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The Mortgage Application Process
Down Payment
You can save much time and worry if you apply for
Are you ready to own a home? The biggest a mortgage before you even start house hunting.
challenge for many people is to save up With pre-approval, sellers may be willing to lower
enough money for the initial down payment, the home price just to move the process along. You
the money paid up front before you take out also know exactly how much you qualify for, and
a mortgage. Having 20% of the home price can shorten the time it takes to move into your new
is recommended, but there are programs home.
that allow you to purchase a home with
3-5% down. You pay a non-refundable application fee of $200 to
$500 to complete a mortgage application. When you
If you put less than 20% down, many lender meet with the lender bring:
will require you to have private mortgage
insurance (PMI). This protects the lender Proof of income: W-2 forms, recent pay stubs,
against a loss if a borrower can’t pay the tax returns for the past two years, proof of any
loan. This is an extra cost that would be additional income.
included in your mortgage payment. Once Proof of your assets: List of bank account
you have 20% equity in your home, you can numbers, the address of your bank branch,
generally drop PMI. checking and savings account statements for the
First-Time Home Buyers Incentives previous 2-3 months, list of investments and their
estimated values, titles of vehicles you own.
If a 20% down payment isn’t possible there
are government-assisted programs such Your debts: Credit card bills for the past few billing
as FHA (Federal Housing Administration), periods; Other outstanding debt, copies of rental
VA (Veterans Administration), and Rural payments, alimony or child support.
Development Services which can help you This approval process can take from one to several
find financing where the down payment weeks as the lender verifies your
requirements are lower. Visit www.hud.gov information, runs a credit check, and
for more information. determines if you are a good risk.
Additional Costs
In general, you need to come up with enough money
to cover three costs: earnest money, the deposit
you make on the home when you submit your offer,
the down payment, and closing costs, the costs
associated with processing the paperwork to buy a
house.
Equity
One of the best things about owning a home is the fact that you are building equity, or
value, in the home. When you make a rent payment, you never see that money again, but
as you pay your mortgage, you are building
ownership in your home. Each payment means
you own a little more of the house. As home
prices rise, you also have a greater return on
your investment. If you purchase your home
for $100,000 and in five years it is worth
$120,000, you have gained $20,000 in equity
just by owning your home!
Equity Increases over Time
When you make your mortgage payment, some
of your money will be used to pay interest, and the rest will be used to pay off the amount
you borrowed (principal). At the beginning of your loan you are paying interest on your
whole loan so more of the payment is going towards interest than principal. As you begin
paying more principal, the amount of interest owed reduces and more money goes towards
principal. The more principal you have paid, the higher the equity in your home.
Exercise - Comparing Mortgage Costs
You are a first time home buyer and you want to compare two possible loans:
a fixed rate loan of 5.5% and a variable rate loan that starts at 3.25% and increases ¼%
yearly for the duration of the loan. The loan is for 30-year, $100,000 loan. It also assumes that
the variable rate loan has a cap so it cannot exceed 9.25%.
1. At the end of 30 years, which loan cost more? Fixed / ARM
2. If you are planning to live in your house about 10 years and then sell, which loan would you choose?
Fixed / ARM Why?___________________________________
3. When would you choose the fixed rate? ___________________________________
You can use the following mortgage calculators to determine fixed and ARM costs:
Fixed: http://www.bankrate.com/calculators/mortgages/mortgage-loan.aspx
ARM: http://www.bankrate.com/calculators/mortgages/adjustable-rate-mortgage-arm-
calculator.aspx 1. ARM 2. ARM, less interest paid, 3. Staying in home for longer. fixed payment