As with any loan, take your time in deciding about what mortgage to take out and make sure you can afford the repayments. Never agree to a mortgage or financial commitment, no matter how tempting, if it falls out of your range of financial comfort. Key points to take into consideration when taking out a mortgage may include:
- Type of down payment you make
- Amount of time to pay the loan back, also known as the loan term
- How long you plan to stay in the space
- And the interest rate you can afford to pay
There is a wide variety of mortgage types which differ substantially between the different types as well as between the different lenders.
There are two basic ways that mortgage lenders charge the borrower for using their money – (1) through interest charges you pay each month over the life of the loan, and (2) points.
Points are an upfront fee based on a percentage of the loan. One point represents 1% of the mortgage. For example, for a $150,000 mortgage, one point would be $1,500, or 1% of the mortgage; two points represents 2% of the mortgage, or $3,000; and so on.
These points can be paid as part of closing costs, or the lender will reduce the available loan proceeds by the amount of the points. Some loans will not charge points, but will have a higher interest rate.
When reviewing different mortgage products, compare their interest rates, points’ amounts and other fees to get a clearer picture of how much you will pay.
Below is some helpful information on the most common types of mortgages that are on offer from a financial lender. Always keep in mind that these mortgages are almost always negotiable, especially if you have pulling power with good credit and a large down payment.
How Mortgages are Approved
There are several factors involved in the loan approval process of your mortgage application.
Income
When you’re qualifying for a loan, lenders usually use your gross income (all the money you earn before taxes) to determine the monthly mortgage payment you can afford. Gross income may also include the average of overtime pay and commissions, and child support or alimony, if you wish to have them considered.
Percentage of Income
Your monthly mortgage payment is calculated as a percentage of your income. That is, lenders require that your total monthly mortgage payment — principal, interest, property taxes, mortgage insurance, hazard insurance and any homeowner association dues — be no more than 28% to 33% of your monthly gross income.
Total Debt
The borrower may have car loans, student loans, credit cards, child support, alimony or other monthly expenses. In general, lenders require that the total of all your monthly expenses (excluding basics like utilities and groceries) not exceed 38% of your gross monthly income.
Credit History
A satisfactory record of paying your bills on time is an important part of getting a home loan. If you have had credit difficulties within the past two years, a good explanation of any late or missing payments on your credit report will be taken into consideration.
Employment History
Lenders usually prefer to lend money to people whose incomes have grown steadily over the past several years and who have worked consistently in the same or related occupations. You will need to verify employment. If you’re self-employed, work on commission or have been at your job less than two years, you may need to provide additional information about your work history.
Property Appraisal
A professional appraisal is done to determine the value of the home. An appraisal is based on the home’s condition and selling prices of comparable properties in the area and confirms that the property is worth the purchase price you are offering for the home.
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