What is a mortgage? Simply, it is a loan that is secured by the property. The home-buyer promises to pay back the principle + interest within a specified length of time. You will have to sign legal binding papers that specify that if you default on payments the lender has the right to take your home and sell it to get their money back, so you don’t really own your home until the principle (original amount of home cost) + interest is fully paid.
Mortgages are paid back in monthly payments or bi-weekly payments, (FYI: bi-weekly receives a couple extra payments so it pays down a little faster) these payments include taxes, mortgage insurance, and the principle.
Mortgage insurance protects the lender from losses in case borrower defaults on loan and hazard insurance protects both parties in case of property loss.
When you apply for a mortgage go to the bank prepared with the information that you will need in order to start the application.
You will need:
your banking information, bank account, and three months of statements
If any investments bring three months of statements
Proof of employment and two years worth of income
Tax returns and balance sheets if self employed
Any debt you owe, amounts due account # ie:(car loan, student debt )
Divorce papers if applicable
After application is complete the lender will review it and let you know if approved or denied. By law the lenders have to give you a disclosure statement that tells you why the application was denied.
Don’t fear if denied, there are many lending institutions, see where you fell short and try to figure out a way to remedy the situation and try different lenders. The most important thing they look at is the ability to pay the loan, so they will really look closely at your employment earnings. Students may have to provide transcripts. Also, if there are gaps In your employment history, you have to have a written explanation. The lenders will probably send a verification form to your employer to fill out for further proof of employment.
The last step after you are approved for the mortgage is the closing, this makes everything official, all parties sign all the legal papers and ownership is transferred.
How much can you afford for a home purchase
Lenders used to base the amount on approximately three times the gross annual income, but that did not work out very well for many. Do you remember the last article about budgeting? Now consider how much a person has to spare at the end of the month after monthly payment of mortgage and home owners insurance, taxes, and maintenance of property and other expenses. The lenders want to keep the payment for such things from 28% — 40% of their income toward mortgage.
What everyone should do is get a pre-approved home loan amount, before you even start looking for a home this way you know what price range you can afford and there will not be any surprises when you go apply for the mortgage, because you are already approved for a determined amount.
The key again is to start saving as much and as early as possible, the more you can personally put down as a down payment, the less your mortgage will be and you will be able to afford a bigger or nicer home with less mortgage.
Tip: Don’t forget start stashing that 10% away from every pay check you get, it may not seem like much at first but when you see your account growing and by the end of the year you have a couple thousand saved up it will certainly make a difference after a few years.