When you think of what the American dream embodies, oftentimes owning a home is first on the list. Since the 1930s, banks have offered home loans to qualified customers for the opportunity to purchase a home without the need to save the full purchase price amount.
What is a Mortgage?
A mortgage is a home loan which uses the home as collateral to obtain the loan. The homebuyer is then expected to pay back the loan in monthly installments, within a set timeframe and with a relatively low interest rate. If the homebuyer fails to make the mortgage payments, the bank has the right to foreclose on the home to recover the money lent.
There are several aspects of a loan of which a home buyer should be aware. Your Omaha mortgage brokers will explain these aspects in detail when you apply for a loan. But we will discuss them below to give you a general idea of how a mortgage works.
Qualifying for a Mortgage
There are several types of mortgages to choose from. Each type has its own criteria to meet for qualification.
A conventional loan is a mortgage that is not insured by the federal government and generally requires a 20% down payment.
The VA, FHA and USDA all offer government-backed loans, which are intended to make it easier for qualified applicants to obtain a mortgage with a lower down payment. Because this loan is insured by the government, there is less risk to the bank and therefore they can require a lower down payment. With a conventional loan, there is more risk to the bank and so the homebuyer is usually required to put more down, however, the interest rate may be better, and fees can be negotiated.
No matter which loan type you apply for, there are certain requirements to be met. Your credit score is important. Generally speaking, a minimum FICO of 620 is necessary for a fixed-rate mortgage.
Debt-to-income ratio is also a factor. This is your total monthly debts divided by your gross monthly income. Mortgage companies in Omaha typically want DTI to be 36% or less for a conventional loan, however higher credit score, investments, or savings can persuade lenders to allow a slightly higher DTI.
In order to qualify for a mortgage, you will be required to show proof of stable and substantial income to support the loan payments. Your mortgage professional in Omaha will ask for documentation such as bank statements, paycheck stubs, W-2s, income tax returns or other documentation that can support your proof of income.
Lenders offer different products to choose from and have guidelines for each, with down payments as low as 3%. However, with a conventional loan, any down payment less than 20% will require private mortgage insurance. PMI is insurance protection on the loan until 20% of the loan amount is paid, at which point the PMI requirement is waived.
Other Important Details
There are several aspects about a home loan that your mortgage professional in Omaha, Nebraska will talk about during the loan process. It is helpful to have an understanding of what each of these details mean.
Closing costs refer to the expenses the bank or lender incurs by financing the loan. These are in addition to the cost of the home loan. These costs include origination fees, points, appraisal and title fees, surveys, title insurance, and other fees. These fees typically range from 2%-7% of the loan value.
Points refer to money paid to the lender in order to reduce the interest rate. One point is equal to one percentage point.
Annual Percentage Rate
The APR is the cost of the loan represented as a yearly rate and must be disclosed to you upfront.
The interest rate represents what the lender charges to borrow money and is equal to a percentage of the loan amount.
PITI stands for principal, interest, taxes and insurance. Added up together, these costs make up your monthly mortgage payment.
This refers to the amount of time in which you will repay your home loan. Examples of mortgage terms are 30-year, 20-year, and 15-year. At the end of your mortgage term, your home should be paid in full unless your loan includes a balloon payment at the end. In this instance, you would owe that balloon payment or need to refinance the loan.
If you are interested in discussing a mortgage and how the process works, contact Steph, The Mortgage Genie, one of the top Omaha mortgage brokers. She is ready to answer any questions you may have and assist you with every step of the mortgage process.