When you’re faced with the prospect of buying your first home, you’re inundated with information and have a lot of newbie mortgage loan questions. Unfortunately, since this process isn’t one most are inherently knowledgeable about, that information can cloud the process and keep you from really understanding what you’re getting into and how to proceed in a direction that works best for you and your financial situation.
Luckily, we’re pulling back the curtain on more of those burning newbie mortgage loan questions and helping you feel empowered in the home buying process.
What documents do I need to have in order to apply for a mortgage loan?
In order to make the home buying process run as smoothly as possible, organization is key. Here is a basic checklist of what you will need (although your lender could ask for more, depending on your specific situation).
- Paycheck stubs for each applicant
- W-2s (previous two years)
- Federal tax returns (previous year to two years)
- Bank statements (two to three months)
- List of debts (car loans, student loans, credit cards, etc.)
- List of assets (records of investments, car and real estate titles, etc.)
Other documentation you might need, if applicable:
- Proof of pension, social security, and/or disability income
- Child support and/or alimony payments
- Profit and loss statements if you own a business
What exactly do lenders look at when determining if I qualify for a mortgage?
Being considered for a mortgage loan is about more than just how much you make or how squeaky clean your credit history is – although those do play a major part as well. Here’s a snapshot of what they are considering:
Your credit report, score, and history
- Do you make on-time payments? Or are you routinely late in paying your financial obligations?
- Do you have any credit report blemishes you haven’t taken care of?
- How high is your credit score? (Learn more about optimal scores in part 1 of this series)
Your financial ability to take on a mortgage
- What is your debt-to-income ratio? (Learn how to calculate yours here)
- Are you stable at your place of employment or, if you own a business, is your income reliable?
- Are you bringing a down payment to the table?
- Do you have liquid assets to pull from should your financial situation change?
How do closing costs work and how high are they?
In addition to accumulating money to pay for a down payment, there’s something else to consider – how much your closing costs will be.
Closing costs cover a variety of things – an appraisal fee, title insurance, loan underwriting fee, origination fee – just to name a few. These costs can be paid by either the buyer or seller, depending on what both parties agree to.
Closing costs are generally between 2-5% of the total loan. Lenders will give a closing cost estimate and then the actual amount will be given a few days before closing.
It’s important to note, these costs can vary by lender. If one lender seems to be high, make sure you shop around.
What is included in a monthly mortgage payment?
When looking at your monthly mortgage payment, it’s important to understand you are putting money towards more than just your loan principal.
If you have an FHA loan, or if you put less than 20% down on a conventional mortgage, you will likely be required by the lender to open an escrow account. This means additional money will be collected monthly – along with the mortgage payment – in order to cover annual expenses like property taxes and homeowner’s insurance. These bills will then be paid on your behalf.
In addition, interest is also being paid with your monthly mortgage payment, as well as Private Mortgage Insurance (PMI) if you paid less than 20% on a conventional loan, or Mortgage Insurance (MI) if you have an FHA loan.
Still have more questions about the home buying process? Tune in for part 3 of this series. Don’t forget to read Newbie Mortgage Loan Questions – Part 1.