Apply for your first mortgage
Navigate this process with confidence
The process of buying your first home is more manageable if you take steps to prepare for the purchase (discussed in the article Thinking of buying your first home?). Once first-time buyers get to the mortgage application stage, it’s important to be well-informed. These tips can help you navigate the mortgage application process.
Consider shopping for your mortgage first…before you find your home
Knowing your loan options before you start looking for homes will help you in your home search by providing the amount a lender will lend you to buy a home. This information will help you target homes within a price range you can afford. When you find a lender and mortgage that suits your situation, you can get pre-approved for the loan, which will save you time later when you’re ready to make an offer on a home, since lenders will have most information they need to go ahead with the loan.
A mortgage pre-approval is similar to a loan application, but with important differences. With a pre-approval, a lender provides a commitment letter/document and agrees to lend you a specified amount of money to purchase a home, subject to certain conditions. With a pre-approval, you don’t provide a specific home you want to buy, but you have a clear idea of how much money you can get to buy a home. To get pre-approved, you will need to provide documents. Lenders typically ask for things like ID (state-issued ID, like a driver’s license and/or passport), pay stubs for the past 60 days, two years federal tax returns, bank account statements (savings and checking) and any investment account statements (including retirement accounts) from the last quarter. The lender will also check your credit history by obtaining a credit report. Pre-approvals are generally valid for 60-90 days. You don’t have to formally apply for a loan you’ve been pre-approved for, so always shop around to make sure you get the best deal possible. It is important to note that a mortgage pre-approval is different from a mortgage pre-qualification, which only gives you a general idea of how much a lender may be willing to lend you and the terms available based on valued financial information you provide.
Find the mortgage that’s right for you
There are many types of mortgages to choose from, and an important part of the process is choosing the right mortgage for you now and in the future. When shopping for a mortgage, consider the type of interest rate (fixed or adjustable) and whether a classic loan or a government guaranteed or insured loan is best for you.
The particularity of the fixed rate mortgage loan is that the interest rate does not change. This means that your monthly principal and interest payment will remain the same for the entire repayment term, be it, for example, 15 years or 30 years. (However, your total monthly payment could still change if you pay property taxes and insurance as part of your monthly mortgage payment and those costs change.) On the other hand, the interest rate fluctuates periodically (e.g. annually ) with a variable rate mortgage. (ARM), so your monthly payment will generally change depending on the rate. MRAs can offer a lower price initial interest rates than fixed rate mortgages, but when rates go up, your payments usually go up.
Before deciding on a fixed rate mortgage or ARM, think about how long you plan to stay in the home you’re buying. In general, borrowers who plan to sell their home in a few years are more likely to benefit from a low-rate ARM than those who plan to own the home for many years. But, an ARM may be a good choice for some borrowers depending on other factors. Be sure to determine if you can make your ARM loan repayments if the interest rate increases to the highest possible level while you own the home.
Types of loan
You can also opt for a conventional mortgage or a federally insured or guaranteed loan. Federal Housing Administration (FHA), United States Department of Veterans Affairs (VA), and United States Department of Agriculture (USDA) loans offer government-insured or guaranteed loans. These loans generally have more flexible requirements than conventional loans (such as minimum credit score required for approval) and may allow borrowers to make smaller down payments than conventional loans. However, rates and fees may be higher for these loans than for conventional loans, depending on your credit history, down payment and other factors. However, you will have to pay for mortgage insurance, an additional cost that increases your monthly payments and protects the lender in case you default on your mortgage.
You can also find lenders offering interest-only loans, hybrid mortgages, and lump sum loans. These loans usually start with low payments that increase over time. Before choosing one of these loans, make sure you fully understand the terms of the loan and the potential risks.
Once you’ve decided on a type of mortgage, compare your loan online and/or by getting quotes from different lenders. Interest rates and fees vary from lender to lender, even for the same type of loan, so shop around and don’t be afraid to try to negotiate these costs.
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Knowing the monthly payment and the interest rate of your loan is not enough; you need to understand the main other costs and terms of the loan. When you apply for a mortgage loan, the lender must provide you with a document called “Loan estimate» within three working days of receiving your request. The loan estimate provides important information about the loan offered to you by the lender, including a summary of loan terms, estimated loan and closing costs, and additional information.
Go ahead with the loan
The loan estimate is not an approval of the loan; it simply indicates the loan terms that the lender can offer you if you decide to go ahead with them. You must inform the lender if you decide to grant a loan and you can obtain a written ‘block’ from the lender. A lock guarantees the agreed rate, the duration of the lock and other information that you have specifically negotiated, such as the number of “points” (fees) to be paid to the lender for the loan. (Usually the more points you pay, the lower the interest rate.) A fee may be charged to lock in the loan rate. If so, ask if the fees are refunded at closing.
During the processing of your loan application, you may be asked to provide additional documentation indicating the source of your down payment funds, cash reserves to cover the first months of mortgage payments, and documentation specific to your situation.
Closing of the loan
Closing is the last step in the process. At closing, you will need to have the agreed funds available, which could be used for closing costs (including the escrow deposit, which is money set aside for a few months of property taxes and insurance payments mortgage) and the down payment. The closing costs vary depending on the type of loan you choose and the type of property, but can be anywhere from 2% to 6% of the loan amount. These costs typically include appraisal fees, attorney fees, credit report fees, title search fees, and property inspection fees.
To learn more about mortgages, see the FDIC’s Guide to Affordable Mortgages. Additionally, the Consumer Financial Protection Bureau website provides useful information on mortgages.
FDIC Affordable Mortgage Center
FDIC Get Banked
CFPB Mortgage Key Terms
For more consumer resources, go to FDIC.gov or go to FDIC Knowledge Center. You can also call the FDIC toll-free at 1-877-ASK-FDIC (1-877-275-3342). Please send your story ideas or comments to [email protected]