A pre-qualification is the result of a basic review of your financial situation. Based on assumed, unverified information that you provide, we can give you a general idea for what kind of loan you might qualify. This is not any kind of commitment to provide you a loan, but it can be very helpful as you consider how much home to shop for or how to reorganize your finances.
A sizable chunk of the time required to approve you for a mortgage is gathering and analyzing documentation that will help demonstrate your ability to repay the loan. The faster and more completely you are able to gather the required documentation, the faster your loan decision can come. The documentation required for your individual situation will vary, but the basics include the following.
- Most recent 2 years Federal tax returns, including all pages and schedules
- For all employers you’ve had, W-2 forms from the most recent 2 years
- Your most recent 30 days’ paystubs
- For the last 2 years, the following information for each employer
- Employer name
- Position you held for the employer
- If the following are part of your financial picture, the last 2 years of:
- Business tax returns
- State issued photo ID
- Social security card
- Most recent 60 days bank statements (Include all pages, even if blank. A transaction history is insufficient)
- For any rental properties you have, copies of the associated mortgage statements
- If all or part of your down payment is coming from a gift, you will need “gift letter” from the source of the funds explaining that the funds are in fact a gift, not a loan.
- For the homeowner’s insurance provider, the following:
- Provider name
- Agent name
Conventional loans are the most common because they are typically the least costly overall, but it can be more difficult to qualify for a conventional loan than for other loan types. FHA and Utah Housing loans can be great alternatives for those who can’t qualify for a conventional mortgage. VA loans can be a great option if you are a veteran. If you want to purchase a home in an area that qualifies as rural, a USDA loan can be a great zero-down option. We have jumbo mortgage options for loans that exceed conforming limits. Our team is expert in analyzing individual borrower situations. We can provide you a side-by-side comparison of how different loan options and help you select the loan type that will best serve your individual financial interests.
The short answer is that you will usually need at least 5% down on a conventional mortgage. You can get an FHA mortgage with as little as 3.5% down. VA or USDA loans are available with no money down at all. Something to consider though is how your down payment will affect your monthly house payment. How much you put down will certainly affect how much your monthly principal payment will be. It will also largely determine whether you have to pay private mortgage insurance or “PMI”.
It is possible to be approved for a mortgage with a credit score even in the 600s. However, generally the lower your credit score, the higher your interest rate will be.
Beyond a pre-qualification, a formal pre-approval can be a very useful tool in your homebuying process. Many people shop for a home before they get a realistic idea of what kind of financing is available to them. This can lead to unrealistic expectations, unconsidered purchase offers, and disappointment. Even if you already have a property in mind to purchase, the first part of obtaining financing for that property is approving you as a borrower for the amount of money you will need. A great way to begin your homebuying effort is to start this process, also called “credit approval” before you ever look for a home. After an examination and verification of your credit, income, assets, and employment we can formally issue you a commitment to lend you a certain amount of money. With that formal commitment letter, you can show sellers that you are serious about, and able to follow through with any offers you make. This can give you a distinct advantage over so many other competing buyers who do not get pre-approved.
Closing cost are all of the charges you pay when you close your loan at the title company. Generally, you pay few if any charges for the process of getting your loan while you are IN the process of putting your loan together. There are several parties involved in getting your mortgage for you. In addition to Veritas as your lender, you have some or all of the following that provide necessary services for getting your mortgage: appraisers, inspectors, title companies, government recorders, insurance companies, and others. The fees you incur with these entities in the process of getting your loan are all part of your closing costs. Additionally, most borrowers will have funds held in escrow for payments that will be made later on items like homeowner’s insurance and property taxes. Funding your escrow account is also part of your closing costs. Depending on how you want to structure your loan, these costs can vary widely, but generally you can expect them to be 2-3% of your loan amount.
Discount points are charges that you pay up front on your mortgage to get a “discount” in your interest rate. One “point” is equal to 1% of your loan amount, so on a $250,000 mortgage, one discount point would be $2,500. There are basically two considerations in determining whether paying discount points is worth it for you. First, discount points are tax-deductible. Second, paying the discount points gets you a lower interest rate. So, if the interest savings over the life of the loan coupled with the tax savings in the year you pay the discount points is greater than the points paid, it could make financial sense.
Intercap Lending only offers services as a mortgage lender and does not offer tax services. The information above is for educational purposes only and should not be deemed as tax advice. Please consult a tax advisor regarding your personal tax situation.
Be very wary of companies that promise to get your loan done in 7-10 days. A litany of qualifiers are required for such a promise. If a lender rushes too quickly to close your loan, you might find yourself in a situation where they are forcing you to help them fix resulting errors and even to re-close your loan. We can generally get you a loan more quickly than any of our competitors and get your loan done right. For most loans, you can expect the whole process to take about 30 days.
Depending on what type of mortgage you get, different loan terms will be available. The most common options are 15-year and 30-year terms. A shorter term nearly always comes with a lower interest rate, but since the amortization period is shorter the payment is higher. Therefore, the benefit of a shorter term is that you will save a lot of money in interest over the life of the loan, where on a 30-year loan, you get the benefit of a lower monthly payment.
While rates are low, a fixed rate mortgage generally make financial sense for most borrowers. However, there are circumstances when an ARM could be more suitable. If you reasonably expect to sell your home during the fixed period of an ARM, the lower interest rate could save you money. Also, in an environment where rates are falling, you could benefit from an initially low rate that could drop further.
An escrow account isn’t necessarily specific to a mortgage transaction. Technically, an escrow account refers to money held in reserve by a third party for the purpose of two other parties conducting a transaction. However, an escrow account is most often used in the context of paying annual expenses associated with your mortgage, like property taxes and insurance premiums. When you close your loan, part of your closing costs will be funding your escrow account such that adequate funds will be available from the account when your annual expenses are due. This part of your closing costs is also referred to as “pre-paids” or “impounds”. In most instances, part of your monthly mortgage payment will likewise be for building up the required reserves in escrow to pay your annual expenses the subsequent year.
Most commonly, your monthly payment has four main components:
- Principal: The portion of your payment that goes toward repayment of the outstanding loan balance.
- Interest: The interest charge on the outstanding balance.
- Taxes: One-twelfth of your expected annual property taxes which is deposited into your escrow account.
- Insurance: This includes any hazard insurances you’re required to maintain, such as homeowner’s and flood insurance. Depending on your situation, this can also include mortgage insurance or other guarantee fees.
Frequently you’ll hear people refer to the first initial of the items above when describing a mortgage payment. For example, “P&I” refers to just the principal and interest portion of your payment. “PITI” refers to all 4 components together. Our payment calculator can help you get an idea of what your payment might look like.
Mortgage insurance is designed to lower the risk for a lender of making a loan to you. Mortgage insurance largely facilitates the possibility of borrowers getting a mortgage when they have less than a 20% down payment. It helps to protect the lender against losses attendant to default of a mortgage.
When you get any loan with a down payment of less 20%, you will typically pay some form of mortgage insurance. Depending on the type of loan you get, your mortgage insurance premiums will be structured in different ways and referred to by different names. Below is a quick overview.
With conventional loans, the mortgage insurance will be provided by a private company and is therefore referred to as private mortgage insurance, or “PMI”. If you are required to pay PMI on a conventional loan, the premiums are typically part of your monthly payment. You are generally required to pay those premiums until your loan balance reaches 78% of the purchase price.
Federal Housing Administration (FHA)
With an FHA loan, your mortgage insurance premiums, or “MIP”, are paid directly to FHA. MIP is required on all FHA loans. There is an upfront premium (“UFMIP”) which is typically included in your closing costs, and can be rolled into your mortgage. There is also a monthly premium included as part of your monthly payment. Usually, this monthly premium remains a part of your payment for the life of your loan.
Veterans’ Affairs (VA)
Instead of typical mortgage insurance, the VA guarantee acts as a risk protection mechanism on VA loans. There is no monthly cost associated with your monthly payment. Instead, there is an upfront “VA Funding Fee” due at closing, which can be rolled into your mortgage. This funding fee will vary based on factors like the purpose of your loan, whether or not you’ve had a previous VA loan, your type of military service, your disability status, and the amount of your down payment.
US Department of Agriculture (“USDA” or “Rural Housing”)
The insurance premium associated with USDA loans is typically referred to as the “Guarantee Fee”. You’ll pay the guarantee fee both upfront, which can be rolled into your mortgage; and as part of your monthly payment.
There is no mathematical formula to answer this question for you. People choose to buy a home for a variety reasons, including many that aren’t financial. For example, some people crave the independence that comes with owning your own place. Others want to customize their home to make it their own. However, the most important factors in this decision are financial. Because your situation is unique, it is impossible give you a definitive answer to this question. However, our Rent vs. Buy calculator is one of the best out there for helping you simplify the complexities you need to consider when making this important financial decision.