Not only will you need some money for a down payment in most cases but you also want money to cover your closing costs. In addition, you want to keep your emergency fund intact before you buy the home so you can prove to your lender that you can make the mortgage payment should you suffer a medical emergency or a job loss

8. Complete the final walkthrough

Before you go to the closing table, walk through the property to make sure the repairs were addressed. Once you are at closing you will pay your down payment, sign several documents, pay your closing costs, and get your keys

Home Buying Mistakes to Avoid

Buying a home can be a great experience but it can also be overwhelming. There are ways to streamline the process but it’s important to avoid these home buying mistakes.

Preapproval First

It’s best to start the process of home purchase loans early and get a preapproval. This part of the process is helpful because it shows you how much home you can reasonably afford and that way you can adjust your expectations and budget accordingly. Preapproval will also give you the opportunity to check your credit. Once you have preapproval you can confidently shop for a property knowing that your financing will be in place.

Putting Off Credit Issues

You have to deal with the credit issues that could be keeping you from getting a loan. This includes raising your credit score, waiting to open more credit cards, and paying off debt. Your credit score is a key factor that determines the conditions and terms of your mortgage so it’s important to know where your score stands. Those with a score of 620 could pay almost a full percentage point more than someone with a 740 score. Some credit issues can be easy to fix and it can save you thousands on your loan. Start tracking your score now.

Making Assumptions About a Down Payment

You may think you don’t need any money for a down payment but, in fact, you do. You can get away with less than a normal 20% down payment but you likely have to put something down.

Not Having a Good Real Estate Agent

Finding a real estate agent who is knowledgeable and has your interest in mind is important to home buyers, especially first-time home buyers. You will likely have a lot of questions and this person is responsible for helping you find your dream home. In addition to finding someone you trust, you need to find one with current market knowledge.

Not Researching Mortgage Lenders

Finding a good mortgage lender is imperative in a competitive market. A seasoned mortgage lender can help you set your financial goals and secure a loan within your budget. Once you find someone you trust you can feel confident in the mortgage rates and the steps they are helping you take to protect your finances. Start with referrals from family and friends and then ask questions.

Loanry can help you to find reputable, trustworthy lenders. Put in your information below and see if you will get any offers from potential lenders.


What You Need for Preapproval for Home Purchase Loans

Since preapproval is such an important step when it comes to home purchase loans it helps to know what you need in order to get one. Preapproval usually lasts for a particular period, such as 60 or 90 days. The final approval happens when you have an appraisal done and the loan is applied to the property you are buying.

Proof of Income

Homebuyers will need to produce W-2 wage statements from the past two years, some recent pay stubs that show your income, and year-to-date income. There should also be proof of any additional income, such as bonuses or alimony and the most recent year’s tax returns.

How to Find A No Income Verification Mortgage Loan?

Proof of Assets

A borrower will need investment account statements and bank statements to show that there are funds for the down payment and for the closing costs, as well as additional cash reserves. The down payment will vary by loan and will have mortgage insurance if you are putting less than 20% down. A buyer who has money from a relative or a friend to help with the down payment will need a gift letter in order to prove that the funds aren’t a loan.

Good Credit

For a conventional loan, you will need a FICO score of 620. For an FHA loan, you may need a lower credit score. Keep in mind that lenders will usually reserve the lowest interest rates for those with a credit score of 760 or higher. The FHA guidelines allow for approved borrowers who have a score of 580 or higher to pay as little as 2.5% down. Those with lower scores will need to make a bigger down payment. Lenders may work with you if your score isn’t high enough to suggest ways to improve the score.

Employment Verification

Lenders want to be sure that they lend money to a borrower with stable employment. Lenders not only want to see the pay stubs but will also call the employer to verify salary and employment. A lender may want to contact the employer if a buyer recently changed jobs. Those who are self-employed will need to provide a lot more paperwork confirming income and their business. The factors that go into approving a self-employed borrower include:

  • the stability of the borrower’s income
  • the nature and location of the borrower’s business
  • the financial strength of the business
  • the ability of the business to continue generating income
  • the demand for the products or services offered by the business

A self-employed borrower will need to have at least two recent tax returns with all appropriate schedules.

Other Documentation

Even if all this seems like a lot of documentation, you may still need more. Lenders will need a copy of your driver’s license and your Social Security Number. This allows the lender to pull a credit report. Prepare yourself for all this documentation at the pre-approval session. And then you may need to provide additional paperwork if requested by the lender at a later date. The faster you provide the documentation needed, the smoother the process will be.

You want to do this all before you go house hunting. Getting approved for home purchase loans before you find your dream property will save you a lot of trouble down the line. And home sellers will take your offer more seriously with financing already in hand.

Conclusion

Home purchase loans give you the opportunity to purchase one of the biggest things in your life: your home. There are different types of home purchase loans and mortgages to consider and it helps to work with a mortgage lender in order to find the right one that suits your needs. Your income and credit score will play a big role in if you qualify for a loan and what your interest rate will be. There are some home-buying mistakes you want to avoid. Preapproval is an important part of the process and you can make it much smoother by having all the right documentation ready to go.

Rural Mortgages for Those That Like Country Living

Living in the city can be incredibly convenient. Having pretty much anything you need within minutes- possibly walking distance- is awesome. It definitely saves money on gas, but there are some things that living in the city just does not offer.

I had the privilege of growing up in the country. I had a huge yard to run around in and plenty of trees to climb. My cousins and I played football and softball in my front yard and rode four wheelers all over the place. The neighbors all knew one another and I could walk down to the little general store down the road without fear. These are things that I cannot give my kids in the city where we currently live, though I really want to.

If you are like me and dream of giving your family wide open spaces to play and grow, rural mortgages just might be the answer for you, especially if you are having trouble obtaining any other kind of mortgage.

On more than one occasion, I have looked around and wondered, “How can people just buy a house?” For many, first-time home buying is nearly impossible due to credit issues, low income, and a lack of down payment. Personally, my head spins when I think about all of the steps I need to take for a mortgage lender to approve me. Improving your credit, increasing your income, and saving for a down payment all at once is quite the feat.

This is why so many people still rent, even though rental payments are often twice the price of a mortgage payment. Fortunately, there are rural mortgages for those who think it is impossible to own their own home.

What Are Rural Mortgages?

Rural mortgages are mortgage loans that people can get for homes in rural areas. They are also known as USDA loans. The USDA has what they call the Rural Development Guaranteed Housing Loan Program, which is intended to help improve life in rural areas.

Rural mortgages are zero down payment mortgages that are for low-income borrowers. These can be an excellent option for families who cannot qualify for other mortgage loans or afford the payments. They give people who feel that it is hopeless to own a home a chance.

Due to the name of these loans, many people assume that they are intended for farmers. While farmers who meet the eligibility requirements can certainly apply, being a farmer is not part of the requirements.

Who Is Eligible for Rural Mortgages?

USDA loans require the following:

  • The borrower must actually live in the residence and it must be his or her primary residence. As this program is intended to help families with their living arrangements, those looking to simply use the property for investment purposes or as a vacation home do not exactly meet the need that the program is trying to fill.
  • The homebuyer must be legally able to enter into a financial obligation. In short, those with any mental incapacity deemed unable to enter into binding contracts do not qualify.
  • The borrower must meet the income and debt-to-income ratio requirements set forth by the program:
    • You must prove that you have had dependable income, usually for at least two years. However, if extenuating circumstances, such as an injury, interfered with your steady income, that will be taken into consideration.
    • You must fall within the income limits of your county. The income used to determine eligibility is the combined income of all persons over the age of 18 in the home, regardless of who is and is not on the mortgage paperwork.
    • Your monthly debts, excluding your mortgage, cannot exceed 41 percent of your income.
    • The mortgage payment, including interest, taxes, and insurance, should not exceed 29 percent of your income.
    • For example, if you make $1,000 per month, your mortgage payment should be no more than $290 and no more than $410 should be going out to other debts.
  • The homebuyer cannot have been suspended or otherwise barred from federal programs.
  • The borrower must be a U.S. citizen or have permanent residency.
  • The homebuyer should meet the following credit requirements:
    • Have had no debts sent to collections in the last year- unless it is due to extenuating circumstances, such as a medical problem
    • There is no minimum credit score, but those with a credit score under 640 may face more requirements
    • Those with no or little credit history can provide credit references from utility companies, previous landlords, and so on.

What Type of Property Qualifies?

For a property to qualify as rural, it needs to be outside of any cities or towns. Basically, rural properties are those set in the country instead of the city. Some people describe it as anything that is not in an urban area. If you are considering rural mortgages and are unsure if a particular property qualifies, you can ask the lender for clarification or check here.

Types of Rural Mortgages

There are actually three types of rural mortgages or USDA loans. Besides rural mortgages, there are more types of mortgages that you should be familiar with. Every information can help you decide which type is the right one for you.

Direct USDA Loan

If specific criteria are met, the USDA provides mortgages directly to the borrower instead of the borrower going through a bank or other mortgage lender. These loans are better suited for those who fall within the very low to low-income brackets for their area who do not qualify for any other financing. In addition to the previously mentioned requirements and the specific income requirements, USDA Direct Loans are often intended for those that are without safe and sanitary housing and on homes that are 2,000 square feet or smaller.

Guaranteed USDA Loan

Sometimes, the borrower will go through a lender, such as a bank, to get a USDA loan. This is most often for borrowers that fall within the low income to moderate-income bracket for their area. The USDA guarantees your mortgage, which means that if you do not pay it, they will repay the lender. This makes lenders more comfortable about loaning money to people who normally would not qualify for a loan.

USDA Home Improvement Loans

These loans are for low-income borrowers that need to repair or otherwise improve their homes. Sometimes, a part of these loans is actually grants, meaning you do not have to repay them. One can borrow up to $20,000 with an interest rate as low as 1 percent and with 20 years to repay.

Benefits of Rural Mortgages

No Down Payment

A huge benefit is that they do not require the homebuyer to have a down payment. This is a very unique benefit and is one thing that makes home ownership possible for those with low income.

Low Interest

USDA loans offer some of the lowest fixed interest rates available on the market.

Favorable Terms

While you do have the option to choose a 15-year mortgage, you can also stretch it out to 30 years.

No Prepayment Penalties

If your financial situation changes for the better and you decide to pay off your mortgage early, you will not be charged any prepayment penalties.

Bankruptcies Are Not a “No”

Filing bankruptcy usually hurts a person’s ability to get credit in the future, at least for a time. Fortunately, USDA loans may still approve those who have filed bankruptcy if:

  • You have made all of your payments on time for at least a year
  • You have been discharged from Chapter 7 bankruptcy for at least three years

It is rare to find mortgage programs open to applicants with a recent bankruptcy, so this is a really awesome benefit of rural mortgages.

Even Some Suburban Areas Qualify

You may be thinking that you have to find a house out in the middle of nowhere, but that is not actually true. There are many suburban areas that qualify as rural. In fact, the majority of the country qualifies.

They Can Include Closing Costs

Just like down payments, closing costs can be a problem for low-income buyers. With USDA loans, the closing costs can actually be included in the loan amount.

Loan Can Be Used For A Lot

While the major point of these loans is to buy a home, they are actually good for much more. You can use them to refinance or build a home. Any needed repairs can be covered with the loan. A USDA loan can also be used to make the home energy efficient, to pay connection fees of utilities, and household equipment, such as refrigerators, that are conveyed with the home.

Flexible Credit Requirements

As previously stated, there is no set of credit requirements. Unlike most other mortgages, the USDA is not so stringent. They actually take into consideration the financial challenges that low-income families face and remove as many of those challenges as possible.

Full View of Your Situation

With most loans, the lender deals in absolutes. If you show a gap in employment, it usually does not matter if it was due to an injury that kept you out of work. The fact is that there is a gap in income. This is, of course, not true with every lender, but with many, it is.

Thankfully, the USDA takes a full view of your financial situation before making a decision. They deal with each individual situation as they come in. If you did miss income due to something like an injury, they take that into consideration. If you do not hit every requirement the USDA has, they actually consider the reason behind it.

No Max Loan Amount

There is no set maximum loan amount for rural mortgages like there are with other mortgage types. The loan amount depends on the home’s appraised value, the borrower’s income, and the borrower’s ability to repay.

Downsides of Rural Mortgages

Mortgage Insurance

You are required to have private mortgage insurance (PMI) if you choose not to put down 20 percent, but it can be included in your loan.

Limited Location

Though most of the country is open, you do have limits on the location you can buy a house. These limits are very small, mostly only blocking out highly populated areas, but they are still limits.

What to Expect from the Process

While every situation is unique, there are the following basic steps you will go through:

Preapproval

You first need to find a lender. Even though you are applying for a USDA loan, you want to do some mortgage loan shopping. Different lenders may have requirements separate from the USDA’s requirements.

For instance, a lender may choose not to work with anyone who has a credit score of less than 650. That is not the USDA’s requirement, so you can still get a USDA loan. You will just need to do it through a different lender. Once you find your lender, if you meet all of the criteria, they will give you a preapproval.

If you want to check right now whether you can get offers for a loan, put in your information below and you’ll get offers in seconds.


Find Your Home

After you have your preapproval and know the amount you can borrow, it is time to start looking for your dream home. If you have kids, be sure that you check out the schools in the areas you are considering. Looking into potential employment in the area can also be helpful in making a decision.

Sign the Paperwork

After you find your house, it is time to start the official paperwork. During this step, someone usually checks out your soon-to-be home to ensure it falls into the USDA’s guidelines.

Get Your Final Approval

Your mortgage application goes to the USDA for a final review and approval.

Close

If everything lines up, you finish signing your paperwork. Within a few days, you should be moving into your new home. The entire process typically takes a few weeks.

USDA Loan Process in 7 stepsApplying for Rural Mortgages

If you are ready to apply for a rural mortgage, you need to know where to apply. Direct loans and home improvement loans come straight from the USDA, but guaranteed loans go through participating lenders. To learn where to apply in your state, check here.

Next, it is time to prepare for your application. The following shopping for mortgage tips can help:

If you are applying for a guaranteed loan, talk to a few different lenders. Going with the first one you find is not always the best option, so shop around a little before deciding.

Check your credit. Make sure that you have had no collections accounts added in the last year.

Have the necessary documents available:

  • ID and social security card or proof of permanent residency
  • Copy of bills and debts you pay each month
  • Proof of income for the past two years and tax returns
  • Documentation of any extenuating circumstances that may have affected your income or credit

Know what kind of payment you can afford. Lenders tell you what they think you can afford, but sometimes they grossly overestimate. They take into account your bills but not everything else.

For instance, let’s say you have committed to donating $100 per month to a charity or you pay for your kid to take gymnastics. The lender does not know this or any of your other financial goals, so they may think you can afford a $400 payment each month when you can actually only pay $300.

The easiest way to prevent this is to know how much you can afford to pay prior to applying for the loan. Figure up your bills and all of your extras, including your Netflix subscription and date night. Add in any groceries you buy and household products, like cleaning supplies and tissue.

If you know you spend money on it regularly, add it up. Subtract that amount from your income and you will have how much you can afford each month. Prepare to share this amount with the lender you speak with. This can help you find a house within your budget instead of finding yourself in debt you cannot repay.

You may find that the amount you can afford is not going to help you obtain the house you want. If this is the case, you can always go through your budget and look for areas in which you can cut back. You might also consider a second job. Either way, be sure that you can comfortably afford the payments before you accept the mortgage or even look for the house.

Conclusion

If you are looking to buy a home outside of a metropolitan area and you cannot get approved for a regular mortgage, looking into rural mortgages just might be the best decision you can make for you and your family. Take a look at the income requirements to determine if you are eligible. If you are, gather your paperwork and start looking for lenders. You might find yourself in your dream home sooner than you can imagine.

Fixed Versus Variable Rate Mortgage Loans Explained

Buying a home: what an exciting time! It might be simpler if mortgages were one size fits all. It would be nice if you knew you would get approved, that you would get the best interest and repayment terms because there was only one type. Like, you know ahead of time that you will go in and apply, get approved for a 15 year mortgage at 3% interest, and so on. You know what you are getting into, you know the common words that are thrown around with mortgages, you know exactly what your contracts mean and all so there is absolutely no confusion.

Yes, I know, it would be wonderful. Unfortunately, it just is not real. There are so many different terms and factors and rates and everything when it comes to mortgages, and interest rates is a major thing that changes depending on so many factors. That, my friends, is going to be our discussion for today. Among other important mortgage information, we are going to have a talk about fixed versus variable rate mortgages. Why? The one you choose can have a major impact on every other part of your mortgage. Choosing the best one for your bank account and lifestyle is beyond important.

Fixed Versus Variable Rate Mortgage: The Basics

Of course, in order to talk about these different types of mortages, we need to make sure you know the basics. In the next couple of sections, I’ll define fixed and variable rate mortgages, compare them and talk about pros and cons of each. So here we go.

Fixed Rate Mortgage

A fixed rate mortgage means that the interest rate will stay the same throughout the entire mortgage term. This means that if your rate is for example 5%, it will stay like that forever. You will see the change in the payment every month, but not because the interest rate changed. It is because the principle amount owed decreases over time. Let’s see an example of a so called amortization. means that each mortgage payment you make puts some towards the interest and some towards the principle. In the beginning, your monthly payments pay a high amount of interest with little going on the principle. However, as the principle decreases, so does the interest, meaning that with every payment pays more to the principle than the last payment.


Month1:

Payment= $536.82

To Interest $416.67

To Principle= $120.15

Month 2:

Payment= $536.82

To Interest= $416.17

To Principle= $120.66

Month 3:

Payment= $536.82

To Interest= $415.66

To Principle= $121.16

Month 6: (Skipping Ahead)

Payment= $536.82

To Interest=$414.14

To Principle= $122.68

Month 9 (Skipping Ahead)

Payment= $536.82

To Interest= $412.60

To Principle= $124.22

Month 12: (Skipping Ahead)

Payment= $536.82

To Interest= $411.04

To Principle= $125.78


As you can see, your payment stays the same, but how it is split changes. The amount will continue to shift until your very last payment. It is important to note that the interest rate remains at 5% the entire term.

Variable Rate Mortgage

In most cases, if you try to look up what a variable rate mortgage is, your head will start to swim. The explanations can get crazy, which is crazy in itself. It is not really that bad. Like a fixed rate mortgage, a variable rate mortgage has set payments. To keep everything simple, we are going to use the same payment information as in the amortization example above, making the monthly payment $536.82.

The difference is that the interest varies according to market fluctuations. You are still paying the same $536.82 every month, but the amount of that which is put towards the principle depends on the market. Where the fixed rate mortgage meant the interest was determined according to the fixed 5% interest rate and the amount of principal you owe, it can get a little crazier with the variable rate.

Let’s put it like this: With a variable rate mortgage, if the market interest rate is only 2%, then more of your monthly payment is going to your principal. If the market interest rate goes to 6%, less of your monthly payment goes to your principal.

How Come The Interest Rates Can Change?

If you are wondering how do banks set the rate at which they give loans, here it is. The interest rates depend on the Federal funds rate. The Federal Reserve determines the periods where they either tighten or ease the Federal funds rate. So naturally, when you are looking to buy a home and get a mortgage, timing is everything. If you are looking for a fixed rate mortgage, it is crucial that you get the mortgage during the period where the Federal funds rate is low. Because once you set the rate, it stays like that forever. However, if you are looking to take out a variable rate mortgage, it will change according to what we just mentioned.

Variable Rate Mortgages and Adjustable Rate Mortgages are Not the Same

As if fixed versus variable rate mortgages are not confusing enough, there is another term to throw into the mix. Let’s go ahead and get it out of the way: Variable rate mortgages and adjustable rate mortgages are two separate things. An adjustable rate mortgage is a type of variable rate mortgage, but the terms are not mean to be interchangeable. Adjustable rate mortgages mean that the borrowers payment fluctuates according to the market interest rate.

A variable interest rate mortgage- unless specified otherwise- keeps the payment the same. Sometimes, though, depending on the contract, the payment with a variable rate mortgage only keeps the payment the same for a certain number of years, so be sure you know what you are signing up for.

Fixed Versus Variable Rate: Pros and Cons

So what are the clear cut differences between a fixed versus variable rate mortgage? Now that we have gone over all of this information, let’s see if we can tie it all together with a nice little bow.

When it comes to choosing between fixed versus variable rate mortgage, there is one thing to know: you have to consider the pros and cons according to your life and make up your own mind.

Variable Rate is Historically More Beneficial

Up to this point, variable rate mortgages have charged less interest over the life of the loan. This tends to make new borrowers decide to go with variable rates, but it is important to note that history does not decide the future. Just because it has charged less in the past does not necessarily mean that it will charge less in the future.

Another pro is that this type of mortgage is much more flexible. You can decide to pay more every month, or even pay the mortgage off earlier, but you don’t have to worry about the penalties as with other types of mortgage.

Fixed Rate Mortgages are More Predictable

With a fixed rate mortgage, you know how much interest and how much principle you will be paying every month. In fact, your lender might have even printed you off a schedule. You know when your last payment will be and you can literally count down until that moment. And you can even much more easily make a plan to pay your mortgage off early. You can determine how much faster you can pay it off if you pay just an extra $5 per month.

This is not so easy with variable rate mortgages. Sure, you can take a look at current market rates each month and decide what to do, but you cannot make a progressive plan ahead of time. With all of the fluctuation in the market, the best you could probably do is a month to month plan, but that might not even be foolproof considering that daily mortgage rates change.

Consider the Cons As Well

We talked about the pros, but there are also cons. With a variable rate mortgage, you never know what could happen. Yes, the rate just might go down, but there is a chance that it goes up as well. This is a very important thing you should be aware of. You can benefit greatly from a variable rate, but you might also have less luck during your 20/30-year term.

On the other hand, a fixed rate mortgage rate does not change, but if the rates drop, you have no way of benefiting from that. Your rate is fixed, and it stays the same no matter what happens. It is also pretty difficult to increase the amount you pay every month without any penalties. So if you think you will somehow get a larger amount of money in the future, you would want to leave the option of repaying your mortgage earlier open (or at least paying more each month).

The fact of the matter is that if you wish to make any type of plan for the future, it is best to choose a fixed versus variable rate mortgage. If you are okay going with the flow, a variable rate may be the better choice.

Choosing Between Fixed and Variable Rate Mortgage

As with most financially related stuff, there is not a single answer to this question. It largely depends on several factors. You should ask yourself whether you appreciate stability and predictability more than potentially paying less in interest over time if it drops. But you should also ask yourself whether you will be able to handle increasing of rates if you choose a variable rate.

Some other things to consider are whether you will want to pay off the mortgage earlier if you get the chance, or maybe increase your payments. These two things are more difficult to do with a fixed rate mortgage. You can also think about whether you love the terms of a fixed mortgage and if you will be able to stick to them, then this may be the right option for you. Finally, if you are considering to switch mortgage one day, you should definitely look into a variable rate one, since it not possible or very expensive when you have a fixed rate mortgage.

The Mortgage Process Including Fixed vs Variable Rate

Have you ever applied for a mortgage? If you have not, you may be surprised to know the entire process of applying, getting approved, and closing the deal can take months. The average, when everything goes at least somewhat according to plan, is three to five months. I say this not to burst any excitement bubbles, but for three reasons:

  • To set proper expectations.
  • To make sure you know that you have time to step back and really make sure you are making good choices with your mortgage loan shopping.
  • Also to let you know to take your time and do your part as well as possible to prevent adding extra time to this timeline.

Now that you know what fixed and variable rate mortgages are, their similarities and differences, let’s describe the mortgage process so you know what to expect.

Step 1: Get Ready for a Mortgage

Really….if you are buying a home with a mortgage, you need to prepare for it. This should start with a look at your credit report. What type of rates will your credit get you? Of course, you will not know this until for certain until you get offers, but you can get an idea. The best rates usually go to those with a credit score of at least 750.

Sometimes, you can find good terms for lower scores, but it takes some real rate shopping to find them, so take a good look around and do not settle for the first mortgage lender you locate. In fact, getting preapprovals from a few lenders is a really good move to compare.

This is the moment where you should decide whether you want a fixed, or a variable rate mortgage.  Take a dive into your financial situation and decide what seems best for you and your family. If your kids will be moving out in ten years and you and your spouse plan on downsizing at that time, a variable rate mortgage that you can pay off earlier may be a good fit for you.

After you have an answer solidified on that, consider your down payment. How much can you put down to help lower your mortgage? Really think about this. If you must, find a way to increase your down payment. Remember- the less you borrow, the less you pay interest on, which should always be a goal. Whether the interest is fixed or variable, it is always best to borrow as little as you can.

Now, you can start looking into mortgage lenders a little deeper and put in official applications. You will get either a rejection or preapproval. The good thing, though, is that if you are rejected, you can ask what you can do to get approved. Often, lenders can give you some pretty good and clear suggestions since they have actually taken a look at your credit. Hopefully, though, you will be approved and get to move to the next step.

Step 2: Find Your Home

Sorry, the work is not over- it has just begun. You now have to find a home that meets your needs and wants within your loan amount and price range. This is done more easily with a real estate agent, but do remember that there may be extra fees included with hiring a real estate agent. Most often, they will be included in all of your home buying negotiations/closing costs, so nothing should be coming out of pocket. When you find the right home, you make an offer.

Step 3: Get the Mortgage

If the seller accepts your offer, it is time to get to the nitty-gritty. It is time to finalize the mortgage and all the details it involves- including but not limited to choosing between a fixed versus variable rate mortgage- get the home inspected and appraised (the costs of which are usually included in the closing costs), negotiating, and anything else that may need to be done.

In this step, Loanry maybe can help you to make all process a little bit easier. All you need to do is to enter your information and see whether you could be paired up with lenders which may make you an offer within next couple of minutes. You can start here:


Step 4: Wait

You are pretty much done, but you have to wait on the lender to finish its process, which means the underwriting process. They will verify everything, ask you for any additional documents, and so on. When they have finalized their approval, you finish signatures and make your down payment and close the deal. Whew! It took a lot of work, but you are now in your new home. All you need to do now is enjoy it and make your mortgage payments, which is why choosing the right mortgage and interest rate is so important. You do not want the wrong choice to cause you to lose the home you worked so hard for.

Conclusion

I hope that this guide has helped you get a good understanding of common mortgage terms and what it means to choose between fixed versus variable rate. When you do get your hands on your dream home, I want you to be able to hang onto it. Look through this guide as often as you need to feel confident in your decisions and, of course, do not forget to consult your financial advisor if you need to discuss your situation specifically. Be sure you take your time with all of your rate shopping and decisions. This is a commitment, so do not rush until you feel confident about your decision.

 

No Closing Cost Mortgage: We All Like No Cost

A no closing cost mortgage can be a bit confusing but it’s one of the residential mortgage types that are available to you. With this term, you may think that the fees are being paid by someone else or being waived completely. With a no closing cost mortgage, you are instead paying the closing cost with your loan balance instead of out of pocket. Not every bit of your closing costs will be able to get folded into your loan. But the closing costs you pay at the signing will be less than with a traditional mortgage.

What Are the Closing Costs?

Every house mortgage will come with some closing costs. Closing costs can be pretty high and typically range from about 2% to 5% of the loan amount. It may be helpful for you to calculate the closing costs for your particular situation so you can get an idea. If you are purchasing a $250,000 home then you may be paying anywhere from $5,000 to $12,500 at the settlement table for closing costs. The closing costs vary with your specific situation and location. Common closing costs include the appraisal cost, title insurance, tax service provider fees, taxes, and prepaid costs, such as homeowners insurance and property tax. Lenders can also add loan origination fees and application fees that can increase the closing costs.

There really isn’t a way to get a home without closing costs. You have the decision whether or not you pay them with cash when you are signing the loan or add them into the monthly mortgage payment. However, there are ways to reduce the closing costs by negotiating third-party charges and lender fees. It’s also possible to qualify for housing grants or closing cost assistance in some areas. Many of the grants can be free money and you don’t need to prepay them unless you move or refinance. If you have a military connection, VA loans have a limit on the closing costs that are allowed.

How Does a No Closing Cost Mortgage Work?

There are two different ways that lenders structure no closing costs mortgages. The differences are subtle but the result is the same.

1. A lender can have you finance the closing costs. With this loan, the lender just adds your closing costs to the total loan balance. The monthly payments will be higher because you are now paying the closing costs with interest for the full length of the term.

2. The second option is that the lender absorbs the closing costs but you have a higher interest rate. This also means you will be paying more each month since your total interest costs will be higher over the life of the loan.

No matter how the lender does it, your monthly payment will increase slightly. You will pay less at closing time but pay more over the life of the loan.

Pros and Cons of a No Closing Cost Mortgage

One of the main advantages of using this type of loan is the upfront savings. With this loan, it helps a borrower who is short on funds to close. This is helpful if you have made a large down payment and already paid out of pocket for your inspection and appraisal. You may still want to have some cash on hand to make upgrades and renovations once you move into the home. You may not need the cash on hand for home improvements but may need it for other expenses, such as medical expenses. Maybe you would rather have the peace of mind that having a large emergency fund brings.

Assigning a dollar amount to the savings will depend on the purchase price and closing costs. If paying for closing costs out of pocket would drain your cash then a no closing cost mortgage can be the obvious choice. However, you should weigh the original savings against what you may pay in interest over the loan when you have a higher rate. Even just a small fraction of a point can cost you thousands of dollars over the loan term.

For example, Buyer A has a 4% rate, while Buyer B has a 4.25% rate. Both are purchasing a $250,000 home. Buyer A pays $179,674 in interest while Buyer B pays $192,746. This is a difference of $13,072. You then have to add this interest to the additional interest Buyer B is paying for the closing costs in the loan. Financing the closing costs can make it harder to qualify for a loan and the higher interest rates can mean a bigger monthly payment, which could push your budget. If your borrower qualifications are already tight then the higher interest rate could be an issue.

Debt to Income Ratio

Your debt-to-income ratio is the percentage of your income that is going toward paying your debt each month. Many lenders like to see a number of 43% or less. This figure will include what you are spending on your mortgage, as well as student loans, credit cards, and any other debts you have. If you are accepting a higher rate to pay for the closing costs then this will increase your monthly payment. When you are increasing your monthly payment, you have a higher debt obligation.

Even if you are okay with the extra interest and are getting a no closing cost mortgage, it doesn’t mean that you don’t have any money due at the table. Your lender may allow you to have a loan that covers customary closing fees, such as tax recording or escrow. However, you may still have to pay for things typically charged as closing costs, such as private mortgage insurance, transfer fees, or real estate taxes.

Is A No Closing Cost Mortgage Right for You?

If you are considering a no closing cost mortgage then you should think through the decision carefully. You should weigh the pros and cons and keep some things in mind. What is your motivation for getting the no closing cost loan? How much are you saving by not paying any closing costs upfront? What is the new loan rate and how much does it affect your monthly payments? How long do you plan to stay in the home?

The decision on whether or not a no closing cost mortgage is right for you is going to depend on how long you plan on staying in the home. If you are going to stay in the home for the full mortgage term then you will end up paying more for the closing costs, in the long run, thanks to the interest rate. However, if you plan on moving within a few years of buying then the financial impact of the higher interest rate may not matter as much. If you have short-term plans with the financing then not paying closing costs may be a good strategy. However, if you think of this home as your forever home, it’s probably best to pay closing costs upfront, instead of throughout the life of the loan.

Things to Consider with a No Closing Cost Mortgage

You can use different mortgage calculators to determine if a no closing cost mortgage is right for you but there are also some other things to consider.

Do you have enough for closing costs? Many people are only eligible for a loan if they can agree to have a certain amount for a down payment. This can be the bulk of savings for many people and there just isn’t enough to pay for closing costs. Instead of having to dip into an emergency fund or savings, a no closing cost mortgage may be the only way that you can go through with the purchase. If this is the case, you have to decide if the price of this type of mortgage is right for you or if you should save more before you purchase a home.

How long will you be in the home? This can help you determine the break-even point of how long you will be in the home with the added monthly payments. If closing costs are $10,000 then it may take you about 8.3 years to break even. After this, you are paying more than if you would have just paid the closing costs upfront.

Is there an early repayment penalty clause? If you decide to go the higher interest rate route while thinking that you can pay off the loan ahead of the break-even point, you need to check if this is an option. Many mortgage contracts have a penalty for the early repayment of a loan. If your lender does have this, it could make it harder to avoid paying closing costs upfront and avoid paying even more over the course of the loan.

Examples of Closing Costs

  • Loan Origination Fee: The origination fee is so that the lender can prepare your loan. The average fee is about 1% of the loan.
  • Appraisal Fee: During the appraisal process, a professional comes to the property to assess the value. Many appraisers charge $300 to $500 for their services.
  • Title Fees: The document you receive when you buy your home is the deed. The title shows that the seller legally transferred ownership of the property to you. Title insurance saves you from any errors in the records of your property or home.
  • Credit Report Fee: Lenders need to check your credit score and some lenders will pass the fee of checking the score back to you during closing. These fees can range from $25 to $50 depending on your state and your lender.
  • Prepaid Interest: The lender can ask that you pay the first month’s interest upfront during the closing. This will depend on the interest rate and that depends on the type of loan you have and your credit.
  • Discount Points: These are optional and this is the fee you would pay the lender in exchange for a lower interest rate. Each point costs 1% of the total loan amount and you are able to buy multiple points.

Are There Other Ways to Get Rid of Closing Costs?

If you are hoping to avoid closing costs then a no closing cost mortgage may not be the only thing that will work for you. You can also take other routes to help manage some of the costs. One of the first things you want to do is ask the lender to waive some of the closing fees. It doesn’t hurt to ask but don’t expect too much. A more realistic solution can be to ask the seller to cover some of the closing costs by using a concession. A seller concession works by determining the closing costs you want the seller to pay.

If the seller agrees then that amount is added to the purchase price. You get a mortgage for the new purchase price and then the original purchase price is paid to the seller and the differences go to the closing cost. This is a legal way to roll the closing cost expenses into your loan, which wouldn’t normally be allowed unless you are refinancing. However, it’s still important to note that if you are rolling the closing costs into the loan, you are paying interest on them. When you increase the total loan amount, you are increasing the monthly payment as well.

Even with a seller concession, you still need to bring money to closing. The number of seller concessions you can have will depend on the loan type. If you want to ask the seller to pick up some of the closing costs, be sure to get help from your real estate agent. Agents are able to help with negotiations for seller concessions once your offer has been accepted.

Reducing Closing Costs

Besides a seller concession, there are ways to reduce the closing costs you are paying.

Compare Costs

Lenders have different fees. So it’s even more of a reason to go mortgage loan shoppingAnd see which lender offers the lowest closing costs. You can ask a lender to match lower closing costs you see offered elsewhere. There are some services in the closing costs that you are allowed to shop around for before committing. You don’t have to go with the provider the lender suggests if you can find a lower price.

Compare different mortgage lenders here on Loanry. Enter your information below and you will get a list of lenders who may give you a loan, based on the information you put in.


Evaluate the Loan Estimate

Don’t just go through the loan estimate right away. Take the time to evaluate each item with the lender and question what each fee covers. This can be a good way to identify any unnecessary or padded fees. Keep an eye out for fees that have a similar name. This could mean the lender is likely charging twice for the same thing.

Negotiate Fees with the Lender

Once you have a handle on the fees you are paying then you are able to start negotiating. Ask for more vague fees to be knocked off the final total. Ask the lender to give you a closing disclosure form when it’s available. This details the final closing costs. Compare it to what was on the loan estimate and then ask the lender to justify the discrepancies.

Delay the Closing

You can minimize the prepaid daily insurance charges by closing toward the end of the month. Plan ahead and try to schedule your closing when you will have to pay less money upfront.

Save on Points

If you are buying in a low-interest rate environment then you likely don’t need extra points. Paying for points can add up fast so save that money and pay it toward the closing costs.

Alternative Lower Cost Loans

A no closing cost mortgage isn’t the only way to save money. And you may find that there are alternative loans out there to decrease the amount of cash you need upfront.

FHA Loans: These loans are offered by private lenders but are insured by the Federal Housing Administration. Under this program, you can have as little as 3.5% down on a home, saving you money on upfront costs.

VA Loans: These loans are offered to veterans and service members but may be loans that don’t require any down payment.

USDA Loans: These loans are backed by the U.S. Department of Agriculture and are designed for borrowers in rural areas defined by the agency. Under this program, borrowers may be able to take out a loan without making a down payment.

Final Thoughts

A no closing cost mortgage allows you to bundle many of the closing costs into your loan. This way, you end up paying more over the life of the loan in interest. But you don’t have to have a large amount of cash upfront. This may make sense for you depending on if you have the funds for closing, how long you are going to be in the home, and how the structure of your mortgage. There are ways to lower closing costs so you aren’t stuck paying a huge fee upfront. Or having to bundle it into the loan. There may also be alternative lower-cost loans that don’t require large down payments. So you don’t have to bring as much cash to the signing table. Always shop around for your mortgage options so you are picking the right one for your situation.

Mortgage Broker Versus Banks Explained


Buying a house is an important part of life. It is exciting, scary, and stressful all at the same time. There are so many things that you should know when you are preparing to buy a house. When you feel like you do not have all the information, it can be a more stressful time. While there are many details that go along with home buying, there is one that is not talked about much. That detail involves a mortgage broker. You may not even know what a mortgage broker does. Do not worry about that because it will all be explained in the article. Continue reading to find out the differences between a mortgage broker and a bank so you can choose the right one for you.

How Do I Know If I Should Buy A House?

Buying a house is the largest purchase you will make in your life. It is the most expensive and probably the one that will cause you the most headache for years to come. You should make sure you are ready to make the plunge into homeownership before you even start looking at houses. There are a few key items to indicate if you should buy a house now, or maybe wait a little longer. Making sure you are ready for the responsibility is key. While it makes sense to be nervous about taking on a mortgage and the upkeep of a house, if it makes you feel completely unprepared then you may not be ready, yet.

If you have a secure job and believe that you are going to stay where you are for a while, then now may be a good time to buy a house. When you buy a house, it makes you feel a little more stable in your life and community. If you know you want to stay where you are for a while, buying a house may be a good idea. Perhaps you are interested in getting a tax break. If you do not have a mortgage to claim, you are missing out on a tax break and could pay higher taxes. Owning a house also gives you the opportunity to earn equity in something. As you pay the mortgage, the home becomes yours. When you have paid it off completely, you own it and it becomes your largest asset.

What Is A Mortgage?

If you think that you are ready to buy a house, there are some details that you need to understand. A mortgage is an agreement between you and a lender. The lender agrees to allow you to borrow a significant amount of money to purchase a house and property. You promise the lender that you will make a payment each month to repay the loan until the agreed upon time has ended. At the end of that term, the mortgage has been paid and you are now the sole owner of the home and property. If you do not pay back the mortgage, the lender has the right to take your home.

When you borrow money for a mortgage, you are borrowing the cost of the house, but you are also paying interest on the money you borrow. The amount of interest you pay is directly related to your credit. A mortgage broker may be able to help you find a mortgage with a lower interest rate. It is important to note that when you are considering the purchase of a home, you should not only shop for a house, but also do some mortgage loan shopping. Not all mortgages are alike and you have to find the one that is the right fit for you.

Mortgage Broker versus Banks – Which One Is Better For You?

Let’s get to the point and explain one possible dilemma you may have when getting a mortgage. This dilemma is whether you need a mortgage broker or a bank. Read on and find out what are the pros and cons of each, which one is better for you, and more about every option.

What Is A Mortgage Broker?

I would like to be clear here by saying that you do not need a mortgage broker to get a mortgage or to buy a house. However, you may want to consider at least talking to a mortgage broker to see what value he or she can provide to you. Remember, anything you can do to make this experience easier for you, you might want to consider. A mortgage broker is there to help you. Yes, of course, this person wants to get paid to provide you a service, but the service is completely to your benefit.

A mortgage broker is basically the middleman for you. This is the person that finds you the best loan with the best rates for your credit score. This person works for you to find the right fit for you. This is the person that works with the banks and applies for several different loans for which you may qualify. Typically, a mortgage broker has great relationships with the banks and works hard for you while you sit back. They are individually licensed and do not work for a specific bank or lender.

This person handles most of the work for you. He or she gathers all the documentation that you need, pulls your credit report and history, as well as verifies your employment and income. He does this all in a short turnaround time because he is completely dedicated to providing this service. Once you pick the loan that you feel works best for you, the mortgage broker interacts with the underwriter for the lender, your real estate agent, and the closing company to make this transaction as easy and simple for you as possible.

Do I Need One?

You certainly do not need a mortgage broker to buy a home. The real question should be do you want one? A mortgage broker makes the process easier for you, but also takes it all out of your hands. I know some of us like to be in control of every step along the way. If you are that person, you might not find much value in a mortgage broker.

If you someone that stresses easily and finds comfort in someone who is an expert doing the dirty work for you, then a mortgage broker might be the way for you to go. In addition, using a mortgage broker can save time for you. They can save you the time it takes for you to fill out loan applications. Once you get a response from the lenders with loan estimates, you are going to want to do a side by side comparison of those estimates. A mortgage broker can help you with those comparisons. If there is any interaction with the underwriter after you have decided which lender you plan to use, a mortgage broker can handle that for you.

Does It Cost More For A Mortgage Broker?

There are fees associated with using a mortgage broker. If you are considering using a mortgage broker, you should be aware of the fees and how they are paid. There are two basic types of mortgage broker fees. One is lender based compensation and the other is borrow based compensation. The broker decides how he or she collects the fees, so it is important for you to ask before signing a contract with a broker.

Lender based compensation means that the lender pays your broker’s fees. Those fees are passed along to you in your mortgage, so you end up paying the fees for the life of your mortgage. The downside to this type of fee schedule is the broker may decide to go with the loan that pays a higher fee to them. Borrower based compensation means that you pay the fees at the time of closing. This is often in an origination fee, which varies on the state, your broker and the amount of your loan. The downside to this is you have to have this money at the time of closing. The positive side to this is your mortgage payment is not inflated by the cost of your broker’s fees. You also do not have to worry about the broker selecting a lender that pays a higher broker fee.

Keep in mind, no matter what mortgage broker you use, there is always be an additional fee to your residential mortgage. It may be worth it to you to pay that fee for the peace of mind using a broker gives you. If you have the money to bring to closing to pay for a broker, then this may be the best option. Just be sure no matter which choice you make, it is the right one for you at this time.

What Does A Bank Offer?

A bank does not really offer more than a mortgage broker offers to you. If you have a long-standing relationship with a bank, it might make more sense for you to use that bank. Often times, your real estate agent may have a relationship with a lender that you can use for your mortgage. There are always fee associated with buying a house and obtaining a mortgage. Even if you use a mortgage broker, you still need a lender to give you the money. That lender has fees of their own, which they pass along to you, either in your mortgage or at closing. If you utilize the services of a mortgage broker, there are fees on top of the lender’s fees.

The only real benefit to going directly to a bank instead of using a mortgage broker as a middle man is that you do not have to pay additional fees. If you already know which bank you want to use, there is no real reason to use a mortgage broker. You are adding fees that you do not have to pay on top of the lender’s fees.

But, if you still don’t know where to look for a mortgage loan for your new home, maybe Loanry can bring some options to you. The only thing that you need to do is to enter your information and see if you qualify:

Are Bank Fees Different?

The fees that a bank charges are different from the ones a mortgage broker charges. You always have to pay the bank fees when you borrow money, however, you only have to pay broker fees when you use a mortgage broker. So you should be aware of the fees that you will have to pay as part of your mortgage. You will get the total cost that you have to bring with you at closing. And you should have an idea of how much money is expected of you in advance. You may not be given the actual number until a few weeks before closing. That may not be enough time for you to gather the money you need.

Some of the fees that a bank may charge are:

Origination fee – This is a fee that lender charges you for handling all aspects of your loan. This covers their administration costs, application fees, underwriting fees, processing fees and really any other fee that they would like to add. You must bring this money to closing. It does not get included in to your mortgage payments.

Points – This is something that you can negotiate with the lender. You can lower your interest rate by paying points. You must pay for these points at closing. One point will cost you about 1 percent of your mortgage, or about $1,000 for every $100,000 borrowed. Each point you pay can reduce your interest by about .25 percent. This allows you to pay some of your interest up front so it is not attached to your mortgage payments.

Other Fees – There are other fees associated with buying a house. You have to pay for an appraisal and title insurance. You may be able to negotiate the payment of these items. Most of the time you have to pay these fees at closing.

Why Does My Credit Matter?

Your credit matters because your credit score directly impacts the interest rate you receive. Your credit score is a three digit number that appears on your credit report. And your credit report gives you a detailed list of all of your credit activities. It shows your payment history, how much debt you have, and how you use it. And it can also show the age of your credit. It shows all of your late or missed payments and even loans on which you have defaulted. Your credit score is also highlighted on your credit report. Your credit score gives lenders an indication of your credit worthiness.

You should know your credit score before you attempt to get a mortgage. One way you can do that is by pulling a copy of your credit report. You are entitled to a free copy of your credit report every year. When you want to buy a house, it is a good idea to look at your credit score about 4 or 5 months before you apply for a mortgage. You should also begin looking at the mortgage rates. A 740 or above is a great credit score. Anything between 680 to 739 is average. A score between 620 to 679 is fair. Anything between 580 to 619 is poor and a score below 579 is bad.

You should also know that when you apply for a mortgage, the lender looks at your FICO score and the credit score. The difference with a mortgage is the lender pulls a credit report from each of the three credit bureaus. Typically all three scores are a little different. As a result, the lender uses the middle range score. So the way that looks is if your credit scores are 600, 620, and 650, the lender uses 620.

Can I Improve My Credit?

You can still get bad credit mortgage loans, but it is always a good idea to improve your credit score. While it is possible to improve your credit, it does take consistent and hard work. You must be prepared to make some compromises so that you can get your credit score to increase. One of the best ways to improve your credit is to review your credit report for errors. If you find any, you should work to correct them immediately. If you can have errors removed from your credit report, you can increase your credit score.

After that, you should make every effort to reduce your debt as much as you can. The higher your debt is means the lower your credit score is going to be. The lower you can get your debt also means the lower your debt to income ratio is going to be. The lower your debt to income ratio means the higher your credit score. Lenders prefer to see your debt to income ratio below 30 percent. Another way to improve your credit is to increase your income. You may not be able to change your income, you can get a second or side job. This allows you to take all the money you earn from your second job and put it towards paying off your debt. This may help you to cut the amount of time it takes you to pay off your debt in half.

Do I Need A Down Payment?

Yes, you typically always need a down payment. There are some grants or loans that do not require you to have a down payment when you obtain the loan. The down payment is the money you put down on a house. You pay this money at closing. You do not borrow this money from the lender. So you need to provide this money on your own, out of your pocket. This is the amount of the purchase price house for which you pay. This money is supposed to come from your savings account. You can pay it electronically from your bank account, or with a check, or with a credit card. This money is not included in the amount of money you take out for your mortgage.

The higher your down payment that means the less money you borrow from the lender. This also means that your monthly mortgage payment is going to be lower. You may hear many people debate over the correct amount that you should put down with a down payment. You should put down as much money as you can afford for your down payment. Most lenders want you to put down at least 20 percent of the purchase price of the house.

If you do not put down 20 percent, the lender sees you as a bigger risk, so they want you to pay PMI. When you do not pay at least 20 percent down, that means that the bank could allow you to borrow more than the house is worth. PMI is private mortgage insurance that increases your monthly payment. The private mortgage insurance gives an extra layer of protection to the lender. If you default on the loan, the insurance covers the money you owe to the bank.

What Should I Avoid?

When it comes to obtaining a mortgage, there are a few other details that you should consider. You should make sure that you get pre-approved. Most sellers require that you get a pre-approval notice. This proves that you are serious about actually buying a house. It also lets you know how much of a mortgage you qualify to obtain.

Just because a lender approves you for a certain amount, it does not mean that you should actually borrow that amount. Most likely, even though the bank thinks so, you may not be able to afford that amount. You should create a budget to determine how much money you can afford to pay in mortgage payments. There are many mortgage calculators available online that will help you estimate how much your actual mortgage payment may be. Once you have a good estimate of your mortgage payments, and you have a good budget that indicates how much you can afford to pay. Hopefully, the two numbers match. If they do not match, you need to adjust how much you want to spend on a house.

You should avoid not getting an inspection on the house you want to buy. A house inspection can tell you about any problems that might be hidden in the house. It can tell you if there are houses that you might want avoid purchasing because there might be hidden problems. You also want to make sure that you read all the entire mortgage documents. You especially should make sure that you read all of the fine print on all the mortgage documents.

Other Terms I Should Know

There are a few terms that you should understand before you embark on house shopping.

Loan to Value Ratio (LTV) – This is the ratio of the value of the house versus the amount the lender allows you to borrow. The lender wants the LTV to be 80 percent or less. This is where your down payment of 20 percent comes in.

Fixed-Rate Mortgage – This is a mortgage with a fixed interest rate. The rates that the lender gives you at the time of the loan remains the same throughout the life of the mortgage.

Adjustable-Rate Mortgage (ARM) – This is a mortgage with an interest rate that is adjustable. The mortgage starts at one rate, which is usually lower, and it stays there for a set period of time. That set period of time is typically 5 years. After that set time, the rate is adjustable based on the prime rate. You take your chances with an ARM, because it is possible that the interest rate increases your mortgage to a rate that you cannot afford to pay.

Title Insurance Company – This is a company that is a settlement agent that acts during closing. They take the money from the buyer or the lender and make sure that everyone that should get paid during closing gets paid.

Conclusion

I have given you a lot of information about mortgages, mortgage brokers and fees from lenders. It is important that you have a full understanding of all of the fees associated with a mortgage before you apply for one. When you buy a house, you have the option to use a mortgage broker or work directly with a bank. There are additional fees associated with working with a mortgage broker that are applied on top of any fees that the lender applies to your mortgage.

You should also understand if you pay the fees upon closing, or if you pay them as part of your mortgage payments. To understand the fees and how they work, you should be sure to read all of the documents from the lender, including any and all of the fine print. You are responsible for understanding all of the information that the lender gives you.

Refinance Your Mortgage At Historically Low Rates

Refinancing is a process of obtaining a new mortgage to substitute your current mortgage. The new funds you obtain are used to pay off the remaining payment of your current mortgage, and then you will be accountable to repay the new loan. Like with the current mortgage, the new loan will need application charges, title searches, and an assessment.

How will you know it’s time to refinance your mortgage? Is refinancing your mortgage a smart idea? If it’s the best decision, how will you refinance, and what are the requirements for refinancing a house? First, make sure you know your financial objectives. The moment you determine what you intend to achieve, then you will start thinking about refinancing alternatives.

Common Types of Refinancing Mortgages

There are three main types of refinancing mortgages in the market. They include rate-and-term, cash-out, and cash-in.

Rate-and-term

The most popular form of refinancing is the rate-and-term. It implies that the rate or term of your loan or even both are dissimilar from the existing mortgage. The terms of the mortgage might chance for a period of a 30-year fixed rate to a 15-year fixed rate. Or you might be required to refinance from a 30-year loan at a 5% rate of interest to a 15-year loan at a 4 % rate of interest. That will lead to significant savings in the long run.

Cash-out

This refinance alternative allows homeowners to refinance for a mortgage of a larger amount than the original loan. The homeowner takes the reminder. Therefore, if you begin with a loan worth $100000 on your existing loan and you refinance the mortgage of $120000, you will get a cash-out if $20000. Typically, banks consider this as a riskier option, but when utilized well, it is an effective plan for homeowners who intend to repay high-interest loans or improve their home equity.

Cash-in

Cash-refinance is the opposite of cash-out refinance. Instead of receiving money in return, the homeowner gives money to repay the loan balance. This assists homeowners to get lower rates on their mortgages that are accessible for lower loans or get rid of mortgage insurance premiums. This allows you to save a lot of money.

Note that the form of refinancing you select will depend on your personal financial condition and your objectives.

Since you know what refinancing is, you need to define if refinancing your home is a good option for you.

When To Refinance Your Mortgage

Once you’ve signed your home loan, it might feel like you made a wrong move, but as a homeowner, that is a myth. The move to refinance your home loan offers you the chance to save on the interest, cash out the home equity or reduce your mortgage term. If refinancing reduces the interest you are supposed to pay on the home loan; then this option is for you. Not certain that refinancing your loan is the smartest financial decision? Here are some signs that help you know refinancing is the best decision.

When You Can Get Low Interest Rates

The rate of interest for mortgage tend to fluctuate every day. Numerous aspects influence the rate of interest, such as inflation, the economy, market, Federal Reserve, and monetary policies in the US. If you realize that the interest rates are lower than what you pay, it’s time to refinance your home.

Substituting your home loan for a mortgage that has an affordable rate of interest with the same terms is known as rate-and-term funding. Is the difference in rate sufficient to opt for refinancing? Typically, if you find a mortgage that is 1 or 2% less than your current rate, its better you refinance the mortgage. However, no rule of thumb applies to every person and condition. Even though a 1% interest rate might lead to a huge amount of savings for a homeowner with a multi-million dollar home loan, the same might be different for a homeowner with a mortgage worth $100000.

You might opt for refinancing when the percentage rate of interest is less than 1%. While professionals recommend for at least a 1% decrease, that rule of thumb was used in the 50s when mortgages were small, and homeowners continued to stay in their houses until they die. Nowadays, with big loans, a negligible percentage decrease will still lead to huge savings.

Take your time to look at the updated rate of interest while comparing it to the original rate. Bear in mind that your credit rating will determine your individual rate of interest. That means that a lower interest rate is not always a must.

If You Want To Improve Credit

If you have been striving to rebuild your credit, refinance your mortgage as this will help you. Typically, a higher credit rating means you will have a lower rate of interest. Bear in mind that personal lenders define the worth of your credit rating. So, people with a credit score that is above 700 get the lowest rate of interest. However, you can still get a better deal if when your credit score falls in 600-700.

With the help of a saving calculator, you can compute your APR, cumulative interest, and monthly reimbursement. The calculation is completed based on your credit rating, a form of a loan, the principal amount of loan, and where you stay. 30-year financing for an amount of $100000 at the credit rating of 620-639 will offer you APR of 5.0006 %. That will add up to the monthly reimbursement of $537 and a cumulative interest amount of $93,388.

What will happen if you raise your credit rating to 760-850? The APR will reduce to 3.417%, the monthly payment will reduce to $444, and the cumulative interest paid will be $59.993. That is a difference of $33395.

One of the essential aspects that mortgage lenders look at is credit history. Even a single point increase in your credit score will decrease your loan fees. Luckily, there are numerous ways to increase your credit rating to make sure you get a better interest rate on your loan.

How to Improve Your Credit Score

Get a Rapid Rescore

A rescore will remove all mistakes that are affecting your credit rating. That will boost your credit score from a couple of points, even 100 points within a few days. Mortgage creditors can utilize this approach to assist homeowners to boost their credit rating.

Ask for Credit Reports

Before you start mortgage loan shopping, make sure you know your credit score by requesting a free credit report from the three leading bureaus. They include TransUnion, Experian, and Equifax. Report all errors you might find immediately. If you want to improve your score over many months, you can ask for the free credit report after four months from any of the leading bureaus. Thus will allow you to know how your credit score is progressing.

Pay Your Bills on Time

Both the present and past payment habits are considered to be a dependable pointer of your upcoming payment habits to creditors. Making your payment late or missing any payment is a fast way to damage your credit score. Therefore make sure your payment is consistent, and they are made on time. Utilize automated payment to make sure you do not forget paying any bills.

Enhance Your Debt-to-Revenue Ratio

You will improve your credit rating by paying off your loan and keeping your credit card balances at a minimum. The overall recommendation is to maintain your credit usage at 30%. That means that your credit line usage should not exceed 30%.

Leave Unused Credit Cards Open

By keeping the unused credit cards that don’t cost you any yearly charges open, you will have a chance to maintain your credit mix and credit score. You will also keep your usage ratio low.

Have you improved your credit score? Do you believe that you are eligible for a low rate of interest on your home loan? Then you can refinance your mortgage. If you think refinancing might be a lucrative option for you, make sure you do the calculations well. That is because the mortgage rates tend to oscillate and might reduce even further.

How to Improve Your Credit Score Without Crying

When You Have Experienced an Increased Revenue

An upsurge in revenue might be perfect if you want to refinance your mortgage to a short term. Shifting from a 30-year home loan to a 15-year loan term will save you a lot of cash in interest.

For example, a 30-year fixed mortgage of $100000 at a stellar credit rating of 760-850. The loan will give you a monthly reimbursement of $444, $59,993, and a 2.845% APR. If you decrease the mortgage term to 15 years, the APR will change to 2.845%, and the interest will reduce to $22, 967. That is a huge difference of $37,026 that is a huge increase in your savings.

When You Have Issues with Your ARM Adjusting

Adjustable-rate mortgages tend to differ over the lifetime of a loan. The rates are based on the market situations and also the form of loan to get. Most ARMs amend once every 12 months, while others will adjust after up to 7 years. Mostly, you will pay less interest with ARMs and attract lower monthly disbursements early in the mortgage term.

If your current mortgage has a fixed rate, and you expect the rate of interest to fall further, you may opt to switch to an adjustable-rate loan. If you intend to relocate within a couple of years, switching to an ARM might make sense for your condition. That is because you will not be in your house for many years to wait for the rate to increase.

On the other hand, the most upsetting thing about the adjustable-rate mortgage is when adjusting the loan, the rate of interest and payment might increase. Switching to the fixed mortgage rate might be a viable option if you believe you won’t be able to afford to make the payments once you adjust the loans. You can also refinance your mortgage.

When The Value of Your House Goes Up

From 2011, the value of houses in the US has increased from $250000 to $394000. Hitherto, the majority of homeowners ignore refinancing their mortgages once the value of these homes rises. Once you notice that the value of your home has increased, refinance your mortgage since it will be beneficial. If you want to repay other higher interest loans fast or finance massive purchases, these options will be appealing.

Cash-out refinancing is a funding alternative that lets you get a new and bigger loan so you can get the remainder. For instance, perhaps it was initially valued at $250000. You offer 20% on the upfront. Your home loan of $200000 is now $140000, after a couple of years of reimbursement, but the value of a house has gone up from $250000 to $300000. You might decide to refinance your mortgage for over the difference of $40000. If you decide to refinance the home for $165000, you will use a $25000 difference to repay a high-interest loan, remodel your house, or finance other purchases.

Also, if you are in a good financial condition whereby you are sure you can repay the extra $25000 of mortgage loan with ease, this might be a good move. If you plan to utilize the funds to repay other higher interest loans, make sure you define if you will be required to pay additional interest for that loan than for the mortgage. If you ultimately pay extra interest other higher interest loans, then the cash-out mortgage refinances might be a good option for you. In case you are required to pay additional mortgage interest, you might need to remain with the old mortgage.

Make sure you check your home value to get an accurate approximation before you opt to refinance your mortgage. Undervaluing or overvaluing your property might make you overpay and save less.

In case you experience any of the mentioned signs. It might be the right time to refinance your mortgage.

Questions to Ask Yourself Before You Decide to Refinance Your Mortgage

Every person would like to save money, particularly when it comes to a mortgage. Perhaps, you want to reduce your bills by refinancing your mortgage. Or you want to refinance your mortgage since you are worried that the rate of interest will increase ad it’s your only chance to get a good deal.

Mortgage rates are generally low, and you might have numerous loan alternatives. However, you will need a lot of time to find out if refinancing is your ideal option now. The period you intend to stay in the house, your financial goals, and your credit score will play a vital role when deciding whether to refinance your mortgage.


Here are some of the questions you need to ask yourself before you decide to refinance your mortgage.

Are Mortgage Rates Going to Increase Any Time Soon?

Once the Federal Reserve increases interest rates for short term loans by 0.25 percent, the majority of homeowners fear an increase in mortgage rates. However, rates for a mortgage are not affected by an increase in short term rates.

Alternatively, never expect a fast increase that will prevent you from refinancing your mortgage. You will still have time to repay the high-interest loans and improve your credit profile, and increase your chances to qualify for a high refinance mortgage.

Provided the mortgage rates are still low; people will continue refinancing their homes. The majority of homeowners who bought at a market peak, only to experience the prices go down, have now regained sufficient equity in their properties to benefit from refinancing their mortgages. Many homeowners are taking advantage of the lower rate of interest with cash-out refinancing to finance their home remodeling projects.

You will get a competitive rate of interest provided you have a good credit score, and you provide evidence of steady revenue.

How Much Can I Save On the Payments Made Every Month?

To compute your possible savings, you must add all your expenses for refinancing, like evaluation, a credit check, initial charges, and closing expenses. Make sure you find out if you have a penalty for repaying your original mortgage early. Once you know what rate of interest could qualify you for a fresh mortgage, you can compute your monthly payment to find out the amount you can save every month.

Additionally, you will need to consider if you have no less than 20 percent equity in your property. That is the difference between your debt and the market value. Check the value of your home in your estate to know how much your property may appraise now. Never depend on the online property value estimates as they are always of the real value. However, online websites will give recent selling prices of the same properties in your area. Also, a local realtor will share ideas if what your property is worth.

The amount of equity is essential since creditors will need mortgage insurance if your equity is below 20 percent. This safeguards the lender’s financial interest in case you fail to repay the loan. Mortgage insurance is extremely expensive, and it will be included in your payments every month. Therefore, make sure you include them when making calculations for possible savings.

Will the Savings be Sufficient to Make Mortgage Refinancing Worthwhile?

You will need to spend 2-3% of the mortgage in closing expenses. Therefore, you find out the number of days your savings will go towards recovering the expenses. For example, it will take you 30 months to cover $3000 in closing expenses if your payments every month reduces by $100. If you relocate during that period, you risk losing cash in a refinance.

Is it the Right Time to Get Another Loan Option?

Predict how long you want to stay in your old house and think of the details of your old mortgage. The way these aspects play off one another will have a huge role in your decision.

Let’s assume you purchased a house with an adjustable-rate mortgage for the first term of 5 years at 3 percent. You intend to stay in the house for many years. If notices that the adjustable-rate can get to normal and go high, you may benefit from refinancing your mortgage to 15 or 30-year fixed loan to have a set rate that doesn’t fluctuate.

If you think that you will be relocating in a couple of years, refinancing your mortgage to an ARM from a long term fixed mortgage will allow you to save more cash since lenders provide low rates in the mortgage.

How Does My Credit Score Look Like?

Check out if your payment history and credit rating has improved from the time you obtained the mortgage. If yes, you may be eligible for a competitive rate of interest, and this will assist you to save a lot every month.

Furthermore, experiencing some financial hardships will hinder your capability to qualify for a refinance mortgage and also the rate you will be given. If you are late on paying your credit card, purchases a new vehicle, or obtained a student loan, your credit rating will be low than it was when you obtained the first loan. Make sure you do credit repair before you refinance your mortgage.

If you are finding it hard to make payments, try to automate all of them to ensure you do not forget any. Additionally, check the difference between the outstanding credit balance and credit limit. If the report indicates outstanding balances are close to the limits, it means higher usage. Make sure you maintain the ratio at a lower level by repaying your credit card balances every month. This will determine if you are eligible for a new mortgage.

Steps of the Refinancing Process

There are numerous reasons you may need to refinance your mortgage. You want to reduce your monthly payments, reduce e rate of interest, or get some cash to repay a high-interest loan. Irrespective of your reason, you need to know what to expect from the refinancing procedure before making a decision. To refinance your mortgage, you will need to through these steps:

Ensure You Will Benefit from Refinancing

Your initial step when to refinance your mortgage is ensuring that refinancing will be helpful to you. Set your financial goals and determine if you can achieve them. Are existing rates cheap to allow you to save? If you decide to cash-out, ensure the cash you get will outweigh the additional years you spend on the loan. Every homeowner has a unique financial situation and priorities, and for that reason, you are the one to choose what is best for you.

Call the Mortgage Lender

Get a lender who will make the refinancing procedure as fast and stress-free as possible. A good lender will allow you to get reapproved within 15 minutes, with a free rate quotation and no onus quote.

Finding the right lender is very important. One of the best places to look for reputable lenders online is Loanry. This is what we do. We connect you with credible lenders and help you go through this process a bit quicker. Start here:


Fill the Loan Application

The moment you are ready to refinance your mortgage, start your application with one of the leading lenders

Sign Your Disclosure

The lender will send you the original disclosure to sign, and you might take advantage of that chance to look at the terms of the loan. This will help you make sure you achieve your goals of cashing out or reducing your rate.

Offer the Required Documentation

Once you sign, you will need to give your paperwork to the lender, including your income and property verification.

Submit the Mortgage Conditions

The lender will send your documentation to the underwriters who will check if there is anything else required.

Sign the Final Documentation

Once the mortgage is approved, you will need to sign with a lawyer.

Remember to Check Back with the Creditor

After 72 hours, whereby you are allowed to cancel the refinance mortgage without any charges, your mortgage will be financed. At this moment, your old mortgage will be repaid in full.

Start Repaying the Loan

Since you’ve completed the refinancing procedure, you can begin repaying the current mortgage that will be due in one-two months after the financing process.

Bottom Line

A good refinance must benefit the homeowner by reducing his or her monthly mortgage payment or reducing the term of their home loan. Unluckily, some complexities tend to trip up the gullible borrower, resulting in a sore deal. So, make sure you understand the process. This article shares some mortgage tips to help you make an informed decision.

Before you decide to refinance your mortgage, get your creditor, and do the calculations. This will help you to find out if the payment term is sensible to allow you to save. Take a comprehensive inventory of your financial objective and contemplate how your existing house will achieve your location and space needs.

Saving some dollars on your mortgage will help you accumulate wealth, and everyone loves doing that. If you think that it’s not the right time to refinance your mortgage, continue paying your old mortgage. Maintain your credit score such that you can be prepared when the time comes. However, doing a bit of rate shopping is important as you will have a guarantee that you will get an affordable rate.

Your Guide to Understanding the Different Types of Mortgages

When you are buying a home, it’s likely that you will need a residential mortgage. There are different types of mortgages that you may need to consider based on your unique situation. It is important to shop around and make an informed decision. Also, remember, you are not alone in this. You surely have a lot of people around you who can tell you about taking out a mortgage loan from personal experience. Listen to them, but also educate yourself. This will help you make the best choice for your situation.

Statistic: Value of mortgage debt outstanding in the United States from 2001 to 2018 (in trillion U.S. dollars) | Statista

Basic Types of Mortgages

There are different types of mortgages available to everyone based on your credit score and then there are some that are only available to certain groups of people.

Conventional Fixed-Rate Mortgage

Резултат слика за fixed rate mortgage infographic

These mortgages have a fixed rate so they are considered a safe bet due to consistency. The monthly payments won’t change over time and this is the standard mortgage you will likely to be offered if you are a typical candidate. A conventional fixed rate mortgage is available in 10, 15, 20, 30, and 40-year terms. The ones that are the most common are 15 and 30-year terms. For this type of mortgage, you will be required to put down 20% of the home price. If you put down less than this then the lender can require you to have private mortgage insurance (PMI).

There are a lot of pros of these mortgages. These mortgages can be used for a primary or secondary home, along with an investment property. The overall borrowing costs will tend to be lower than with other types of mortgages, even if the interest rate you get is slightly higher. When you have 20% equity in the house, you can ask the lender to stop your PMI. The cons of these loans are that a high credit score is required and there are significant documentation needs in order to establish your employment, assets, and income.

These mortgages are good for a borrower who has an employment history, a stable income, and a strong credit profile. While 20% is required to avoid PMI, as long as you can still put down 3% and have a high credit score you can qualify.

Interest-only Mortgage

When you get an interest only mortgage, you have the option to only pay the interest portion of the payment during the first five to 10 years. You aren’t required to do this because it can slow down your repayment time but this can be useful. After this time period, the rest of the mortgage will be paid off like a conventional fixed rate mortgage.

Adjustable-rate Mortgage

There are many different types of these mortgages. These work with the idea that the interest rate will change over time throughout the life of the loan. The interest rate changes based on the economy and the current cost of borrowing money. A common type of this mortgage is a 5/1 loan. With this option, the interest rate stays the same for the first five years, and then the interest rate will change for the remaining 25 years.

You can enjoy a lower fixed rate for the first few years of homeownership, which saves you a lot of money on interest payments. However, monthly payments can be unaffordable if the interest rates go up higher than you expect. This can result in loan default. Home values can also fall, which will make it harder to sell or refinance your home before the loan resets.

You need to be comfortable with a certain level of risk before you get this type of mortgage. If you don’t plan on staying in your home beyond the first few years then this can be a good way to save on your interest payments. However, if you plan to make this home a more long-term investment you need to think about the future.

FHA Loans

These are different types of mortgages that are backed and guaranteed by the Federal Housing Administration. Since they come with built-in mortgage insurance to protect against the possibility of you not being able to repay the loan, those without the best credit scores and who can only have a smaller down payment can qualify.

A government-backed loan can help you finance a home when you wouldn’t qualify for other options and the credit requirements are more relaxed. The first time and repeat buyers can use these loans. The mortgage insurance premiums may not be able to be canceled on some loans once you reach a certain point of equity.

An FHA loan works with flexible underwriting standards that allow borrowers to not have high incomes or the best credit. Mortgage insurance can still be required. It’s usually required when a borrower puts less than 20% down. There are different types of FHA loans since the FHA will also insure other loan programs that are offered by private lenders.

FHA 203(k) loans will allow a homebuyer to purchase a home and renovate it with a single mortgage. A current homeowner can also use this program to refinance their current mortgage and add the remodeling projects into the new loan. The FHA Energy Efficient Mortgage program allows a homebuyer to purchase a home that is already energy efficient. They can also buy and remodel an older home to be energy efficient and the costs of the updates will roll into the loan without the need for a bigger down payment.

An FHA Section 245(a) Loan is geared toward a borrower whose income will increase over time. With this loan, you will start with smaller monthly payments and then those payments go up over time. There are different plans available with different increasing payments amount. In order to find an FHA loan, you get it from FHA approved lenders. The FHA doesn’t give out loans and instead just insures them.

VA Loans

These loans are for veterans of the U.S. armed forces and occasionally their spouses to buy homes. Many of these loans don’t require a down payment since the Department of Veteran Affairs guarantees them.

VA Loans will usually offer the best terms and flexibility when it comes to the loan options offered to military buyers.

USDA Loans

These different types of mortgages are backed by the U.S. Department of Agriculture and can help rural home buyers with low to moderate incomes qualify. Some of the USDA loan limits are based on the family size and local market conditions. Loans can be used for regular, modular. or manufactured homes that are no more than 2,000 square feet in size.

Piggyback/Combo

If you can’t afford a 20% down payment, you will have to get private mortgage insurance. People try to avoid paying for this insurance by getting a piggyback or combo loan. This means you take out two loans of any type at the same time.

Balloon

With this type of mortgage, you only pay interest for a certain period of time and then the total principal amount will be due after this time period.

Jumbo

A jumbo mortgage refers to one that is too big for the federal government to guarantee. The limit is currently set at $700,000. This means that the borrower is likely not going to get the lower interest rates that are available on smaller loans. These loans are generally more common in higher-cost areas and do require more in-depth documentation to qualify.

A jumbo mortgage means that you can borrow more money to buy a home in an expensive area. The interest rates are still comparable with other types of loans. However, you will need a higher down payment and a high credit score. Many require a score of 700 or higher but you may qualify with a score of 660. You need to have a low debt-to-income ratio and you will need significant assets.

Second Mortgage

If you already have a mortgage and have some equity built up then you are able to take out a home equity loan or a second mortgage. This is another loan that is secured by the equity in the home. These loans can have a higher interest rate than your first mortgage but can be used for funding a home renovation and other necessary expenses. It can make sense to take out a second mortgage when there are low-interest rates available.

Subprime Loan

A subprime loan refers to a loan given to a borrower with a higher risk than those who are referred to as prime. These are bad credit mortgage loans. Prime borrowers offer the lowest risk. A prime borrower has a lower risk because he or she has a high credit score, low debt, and a good income. A subprime borrower can have characteristics such as a lower credit score, higher debt load, and lower-income. There are two different situations where borrowers can be considered subprime. Subprime borrowers will usually have no credit or poor credit.

A person with no credit has never borrowed money before. Borrowing money is the only way to build credit. Those with poor credit may have had problems with repaying debt in the past or have too many loans. Income may also be insufficient to cover any outstanding loans. Subprime loans will affect interest rates. A subprime rate is a higher interest rate for those with bad credit. If you are a bad credit borrower you can expect this.

Understanding Mortgage Terms

To understand the different types of mortgages, it also helps to have an understanding of the terms that come along with them. While there are many mortgage terms, there are some that will be used no matter what type of mortgages you seek.

APR

This abbreviation stands for annual percentage rate and it’s the total effect cost of the extension of credit. This will include the loan interest rate and upfront cost.

Appraisal

This is the written estimate for the current market value of the property. A professional appraiser prepares it.

Points

This is an optional prepaid charge that a borrower can pay in order to lower the interest rate on the loan. These points will affect the cost of the loan. A single point will equal one percent of the interest. These can also be referred to as discounts points.

Closing

This is the meeting at which the involved parties will sign the final loan documents. These documents include the deed, mortgage, statements, and more. The settlement agent, who is usually an attorney, will collect the buyer’s funds from them and pay the transaction fees, including approval fees and document recording fees. The agent will also pay the seller for the net proceeds of the sale. At the time of the closing, the purchase paperwork is recorded. During the closing, there will be closing costs. This is a catchall term that refers to the cost of servicing the loan. It can include the costs of processing and closing the loan. Some fees include attorney fees, credit report fees, termite inspections, and title insurance. The closing cost will apply whether or not a home was financed.

Underwriting

This is the process of either approving or denying a home loan based on the evaluation of the property and the ability of the borrower to pay back the loan.

Qualifying For a Mortgage

Each of the different types of mortgages will have their own requirements for credit scores, debt-to-income ratio, qualifying income, and down payment requirements.

One of the biggest factors in determining whether or not you qualify for a mortgage will be your credit score. If you have good credit then you don’t really have to worry. However, if your credit isn’t that great then it can be more difficult to get approved for a home loan. There will be a set of minimum requirements for credit scores for each loan program. However, lenders don’t necessarily have to follow these requirements and can set their own credit score guidelines.

In order to qualify for a mortgage, not only are there requirements for a credit score but there are also income guidelines. To qualify, you will need to prove your income is consistent and sufficient. If you have a salary then this is easy. If you are self-employed or have a commission-based job, this can be more challenging. You will need to have at least two years of income documentation from the same employer or in the same industry. If you get commissions, you will need to average your income from the last two years of tax returns. Qualifying income can include your salary, income from part-time jobs, income from a second job, bonuses and overtime seasonal jobs, and child support and alimony.

If you want to find out for which loans you are qualified with your credit score, you can fill out the form below and see suggestions from Loanry.


In order to help with the qualification process, you need several documents. It will help to start getting these documents ready for the loan officer. These documents include W2 forms from the past two years, three months worth of pay stubs, bank statements for the last three months, the previous two years of tax returns, a list of assets and debts, and any additional income documentation.

Steps to Getting a Mortgage

With so many factors for qualifying for the different types of mortgages, there are some steps you can take in order to better qualify.

Repair Credit and Increase Your Score

Since the credit score is one of the most important factors, it helps to start paying attention to your score and work on increasing it. Different mortgage lenders require different credit scores but do not think about it. Just think about improving it as much as you can. Things you can do to improve your score quickly include paying down revolving debt, such as auto loans or credit card, using a debit card instead of credit cards for future purchases to stay out of debt, and paying bills on time. You should also correct any errors you see on your credit report.

When you are hoping to qualify for a mortgage, don’t open any new credit accounts. Applying for any new credit will temporarily lower your credit score. Lenders will be afraid that if you have a lot of available credit you will take advantage of it and then it can affect your ability to make your mortgage payments on time.

Get a Higher Paying Job

If your income is what is holding you back from getting a mortgage then you may need to find a higher paying job. Search for a new job in your existing line of work that will allow you to earn more money. Since lenders will want to see a steady employment history, you will need to stay in the same line of work in order to make this work. This can be hard for many borrowers since switching professions may give the best chances for a salary increase.

If switching companies isn’t enough to get you a raise, see what you can do to make yourself more valuable to employers. Is there continuing education you can complete? Getting a part-time job along with your full-time job may not provide what lenders can consider qualifying income. Lenders can view a part-time job as temporary and they want long-term income.

Save As much As You Can

No matter the different types of mortgages you are interested in, saving is important. During the time you are fixing credit scores, work on saving as much as possible. The larger your down payment, the smaller loan you will need. The lower loan-to-value ratio will mean that you are less risky to lenders. This can help you qualify for a better loan. While you may not need to save 20% for a down payment, the more you can put down, the better. If you aren’t using the money you have saved for a down payment, you can use it to make repairs for the home or to furnish it.

Don’t Pay More than the Appraised Value

The bank or a lender won’t lend you more than the property is worth because they will be on the losing end of the deal if you enter foreclosure. A 20% down payment isn’t as valuable if the home is worth 20% less than the purchase price. The collateral value is an important factor for lenders so you need to keep this in mind when making an offer to purchase a home.

Reduce Debt

To different lenders, what will constitute debt isn’t a set number. It’s a total monthly debt number that will be too high for you to be able to afford the monthly mortgage payments you want. When deciding how much of a loan you qualify for, lenders look at the front-end ratio. This is the percentage of your gross monthly income that the home payment takes up. The back-end ratio is the percentage of gross monthly income that will be taken up by other monthly obligations, such as car payments and credit card debt.

The more debt you will need to pay off each month will lower the monthly housing payment a lender will decide you can afford. It doesn’t matter if it is good debt, such as a student loan, or bad debt, such as a credit card. The lender just calculates the total debt number. If you want to be able to afford more home then you will need to decrease your debt.

Your Guide to Understanding the Mortgage Process

Conclusion

There are many different types of mortgages that borrowers need to be aware of when deciding to purchase a home. Some mortgage types will determine how you pay your interest. They also determine how much interest you will be paying over the life of the loan. Other mortgage types make it easier for borrowers with poor credit scores.

In order to improve your credit score, it’s important to pay bills on time and reduce as much debt as you can. There are different mortgage terms you should learn in order to make mortgage loan shopping an easier process. Qualifying for the different types of mortgages will depend on the lender use choose. But it helps to reduce debt as much as possible, save as much as you can, and work to improve your credit score.

Your Guide to Understanding the Mortgage Process

A mortgage is a loan on a property. A house mortgage is for your home. This loan is paid back over time with an interest rate you and the lender both agree on. It’s different than a traditional loan because the lender has the right to take the property if payments are not made. This can be called a lien on the property. You don’t fully own the property until you make the last payment. This is where the term paying off your mortgage comes from. The whole mortgage process can be a bit complicated.

A mortgage will likely be the largest debt you will have in your life but they also are a huge benefit. This can be seen in the statistical overview of mortgages in the USA.  If you had to pay cash upfront for a home you wish to purchase, you may never get the opportunity. Mortgages can help keep interest rates moderated. Since the property serves as natural collateral for the loan, lenders are more flexible with the terms. Lenders don’t necessarily want to take the home but they are more reasonable since it gives them a safety net. It’s extremely important than you know what you’re doing throughout the entire process, so you wouldn’t make mistakes when taking out a mortgage.

Are You Ready to Buy a Home?

Buying a home is a big deal so it helps to know if you are really ready to buy a home before you begin the mortgage process. A mortgage is not something you want to take on lightly. You will need to make sure you can really afford the home you are buying. Many mortgage companies will approve you for a mortgage that you can struggle to pay every month.

Owning a home can be costly. You need a down payment, you need to pay off the mortgage every month, and you need to be prepared for added expenses. Before you start the mortgage process and consider buying a home, you will need money saved for unexpected expenses.

Since buying a home is an investment, you need to be ready to stay in the home for a while. You don’t need to spend the rest of your life in the home or that area but you should stay for at least five years so you can see growth on your investment.

It helps to know what you want in a home. Is it going to be home you settle down in and raise a family? Do you have a plan to sell a smaller house and buy a bigger one in the future? These questions are some of the ones you need to ask yourself before you start the mortgage process.

Types of Mortgages

There are different variations you can encounter as you start to search for a mortgage.

Mortgage Loan Basics Spelled Out: Lending 101

Fixed-Rate Mortgage

With a fixed-rate mortgage, monthly payments will stay the same throughout the life of the loan with some small adjustments based on changes to insurance or taxes. This is due to your interest rate staying the same throughout the life of the loan. This is a typical type of mortgage and can be referred to as a traditional mortgage. Payments can be structured so early payments go toward interest on the loan and your payments are applied to the principal of the loan over time.

Adjustable-Rate Mortgages

Many adjustable-rate mortgages will start off as a hybrid. This means you commit to a lower interest rate for a fixed amount of time and then the interest rate will adjust based on the market. This means that in a few years you could be subjected to much higher interest rates than you anticipated.

Balloon Mortgages

These types of mortgages aren’t that common. For most of the loan, you will pay very little. At the end of the time specified by the terms, the full balance becomes due. This sort of mortgage will likely only makes sense if there are unusual circumstances that involve guaranteed funds down the road.

Interest-Only Mortgages

These mortgages are similar to the balloon ones but are structured so an increase in payments is more gradual. Borrowers will only pay interest for a predetermined period of time and then start paying the principal as well. This can be an option for first-time homebuyers who are just starting out in their careers.

Government-insured Home Loans

There are also government-insured home loans. Examples of conventional loans are the ones listed above and aren’t backed by the government.

Federal Housing Administration (FHA) Mortgages

These mortgages are backed by the government to protect lenders in the case of default. This will allow lenders to offer lower down payments and better terms. You will typically have to provide proof of insurance.

USDA

There are options for rural homebuyers from the USDA who meet certain requirements. They want borrowers with limited resources but who can still demonstrate a predictable income.

VA Loans

There is mortgage assistance to veterans as well as active military members and families. These work like an FHA loan and the government guarantees payment to the lenders to secure the best possible terms. There is also an option for no down payment.

Other Government Loans

Different loan options can vary from state to state and there are different programs to help certain people. You can always ask your realtor to see what could be available.

What Is the Mortgage Process?

The mortgage process will happen behind the scenes and some parts can be out of your control. However, there is a lot you can control to make sure you are in the position to get your home and close in a timely manner.

The Mortgage Loan Process

1. Get Your Credit in Check

Anytime you decide to get a loan, better credit will get you better loan terms, lower interest rates and less worrying down the line. This is especially important when you are getting a mortgage since it is probably the biggest loan you will ever get. If you need to improve your credit, this is the time to do it.

2. Getting Prequalified

Before you start searching for the right home, you should speak with a lender or a few different lenders to get prequalified for a mortgage. This will give you an idea of how much you can qualify for. You don’t want to spend time searching to find the perfect home and then realize down the line that you aren’t able to afford the home. The process is pretty straightforward and won’t go too far into your financial background. The lender conducts a soft credit check and looks at your current income and any debt you have. The entire process if free and can be a way to test the waters before you get a preapproval. This process can be done online or over the phone.

3. Choosing the Right Mortgage

With so many options you have when you start loan shopping, it’s important to find the right mortgage for you and your situation. This is the time to stop and really think about it since you will be paying off this mortgage for years to come. Even though you can pay off your mortgage faster, this is not the moment to think about it. Instead, you should find the most suitable mortgage type with terms that you are comfortable with.

4. Finding a Lender

Home shopping may be the fun part but you also need to do mortgage loan shopping. The right lender can be important to a positive home buying experience. Shop your options before you find a home since it will be easier to pay attention to things like closing costs and interest rates.

We are aware that it is important to find a trustworthy lender. Loanry connects you with reputable companies which may give you a mortgage loan if you qualify for it. You can check whether you qualify right now, by putting in your information here:


5. Gather Necessary Documents and Apply

The mortgage process requires a lot of documents and you will need to fill out a lot of paperwork. You want a lot of documents when you apply. This includes the names of employers from the past two years, recent pay stubs, two years of tax returns, W-2 forms form the past two years, proof of pension, any dividend earnings, bank statements, and information about other debts you have, such as student loans, credit card debt, and car loans. During the time you are getting all the documents, you can also use a mortgage calculator to see how much you can afford.

Start Applying

Once you have already gone through the prequalification process and determined that homeownership is the right step for you then it’s time to start the mortgage application. The first step is preapproval and this can signify to homeowners that you are serious about purchasing.

You can apply over the phone, in person, or online. Also, you shouldn’t limit yourself during this phase. You want to apply to two or more mortgage lenders. Every mortgage company and bank has different products with different rates. Even if you think you have the best possible loan, you could find a similar product with better rates.

Comparison is important to find the right mortgage for your situation. If this is the first time applying and you are a first time homebuyer, you should speak to a loan officer to make sure you are answering the questions correctly. If you incorrectly fill out the application, it will make getting approved harder.

What You Need for the Application

Every mortgage application will likely follow the same format and can be about five pages long. If you complete it in one sitting, it should take about an hour.

You will need to know the type of mortgage you are applying for. Determining the type of mortgage you need will also help you choose the right lender. You will need the property information if you have already selected a home.

You will need to provide borrower information, which includes your Social Security Number and information for any co-borrowers. This will also include monthly income and assets and liabilities. You may need to provide a lot more information depending on the lender. Once you have provided the information, there is then an acknowledgment and agreement where you sign on the dotted line to give the lender permission to verify information submitted with your application.

Preapproval

Once your application is approved then you get a preapproval letter. This is the lender’s way of saying that they will agree to lend you the amount of money specified. This letter will help narrow down your home search so you can make sure you can afford the property. It can also make your bid more attractive to the seller.

6. Underwriting the Loan

This process is the lender’s way of determining your ability to pay back the loan. This is the longest part of the process and can take a week to a month. It’s not always simple to give you a thumbs up or down for the mortgage process. It also determines the loan amount and the interest rate. Prior to the process, you will be required to submit many of the same documents that you used for preapproval and there may be more information needed. For instance, if a family member is giving you money for the down payment as a gift then the lender will need a gift letter to prove the money is a gift and not a loan you need to also pay back.

7. In the Meantime – Search for a Home

This is the fun part. You don’t want to find something wrong with every house but you shouldn’t jump at every opportunity. It helps to have a list of your must-haves, dislikes and wants so you don’t get caught up in the moment. Even if you modify your list along the way, it can help you stay focused and remember your home priorities.

When you are searching for a home, remember that you don’t have to use the full amount when it comes to your preapproval. It’s common for lenders to offer you the maximum amount that works on paper but this isn’t practical once real life kicks in and you have to make real payments each month. Just because you can spend that much doesn’t mean you should. Remember, you may want some extra money to make upgrades to the house once you move in. You also want to keep some savings for an emergency fund and if you need to make any home repairs.

Make an Offer

When you have found a home that is desirable and in your budget then you start to negotiate a purchase offer with the seller. For a first time buyer, it’s wise to negotiate with an experienced and trusted real estate agent during the process. A local real estate agent can have a good understanding of the land and can help you identify the right price for the home, as well as provide valuable negotiating experience. Once your offer is accepted then the seller produces a purchase contract that is signed. This contract is the green light to the lender to begin finalizing the loan.

7. Closing

Once you have gone through the underwriting process then it’s closing time and you get to finish the mortgage process. You will meet with different people, including a title company representative, the home seller, a closing agent, and the lender. A closing agent will make sure there are some things done before you can close on the home. He or she makes sure all the legal documents are signed and any escrow conditions are resolved.

There will be closing costs associated with the process. You will be required to make a wire transfer or provide a certified check to the lender for costs associated with underwriting and processing the mortgage. These costs can vary depending on the type of mortgage you have and the lender but will usually be 2% to 5% of the amount of the mortgage. These costs will include an application fee, attorney fee, home appraisal fee, inspector fees, credit check fees, and origination fees.

If you have difficulties following the process because of all the mortgage terms and definitions you may not know, it’s very important to find out what they all mean and understand every part of the process.

Do You Need to Be Preapproved for a Mortgage?

You may be using the terms prequalified and preapproved interchangeably but they are slightly different. Prequalification can be the first basic step in looking for a mortgage. It is intended to be informative and not a binding contract. It can show you how much money you could be approved to borrow. However, a preapproval letter will indicate to the seller that you are more serious about buying the home. It signals that any offer you make should be taken seriously.

When you get preapproval you are considered a qualified buyer. This also locks in your interest rate for 30 days and can help you determine how much your mortgage payments can be depending on the house you are interested in buying. If you have bad credit then it can be harder to get a preapproval. The only downside for preapproval is there will be a hard inquiry on your credit report. It really is in your best interest though to get this preapproval before you begin the process of looking for a home.

Do You Need a Down Payment for the Mortgage Process?

Lenders see a down payment as an investment in the home. Your down payment will significantly impact the amount of money you need to borrow. The higher the down payment then the less money you need to borrow. It can also determine if you will need private mortgage insurance (PMI). If you are using a down payment of less than 20% then the lender will require insurance. A lender doesn’t like to loan more than 80% of the value of the home. The insurance helps protect them. If you have a higher down payment, you may also be able to get a lower interest rate.

Where Should You Shop for a Mortgage?

There isn’t any harm in trying to begin the mortgage process at a local credit union or bank. However, today there are many options online. You can use plenty of online tools to help you look at different rates and different qualification options. This way you are sure to find a mortgage that suits your needs and one that you will be able to afford.

Tips for Paying Off a Mortgage Quicker

If you want to pay off your mortgage faster, you need to check with your lender to understand any limitations or rules about it. You may assume that the lender will be happy to have you pay more but that isn’t always the case.

Figure Out Where Extra Money Can Come From

You will likely need some extra money to pay off your mortgage faster so figure out where this is going to come from. Are you going to cut back on entertainment? Are you going to take your lunch to work instead of eating out? If you aren’t able to save enough to start making a dent in a home payment then try paying off your other debts at an accelerated rate. Once those are paid off, you can apply that money to what you are paying on your mortgage.

Pay Biweekly

If you pay exactly half the amount due each month then this will shave interest over time and pay an additional half month each calendar year.

Pay Extra on Current Monthly Payments

You can request the extra amount you pay to be applied to principal. Even a few hundred dollars on the principal can save a lot in interest.

Put Bonuses or Tax Refunds toward the Mortgage

Instead of using your tax refund or another unexpected source of money like a bonus for other things, put it toward your mortgage.

Consider Less than 30 Years

If you can manage a 20-year mortgage instead of a 30-year one then you should do it. It’s even better if you can manage to shave off 15 years. The easiest way to pay off a mortgage debt is to not have as much debt. Ask your lender about options for 15- or 20-year mortgages and see if those monthly payments are affordable.

When Should You Refinance Your Mortgage?

More people are starting to refinance their homes in order to help with financial problems. Refinancing a mortgage is repaying off an existing mortgage and replacing it with a new one. This is done in cases where the loan is too expensive or too risky. The details of a new mortgage will be based on a mutual agreement by both the borrower and the lender and can be customized for meeting the needs of a borrower.

Secure a Lower Interest Rate

This is one of the more common reasons why someone would choose to refinance the mortgage. If you replace a high-interest mortgage with a low-interest one then you can save a lot of money. This decision will be influenced by daily mortgage rates.

Shorten or Increase the Loan Term

With a new loan term, there can be an impact on both the monthly payments and interest. A short loan term can reduce the interest but increase the monthly payments. A longer term has the opposite effect.

Lower Monthly Payment

If you are facing a cash flow issue then you may want to consider refinancing so you can lower your monthly payments. This can help you still repay the loan without straining your monthly budget and avoid the possibility of defaulting and the lender selling your home.

Consolidate Debt or Tap into Equity

This can be a cause of never-ending debt but it can still be a reason why you may want to refinance. You can access the equity in your home to cover some expenses, such as college education or home remodeling. Some borrowers want to refinance the mortgage to consolidate debt to make it easier to pay off.

Switch Mortgage Type

Since there are different types of mortgages, if your financial situation changes, you can refinance your mortgage in order to take advantage of new opportunities.

There are also some bad reasons for you to refinance your mortgage. If it’s to take advantage of no-cost finance, know that this generally doesn’t exist. If these costs are wrapped up in the loan then the size of the principal increases. Some people also want to have lower monthly payments to save money for a new home. Before doing this, borrowers should calculate how much a refinance will cost and how much it saves them each month in order to determine if it is worth the effort.

How to Increase Your Chances of Being Approved for Refinancing or a Mortgage

If you have submitted an application for refinancing, it can be frustrating to have it be rejected. When it’s time to refinance you want to do everything you can to make sure that it is approved.

Improve Credit

Borrowers should check their credit score and then take the time to see whether there are any errors or inconsistencies. These inconsistencies or errors should be reported to a credit reporting agency. It’s also important to pay bills and other outstanding debts on time to improve a credit score. Having a good credit score will help you save on interest so it’s a good idea to improve your credit score as much as you can before applying.

Increase Your Income

Increasing your income is one of the ways you can make sure that you can afford the mortgage you want. Borrowers who have been at their jobs for a while can ask for a raise. Some other options include starting freelance work or getting a part-time job in order to supplement income.

Use a Cosigner

A cosigner can boost your creditworthiness, which means it increases your chances of being approved. It’s important the cosigner has good credit and a sufficient income. You still need to consider whether you can make all the payments on time so you don’t mess up your credit and the credit of your cosigner.

Can You Get a Mortgage with Bad Credit?

The mortgage process can be complicated enough but it does get more complicated with bad credit. Your credit score will directly impact the interest rate you will get. When you are getting a mortgage with a bad credit score it is referred to as a subprime mortgage loan. These loans refer to a loan extended to a borrower that is a higher risk. A prime borrower is low risk because he or she has a high credit score, low debt, and a good income.

There are two different situations that apply where you could be considered a subprime borrower. This is either with no established credit or poor credit.

No Credit

A person who hasn’t borrowed before has no credit. Borrowing money is one of the only ways to build credit. The fix is to establish credit with a major or store credit card or a small loan. Once you make payments on time, you start to build credit.

Poor Credit

Someone who has poor credit may have experienced problems with repaying debt or have too many loans out that affect their debt-to-loan ratio. There is a lot that goes into determining your credit score. Each credit reporting agency uses a different algorithm. Some of the data points include causes of non-payment, kinds of credit accounts you have, length of credit history, how many inquiries have been made on the report, and any bad credit behavior.

Subprime Mortgage Loans For Bad Credit Borrowers

Subprime rates and prime rates refer to the interest on the mortgage. Getting a loan at a prime rate will mean that you can have a better interest rate. A subprime rate has a higher interest rate.

If you are married, this doesn’t mean you have to take out a mortgage together. You may think that you have to put both names on the loan application but you don’t. This can be good news for couples that have different scores. You can get a lower interest rate if the borrower who has the higher credit score applies for the loan. Instead of applying as joint borrowers, you can save yourself some money. This will mean that they will only consider the income of the applicant but you know that you have two incomes that can pay for the monthly costs. When two people apply then the loan officer will have to base the interest rate on the lower score, which can mean higher interest rates. You may be better off saving some of the money and only have one borrower apply.

What Do You Need to Know about Interest Rates?

One of the most important parts of the mortgage process is the interest rate. This is why it’s so important to go rate shopping. Every mortgage will have an interest rate attached to it. Your credit score has a big impact on the interest rate when it comes to mortgages. You won’t ever be able to find a mortgage that has an interest rate of zero. Interest is what the lender will charge you for borrowing money from them. The amount of loan money you borrow is called the principal amount. Interest is then added to that.

If you know what an interest rate is, then you need to know how it impacts you. Using a loan calculator, you can see that if your score is above 760 then you can save almost $200 every month for a traditional mortgage of $200,000. That can add up to a lot in a 30-year loan.

Conclusion

The mortgage process can be a little overwhelming when you first start out. However, it’s important to take it one step at a time. Start by deciding if homeownership is right for you and then take it from there. Prequalification and preapproval can be important first steps in the mortgage process and it helps to know what kind of mortgage you want. Having a down payment is an important part and you are likely to get better interest rates when you put more down.

The mortgage process can also involve refinancing and this can be necessary when you want a lower interest rate or different payment terms. It is possible to get a mortgage with poor credit but your interest rate can be much higher. Interest rates can have a big impact on how much you are paying over the life of the loan so finding the lowest interest rate will be the most beneficial.

Common Home Mortgage Terms and Definitions


You want buying a house to be simple. It is not. You might end up lucky and only need to view a handful of homes. More likely though, you’ll look at least ten houses. Some will have the right price. More than likely, you’ll settle on a home that comes close to the price and size you want while requiring little work. When the process of buying starts, knowing mortgage terms and definitions comes in handy.

Then begins your miasma of time with the bank or credit union. You’ll wallow in paperwork, beginning with your application and traipsing right on through to the closing documents. Within this pile of paperwork, you’ll read a plethora of business and financial terms. While your bank will not take the time to explain each mortgage term, we here at Loanry will. We’re here to help you with the mortgage terms and definitions you need to understand before you ever apply for your residential mortgage.

Common Home Mortgage Terms and Definitions To Know

To help you understand all these mortgage terms and definitions more easily, we divided them intro to several categories. We also recommend that you pay attention to each individual category since all these terms will be important during the process.

Mortgage Terms and Definitions: General Terminology

The mortgage terms and definitions that the real estate and financial industries consider general terms, you probably don’t.

Acceleration Clause

This is a contractual clause in a mortgage that allows the lender to demand repayment of the entire loan balance if the borrower violates any clause in the note.

Accrued Interest

Earned interest that is not paid and adds to the owed amount. It is also called negative amortization.

Adjustment Interval

The interval of time between interest rate or monthly payment changes in an adjustable-rate mortgage. This is typically displayed in x/y format with “x” representing the period of time before the first adjustment and “y” representing the following adjustment period.

Agency

A legal term referring to the fiduciary obligation one party has to the to the other.

Agreement of Sale

A  legal and binding contract signed by both the buyer and seller describing the conditions and terms under which the described property will be sold.

Alt-A

A mortgage risk category also known as “A minus.” It describes the grey areas between prime and sub-prime credit risk.

Alternative Documentation

A banking term that refers to an expedited method of verifying the applicant’s financial situation. Rather than verifying employment with the applicant’s employer, the bank accepts paycheck stubs and W-2s. Instead of verifying bank deposits with the applicant’s bank, the financial institution verifies using the borrower’s original bank statements. Although it provides an alternative, it still qualifies as “full documentation.”

Amortized Loan

An amortized loan need not be a mortgage. The term refers to any loan paid off in equal installments within the loan term.

Amortization

Amortization is the process of scheduled payments of principal plus interest. The payments must exceed the interest due otherwise the balance rises, creating negative amortization.

Amortization schedule

The monthly schedule of interest and loan principal. It may also include tax and insurance payments if the lending institution made them.

Amount financed

This term refers to the loan amount once the prepaid finance charges, a closing fee, have been paid.

Annual percentage rate (APR)

The total effective cost of the extension of credit. This gross cost disclosure calculation includes the loan interest rate and the upfront costs.

Application

A loan request form completed with potential borrower information as well as property information and requested loan amount. This is a standardized application form known as the “1003.”

Application fee

The fee to submit the loan application. It may cover the property appraisal, credit report or other costs. Some lenders refund it if they decline the loan.

Appraisal

The written estimated current market value of a property as prepared by a professional appraiser.

Closing

A business meeting at which the involved parties sign the final loan documents including the deed, mortgage, note, statements, etc. The settlement agent – typically an attorney or title insurance company – collects the buyer’s funds from them or the lending institution, pays the transaction fees such as appraisal fees, realtor’s commission and document recording fees. They also pay the seller for the net proceeds of the sale. At the close of the closing meeting, the purchase paperwork is recorded at the county courthouse. This meeting is also referred to as the settlement or close of escrow.

Closing Costs

A catchall term referring to the costs of servicing a loan. It includes the costs of processing, approving and closing a loan which may include appraisal and credit report fees, attorney fees, recording fees, survey fees, termite inspections and title insurance. Closing costs apply whether the home was financed or not.

Cost of funds index (COFI)

An interest rate index used to determine interest rate adjustments on an ARM.

Down Payment

This term refers to the cash amount paid at closing by the buyer which reflects the difference between the sales price of the home and the loan amount.

Good Faith Estimate

This estimate of closing costs, typically given to the borrower when they apply for the loan.

Interest Rate

The fee, expressed as a percentage, charged by the lending institution on a loan amount. It is typically calculated on an annual basis and may be tax-deductible.

Loan-to-Value Ratio (LTV)

A ratio expressing the loan amount to the value/sales price of a property. If the LTV ratios exceeds 80 percent, the lender typically requires loan insurance and may charge a higher interest rate.

Mortgage Insurance Premiums (MIP)

The insurance premiums paid on an Federal Housing Administration (FHA) mortgage loan.

Origination Fee

A lending institution charged one-time fee covering overhead costs of making a loan. It represents a fee of the closing costs. The lender may waive it for certain loan types.

Points

An optional prepaid finance charge the borrower can pay to lower the loan’s interest rate. These affect the total cost of the loan. A single point equals one percent of the loan’s interest rate. A point is deductible interest for income tax calculation. The financial community also refers to these as discount points.

Private Mortgage Insurance (PMI)

Lending institutions require this insurance on conventional loans that represent 80 percent or greater of the property value. This insurance insures the lending institution against financial loss if the borrower defaults.

Underwriting

In mortgage lending, the process of approving or denying a loan based on an evaluation of the property as collateral and the ability and willingness of the borrower to repay the loan.

Mortgage Loan Basics Spelled Out: Lending 101

Mortgage Terms and Definitions: Mortgage Types

If this is your first time buying a home, you might go into it thinking “A mortgage is a mortgage.” That’s not so. Numerous types of loans exist within mortgages. Not all of them are offered by a bank or credit union either.
Beyond conventional loans offered through standard financial institutions, some federal agencies also offer mortgage loans.

The Federal Housing Administration (FHA) and Veteran’s Affairs (VA) Administration offer mortgages to special groups. The FHA specializes in those who are first-time homebuyers while the VA offers loans only to veterans of the US armed forces. You can find a lot of information about mortgages if you know where to look.

Within the range of conventional mortgage loans, you also will not likely qualify for each type. Adjustable rate and assumable mortgage loans are probably the toughest for which to qualify.

Adjustable Rate Mortgage (ARM)

A type of loan that varies the interest rate and payments according to a specific schedule and pre-set limits. An ARM typically begins with a below-market interest rate. In the US, these are indexed, but abroad they’re flexible with the interest rate set at the discretion of bank.

Assumable mortgage

A loan contract that lets the seller transfer the loan to a creditworthy buyer thus potentially saving money on the interest rate and avoiding closing costs.

Balloon mortgage

A type of mortgage with smaller principal and interest installments during the loan term that does not fully repay the loan, but requires a lump-sum payment, also known as a balloon payment, at the end of the loan term.

Conventional Loan

A mortgage loan offered by the private financial sector, typically using the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) guidelines.

Federal Housing Administration (FHA) Loan

A loan insured by the Federal Housing Administration with simple qualifying terms which provide first-time buyers a small down-payment requirement. It does require MIP.

Fixed-rate Mortgage

A type of loan in which the interest rate remains unchanged for the loan term.

Home Equity Loan

A type of loan that leverages the borrower’s residence as collateral. The loan functions as line of credit against which funds can be drawn, up to a pre-arranged amount.

Peer-to-Peer Loan

A type of loan that crowdfunds the loan amount from individuals.

Subprime Loan

A type of loan extended to a borrower whose credit score and history does not qualify them for the lowest interest rates. A subprime loan comes with a higher interest rate and may include greater fees.

Veteran’s Affairs (VA) Loan

A type of loan guaranteed by the Department of Veteran’s Affairs which only veterans may take out that requires no down payment.

Mortgage Terms and Definitions: Parties Involved

Going into the house-hunting process you might think that you and the home seller and bank are the only parties involved in the sale. In actual fact, a plethora of individuals and institutions take part in the process of a home loan.
The mortgage process begins when you look at the first home and meet the realtor. If you phone the real estate agency with questions, you’ll find a large staff provides administrative support. The following list of mortgage participants, while not comprehensive, does cover the most common individuals and institutions.

Appraiser

A professional individual selected by the lending institution who has extensive real estate market knowledge and skills in property appraisal.

Borrower

The individual or group who takes out the loan. This can include a signer and a co-signer which refers to the main individual requesting the loan and the person who agrees to partner with them in applying for it, thereby offering their credit worthiness to bolster the signer’s credit worthiness.

Buyer

The individual or group of individuals who purchase the home. Their names will appear on the deed.

Mortgage Broker

An individual licensed as a lending professional and who works with several different lenders to offer more loan options than a credit union or bank.

Seller

The individual offering the home for sale. The current owner of the home.

Underwriter

An Underwriter is a position in both financial institutions and insurance companies. The underwriter analyzes risk, may modify the loan terms the borrower requested and can add conditions to meet before or at the loan closing.

Title Insurance Company

A representative of the title insurance company often acts as the settlement agent who collects the buyer’s funds from them or the lending institution, pays the transaction fees such as appraisal fees, realtor’s commission and document recording fees at the closing.

Mortgage Terms and Definitions: Credit Terms

One of the first steps to purchasing a home is the credit check that precedes your loan application approval. During the process of checking your credit, improving it, and then applying for your mortgage loan will expose you to numerous new mortgage terms and definitions. These definitions present the most commonly used terminology.

A-Credit

Consumers with the highest credit rating are referred to as A-credit or prime borrowers. Typically they have a FICO score above 720 on a scale of 300 to 900.

Affordability

A consumer’s capacity to afford to purchase a house. A lending institution typically expresses this in terms of the maximum home cost a consumer could pay. This amount is also the amount for which the consumer could obtain a mortgage.

FICO score

A three-digit number that expresses a consumer’s credit worthiness and risk level. These scores range from 300 to 900.

Mortgage Loan Shopping: Use Loanry

If you think learning the terminology of mortgage terms and definitions seems exhausting, wait until you begin looking for a lending institution. Mortgage loan shopping can be a tiring process. Your best course of action is to start with Loanry.com to shop mortgage lenders.

Loanry does not offer loans nor does it represent any lending institutions. It offers no lending whatsoever.

Instead, Loanry runs a loan mall. It is like a shopping mall for loans. Rather than searching Charlotte Russe or Dillard’s for jeans, you shop for a loan among many lenders.

Loanry provides you with a way that may help you find a financial lender. The participating institutions offer a cornucopia of loan types. You may even find mortgage loans designed for those with bad credit or no credit. To use the services that Loanry provides, here’s what you need to do.

    1. Visit Loanry.com.
    2. Choose the kind of loan you need at the top of the screen.
    3. Complete the short form with your basic information.
    4. Loanry sorts through its database of financial institutions.
    5. Loanry may find a lender.
    6. You complete each lender’s long application.
    7. Each lender responds to you directly.
Keep in Mind: Loanry Does Not Make Loans

It just rents space to financial institutions just as a shopping mall rents retail space. Your loan, therefore, does not come from Loanry, but from a financial lender.

Loanry cannot promise you that a lender will give you a loan. We have no control over whether the financial institutions agree to loan you money. Our service simply might help you determine which lenders best suit you by organizing them all in one place. By putting your information below, you can see whether you qualify for any of the loans with selected lenders:

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Why Use Loanry

Using the loan mall pre-application causes only a soft hit on your credit report and reduces the number of hard hits on your credit report. These hard hits happen every time you apply for credit, no matter what type. Each request lowers your credit score just a little, so rather than reduce your credit score, you can simplify your application process and salvage your credit score.

While Loanry is not a financial lending institution, it does offer free financial educational articles like this one on mortgage terms and definitions. We want to help you make better decisions about money.

Mortgage Terms and Definitions: Bolstering Credit Worthiness

Now that you know the difference between A+ and A- and what a FICO score describes, you are ready to get started improving your credit score before you apply for a loan. Put those mortgage terms and definitions to work. You need to strengthen your credit score as much as possible before applying for any type of loan so you can get the best interest rate and fees.

To you, bad credit probably means an individual with a score of 300. That’s the lowest score you can get and that exceeds the financial institution’s definition of bad credit.

What’s Considered Bad Credit

You also might consider your score of 540 pretty good, but banks still see that as poor credit. Financial institutions recognize that it means probably do not manage money really well. Many people of normal means have high credit scores, but they do not take out much credit or loans and they always make their payments on time. So, when a financial lending institution sees lower credit scores, they see a person who doesn’t manage money well. Change their perception by learning to manage money better using Creditry.

You simply need to implement common sense advice to raise your credit score. You’ve probably heard it all before, but you may not have put it into action yet. You can improve your credit by learning what lenders look for and doing that.

1. Obtain a Copy of Your Credit Report

Read your credit report once as yourself and once as a lender would. You can get a free copy of the report once each year from each of the three major credit reporting agencies.

Reading as yourself, check each credit report for errors and inconsistencies. Each agency has different data. Some of them collect more data. For instance, Experian lets individuals opt to allow the collection of data from their cell phone and utility payments. The credit reporting agency includes this additional data in the calculation of its score, but the other two credit agencies do not get the same data. That means your score will typically be higher with Experian, but there’s no guarantee that the lender you apply to will use Experian as the agency of request.

As soon as you spot errors or inconsistency, report this to the credit reporting agency and provide documentation that proves the correct information. This may include bank statements, credit card statements and payment receipts that show the payment dates and accounts. It will take a few weeks for the agency to correct the data, but once they do, your score gets recalculated.

2. Make Timely Payments

We realize how basic that sounds, but the key to having awesome credit is to pay your bills on time. Heck, make your payments early. Just six months of making your payments on time can increase your credit score. It works that quickly.

Consolidate your loans using a non-profit agency such as CareOne, or by taking out a consolidation loan. A consolidation agency will contact each creditor for you and negotiate a restructured debt. After the negotiations, the agency combines the many creditors’ payments into a single payment you’ll make to the non-profit each month.

The non-profit organization then distributes the newly negotiated payment to each creditor. This lets you quickly reduce your overall debt, plus unless you miss a payment to the non-profit, your payments are never late. That factor, plus the reduced debt, quickly raise your credit score.

A consolidation loan will ding your credit with a hard hit when the lending institution runs your credit, but otherwise, this option will help improve your credit quickly. It will enable you to pay off all of your credit cards and loans at once. At the point of taking out the consolidation loan, you’ll reduce your score slightly. It will quickly rebound as long as you do not close any of your credit cards.

What do you get

By paying off all of your loans, you make the ultimate timely payment. You have eradicated all outstanding debt. By leaving the credit cards open, you improve your debt to credit ratio. One of the items credit agencies look at is how much of your credit you’re using. If you have five lines of credit, but only use one and have the others open and available, you actually increase your credit score.

Like the consolidation agency, this lets you make only one payment per month. You’ll pay the lending institution who provided the consolidation loan.

3. Start a Side Hustle for More Income

Save money by hustling harder. No, that’s not one of the industry’s mortgage terms and definitions. But, hustling harder can help you get a better loan deal. Raising your income lets you sock away money for a down payment or to buy discount points. It can also help you qualify for a lower interest rate. You have a few options for how to add another stream of income.

Ask for a raise

Increase your existing income by asking for a raise if you have been with your current employer for a while. Do not try this if they just gave you a regularly scheduled performance raise after your annual performance reviews. This is if you have not had a raise for some time and you have performed your job well.

Find another job

Get a second job. It does not have to be a fancy or career-oriented job. You just need to quickly bump up your income and save the money. You can get a  job in retail, grocery, fast food or waiting tables or bartending, typically in less than one week of job hunting. Forget glamourous gigs. You need money for a mortgage down payment. Most employers start you at $10 to $12 per hour. Work at the job at least six months before applying for a loan.

Try freelancing

Start freelancing. You can drive for Uber or Lyft. Rent out a room in your apartment on Airbnb. If you write well or photography is a hobby, try blogging or freelancing as a photographer.

You can quickly add this money together in a savings account that lets you put down a larger down payment and/or buy discount points. Either way, you reduce the amount you’ll ultimately pay back to the bank. Saving it all gives you a larger down payment which means you’ll need to apply for a smaller loan. The less money you are asking for, the easier it is to get approved, generally.

4. Plan It Out With a Budget and Loan Calculator

There’s nothing simple about getting a loan or improving your credit. Buying a house requires serious budgeting along with knowing your mortgage terms and definitions. You have to make the budget and stick to it.

Make a budget if you do not already have one or study your current one. You should have at least 30 percent of your income available before taking out a loan. That is because your total loan repayments including the loan you are applying to financial lending institutions for should not exceed 30 percent of your monthly income.

Use a loan calculator to calculate what you can comfortably afford. Do not try to take out a loan for the absolute maximum for which you qualify. This is just a bad idea that can land you in a lot of trouble if anything happens that makes you late for a payment or two. Use the calculator to figure out your potential monthly payments using various options for loan term and interest rate, plus down payment, if that applies.

Conclusion

Now that you have a handle on the basic mortgage terms and definitions, you’re ready for part two. We’re just kidding. You now know the essential mortgage terms and definitions you need to apply for a mortgage loan. We won’t even pull a pop quiz on you. Do stop by Loanry though and use the request form to jump-start where to apply.