Understanding the Mortgage Process

Potential home buyers are starting to realize that home prices have become more affordable and now is the time to buy. In fact, statistics show that investors have come back into the housing market and are snapping up bargains in many areas. If you are considering buying a home, most likely you will need a home mortgage.  Smart home buyers get pre-qualified for their home loans before setting out with real estate agents. Learn here about the mortgage process so that you know what to expect and how to shop for a mortgage loan.

How Is Your Maximum Mortgage Calculated?

Lenders look at a variety of features when determining your interest rate and the amount of mortgage you can afford. Factors that help determine this are:

  • Your monthly income. This is your gross monthly income (before taxes) from your salary, or your taxable income (after expenses) from self-employment. Income from investments, like interest and dividends, or payments like Social Security, alimony, or child support counts here also.
  • Your debt. Most lenders like to see a debt to income ratio (DTI) of 45% or less (with an emphasis on less). Consumer loans, credit cards, auto loans, other financing, and mortgage payments are used to calculate this ratio. If you make $5,000 a month and your lender allows you a maximum DTI of 45%, all of your debt payments including your new mortgage shouldn't exceed $2,250 a month.
  • Your credit. Credit scoring is still a prime factor in the lending process. Those with credit scores of less than 720 will generally pay more in points or a higher interest rate than borrowers who have higher scores.
  • Your liquid assets. Having savings, IRAs, stocks, bonds, or mutual funds will make you more attractive to lenders and will help to keep mortgage points and interest rates lower. These savings are called "reserves" and the lender likes to see enough in the bank to pay your bills for at least a few months in case your income is disrupted.
  • Your employment. If you are looking to buy a house, it is not the best idea to switch careers. Staying within the same industry helps; however, if you have good tenure with an employer it is nice to have on your mortgage application.

All these considerations help determine your maximum loan amount. Your loan officer uses a mortgage calculator to determine your monthly payment, which will include property taxes and insurance as well as principle and interest. Once you have found a home that you like, you will need to finalize your mortgage application with a lender.

What Do You Want From Your Mortgage Lender?

It never hurts to shop for lenders as they can vary in the interest rate offered, closing costs, and terms and conditions. Check with several before choosing one and make sure your lender is in good standing with the Department of Real Estate in your state. Also, get a Good Faith Estimate and a Truth in Lending Disclosure to ensure you are getting the loan that you agreed to and the costs and terms of the mortgage are what you desire. If you follow these steps, you should have no unpleasant surprises.

Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.

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