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What Is a Mortgage Loan?

A mortgage loan is a loan you can use to refinance or buy property. It’s a good solution if you want to buy a home but don’t have the cash upfront. To qualify for the loan, you must meet some eligibility requirements. So, a person who is approved for a mortgage is likely one with a stable income. Also, you require a debt-to-income ratio of under 50% and a credit score of about 620.

Typically, home loans are secured, so you promise collateral to the lender. In this case, you use your new home as collateral, which the lender can take possession of through a process called foreclosure if you fail to repay the loan. For most situations involving a mortgage loan, you need to offer a down payment, the money you pay upfront to buy a home. The lender will request you to put down a sum of money to get approved for the loan.

Benefits of a Mortgage Loan

When it comes to a mortgage loan, you’re encouraged to repay the loan as quickly as possible. However, you can enjoy some advantages when you carry a mortgage loan for a bit longer. Here are some of the benefits you draw from having a mortgage.

• Low-Interest Debt – Mortgage home loans offer an affordable means of borrowing. While most credit companies will give you teaser rates, those rates are only reasonable in the first year. Most mortgage interest rates are low, so if you get a deal at 3.2%, you can put some money into other debt instead of paying off the mortgage in a hurry. For example, you can repay your credit cards, and once you vanquish high-interest debt, you’ll easily turn attention to repaying loans with low interest.
• Tax-Deductible Interest Rate – While filing the 1040 Form, you can deduct interest on your mortgage. This is even more lucrative if you’re in a higher tax bracket. For example, if you fall within the 36% tax bracket, for every thousand dollars you spend on interest, you’re awarded tax savings of up to $350. Besides, you also get a tidy deduction from state tax obligations.
• You Can Invest Your Extra Money – If you’re locked into a mortgage, you’re already getting some of the best rates for borrowing. Assuming the interest is in the low four percentage points, it’s easy to reimburse yourself by investing in vetted stocks, index funds, and other financial instruments. Historically, the stock market averages about 12% gains per year. Over three decades, this could be a better investment than putting all your money into paying off a home.
• Maintain Financial Liquidity – As one gets older, financial liquidity becomes more important. You might develop a medical condition that needs expensive treatments. Or you’ll want to help your adult children get their own home. Also, after working for many years, you might want to have some fun through different hobbies, maybe vacations. Whatever the idea, you need financial liquidity. With mortgage loans, you don’t need to sink all your money into paying off the home. It keeps your liquid so you can invest in other areas to build even more capital. Ask yourself which scenario serves you better: having the cash flow to pursue what you love during retirement while paying monthly installments for your mortgage, or paying off your home and being forced to use a reverse mortgage.

Types of Mortgage Loans

There are different types of home loans you can choose from. If you understand the lingo, choosing from among the different types of mortgage loans is not difficult. Here’s an overview of the five mortgage loan types you’ll find on the market.

1. Conventional Mortgages

Conventional mortgage loans are loans that are not insured through the federal government. You’ll find two types under this category, conforming and non-conforming loans.

Conforming loans are loans whose amount falls within the maximum limits provided by the Federal Housing Finance Agency. Loans that don’t meet these requirements are called non-conforming loans. Generally, when you apply for conventional mortgage loans, lenders will require that you pay private mortgage insurance on most loans if you put down less than 20% of a home’s purchase price.

Conventional mortgages are ideal as you can use them for a primary home or investment property. The lender can offer as little as 3%, and when you reach 20% equity, you can negotiate with the lender to cancel PMI.

2. Jumbo Mortgages

Jumbo mortgage loans are mortgages with non-conforming loan limits. So, the price can exceed the federal loan limit. Some of the benefits of Jumbo mortgages include that you can borrow money to purchase a home in an expensive area. Also, lenders offer competitive interest rates compared to other conventional loans. However, to get the loan, you must commit a down payment of 10 to 20 percent. Also, a FICO score of at least 700 is required, although you’ll find lenders who will accept a score of 660. Jumbo loans are ideal for people purchasing high-end homes as an excellent credit score is a requirement. One needs a high income to afford the substantial down payment.

3. Government-Insured Mortgages

While the U.S. government does not offer mortgage loans, it plays a role in ensuring more Americans own homes. Several government agencies back mortgages, including the U.S. Department of Agriculture and the Federal Housing Administration. This type of support helps you finance a home if you don’t qualify for conventional loans. The credit requirements are a bit relaxed, and you don’t need a large down payment to get started. These loans are open to first-time and repeat buyers. The only concern with government-insured mortgage loans is that you could incur higher borrowing costs.

4. Fixed-Rate Mortgages

When you apply for mortgage loans with a fixed rate, you’re guaranteed the same interest throughout the loan term. Your monthly payments stay the same. Some of the benefits of this type of mortgage include that your monthly principal and interest stay the same. Also, you can easily budget for the loan month to month. However, you’ll pay higher interest than on an adjustable-rate mortgage.

5. Adjustable-Rate Mortgage

Adjustable-interest home loans offer fluctuating interest rates, which can go up or down depending on market conditions. The benefit of this option is that you enjoy lower interest rates in the first few years, which helps you save a substantial amount on interest payments. The downside is that the monthly payments could become unaffordable, triggering a loan default. Also, home values may plunge, making it difficult to sell or refinance the home.

How Much Can I Borrow For a Home Loan?

Before a lender approves you for a mortgage loan, they consider several things, including your credit score, debt ratio, and down payment. Also, local loan limits play a role in influencing the maximum or minimum amount you can get, so check what the law says in your state. To calculate buyer affordability, lenders want to know how much you make, the number of demands on your income, and the potential for growth or things that could jeopardize your ability to repay the loan.

What Is the Current Interest Rate for Home Loans?

The current interest rate averages 2.823% for a 30-year fixed-rate mortgage. This varies from one lender to another, but the rate is usually less than 3.5%. For example, if you apply for a 30-year fixed home loan amounting to $300,000 and your credit score is 680 – 699, you may require a 20% down payment, which is $60,000. With a rate of 2.93%, your upfront costs amount to $1,611, and you’ll pay monthly installments of about $996. The rate will also vary based on your debt-to-income ratio or credit score.

How Much Do I Qualify For Home Loan?

To qualify for home loans, you need to satisfy certain conditions. Getting approved for a home loan becomes easy if you have the following documents:

• W2s for the past two years
• Pay stubs for at least 30 days
• Tax returns for two years
• Three-months bank statements
• Dividend or retirement earnings statements
• Information about bonds, stocks, or life insurance
• Debt information ( loans, credit card debt, or other debt)
• Rental or mortgage history
• Social security card
• Employment history for the last two years
• Photo ID
• Credit history

Some companies will ask for additional information, so confirm their loan terms to know their qualification for a home loan.

How to Get Preapproved for a Home Loan

In the mortgage loan application, pre-qualification is an important first step. This is usually based on an evaluation of your finances. You share with the lender details about your debt, credit, assets, and income, and then they estimate whether you qualify for a mortgage and the amount you can borrow. Here’s the preapproval procedure:

• Get a credit score. Before getting a home loan, know where you stand. A credit score of at least 620 is preferred, so if you have a higher score, you can qualify for better rates.
• Review your credit history. Request copies of your credit history, and if there are errors, dispute and ensure they’re corrected. Also, check for delinquent accounts and resolve issues.
• Gather personal, income, and account information. This includes your social security number, addresses, and employment details. In the preapproval process, you may require to submit 1099s and a W-2 tax form. Two years of employment is preferred, but you can find exceptions. If you’re self-employed, prepare two years of tax returns.
• Contact the lender. Once you have all documents ready, contact the lender and get started with the review process.

How to Apply for a Home Loan

After confirming home loan interest rates and preparing all required documents, follow these steps to apply for a home loan.

• Fill out the mortgage application: Most lenders offer an online system you can use to fill your application. Go to the lender’s website and search for this page to get started.
• Review loan estimates: Review home loan rates, the cost in five years, the principal you’ll pay, APR, and any other costs. Compare terms and costs before you apply for the loan.
• Loan processing: All the statements you made in your application are scrutinized. The lender may request documents or ask more questions. Ensure you’re available to respond promptly.
• Underwriting: At this stage, the lender assesses the risk of lending to you on the chosen property. They’ll look at your loan-to-value ratio and whether you have a cash flow to afford the monthly payments. If you meet all conditions, your application is moved to the next step.
• Cleared to close: This is the final step, and the lender acts before you move forward. You’ll receive a federally required form, a Closing Disclosure, which shows the final costs of the mortgage. Scrutinize the form and compare if the quoted fees have changed, and ask for an explanation if you spot discrepancies.