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Bringing dates back to your mom’s basement isn’t exactly doing it for you now that you are approaching 30. With the odor of moth balls around and mom upstairs yelling about meatloaf and that new reality show on, no wonder those bumble matches disappear afterwards and don’t return your texts.
Getting out of your mom’s basement and into a basement of your own involves moving. One way to move out of the basement is to buy your own place.
Buying your own space is going to require a mortgage loan more often than not.
By following these 7 steps to getting a mortgage loan, you will be on the right path to home ownership, getting your social life back, and also saving some money.
How to Get a Mortgage Loan and Save Money
Shop and Speak with Mortgage Loan Officers
Going shopping, so to speak, is one of the first steps when looking for a mortgage loan. A potential home buyer will want to look around for the best and lowest mortgage loan rates available.
You should call around and look for lenders online to see who is offering the best mortgage loan rates with the lowest closing costs. Sometimes certain mortgage companies will offer special offers. You can get a mortgage loan from a foreign bank but there are some risks. However, it is another option instead of traditional mortgages.
It’s good to speak with different lenders as they may be specifically able to help you address areas where they see red flags.
For example, if you speak with a lender and you tell them about the $20,000 auto loan you defaulted on, this might be a potential problem.
Depending on the lender, some will offer what is known as a “pre-qualification” letter. This is different than a “pre-approval” letter.
A pre-qualification letter can be generated after a simple phone call with a lender. Sometimes they do not check documentation or proof of income. A pre-qualification letter is not worth a lot of weight at all in the real estate industry.
A pre-approval letter on the other hand IS worth a lot of weight. IF you are trying to buy a house in a seller’s market, you will want to get a pre-approval letter because it is essential.
As a Realtor, I will always accept an offer with a pre-approval instead of a pre-qualification letter.
A pre-approval letter saves time in the home buying transaction because I know that the financial records have been inspected by the mortgage company doing the loan for the house.
We will cover the steps to get a pre-approval letter below.
To qualify for a mortgage loan, your credit has to be acceptable. Normally your FICO has to be above 680 to qualify for a mortgage. That is not to say if you are slightly below this, you will not qualify. Mortgages sometimes are approved by lenders but you will have a higher interest rate because of your lower score.
The best thing to do is start credit repair if you have a low FICO score. This process can take anywhere from 6 months to over a year depending what the needs are.
You might be faced with not having enough open lines of credit or you might be working on paying off debt. Some of the best things you can do to repair your credit are
Pay all of your bills on time
Pay down debt and credit card balances
Don’t apply for new credit
Once you pay off a credit card balance, do not cancel it. Leave the line of credit open and this will also help your FICO score rise.
Decide What Type of Mortgage Loan You Want
Additionally, you should firm up with your lender what type of mortgage loan you want. Your monthly payment could vary by hundreds of dollars depending on what mortgage loan you choose. There are different types of home loans such as
Fixed Rate Loans:
This mortgage loan rate will be fixed for the life of your loan. These loan types make budgeting easier, because your rate simply won’t change. They also come in different terms such as, 30, 20, 25, 15, 10 years. Not all lenders will offer ALL of these but some will. That’s why it is important to shop around.
Adjustable Rate Loans:
These are known as ARMs. These home loans will be fixed for a certain number of years and then the payment will change after that specified time is up. For example, if you decide on a 7/1 arm, that means the payment will be fixed for 7 years at which time it will adjust. Normally these loans offer a lower interest rate for the initial mortgage loan fixed period.
Conventional or Government-Insured Loans:
The main difference between these types of mortgage loans is one is insured by the government if there is default and one is privately insured.
Government-Insured Loans are guaranteed by the Federal government. Those mortgage loans include FHA, VA, or USDA Rural Development mortgage loans. They typically have less upfront costs. We will cover some of those down below.
Conventional on the other hand are not backed and insured by the government. They are administered by private lending institutions such as banks and credit unions. Often times, they require larger down payment amounts and the purchaser must buy private mortgage insurance (since this mortgage loans is NOT backed by the government in default) if they don’t have enough for the down payment which is typically 20%
Need Down Payment Money
I sold houses for a while as a Realtor during the housing crash. Telling people it was hard work is an understatement. I would always tell my clients that before we go out looking at houses we have to find out how much you can afford for a house and if you have enough money on hand to cover the costs of buying a house and getting a mortgage loan.
Buying a house does cost money. Potential home buyers need to have a good amount of down payment available. Depending on the type of mortgage loan, the down payment amount will vary.
If you are a Veteran and you are looking at getting a VA loan, a down payment is not required.
There are also areas that might qualify for a Rural Development Loan (also known as a USDA Home Loan). There is no down payment required and 100% of it can be financed with certain income limitations.
There are a lot of ways you can save money for a house down payment within 6 months if necessary.
For an FHA loan, only 3.5% is required as a mortgage loan down payment.
If you are looking at a Conventional loan to get out of paying the monthly PMI, then that will require having 20% as a down payment.
So sorting out your financial cash-on-hand position can save a lot of time up front.
Get the Pre-Approval Letter
Once you have found a lender that you want to use for your mortgage, get a pre-approval letter. For this stage you will have to provide some documentation. Since the future of money and open banking is not a reality yet, you still will have to physically pull this information yourself.
Some of the items that will be needed are:
The last two years of federal tax returns
Pay stubs from the last 30 days
The last two years of W2 forms from your employer(s)
You will need bank statements showing 60 days of banking records such as savings, checking, and money market accounts
Additional information such as retirement balances, stocks, and investment accounts
If you own any other property, you will have to disclose that. Additionally, If there is a mortgage you will have to provide the most recent statement.
If you are currently renting, you will have to provide the rental agreement as well.
And finally you will have to state where your down payment will be coming from.
If it is coming from your resources, then you have to show the accounts where the money is.
If you are planning to receive a family contribution or a gift, you will need to state that. Depending on the type of mortgage you select, there may be limits on how much can come in the form of a gift.
Find a House
Now it is time for the fun part since all of our financial paperwork is in order. In order to have a mortgage loan, you will need to have a house.
Find a local Realtor that specializes in the area you are interested in and have them show you houses available for sale.
Once you find one that you like, write up your offer with your real estate agent. Be sure to also include your “pre-approval letter” with your offer.
One your offer is accepted, you will need to have an inspection done. I have worked with clients in the past who have actually waived the inspection process. I do not recommend this because you never know what may be lurking in areas of a house that you cannot see with the visible eye.
There are many things such as problems with sewer lines or even Radon gas that could be present that you would have no way of knowing. The only way to know if these defects exist is to have the property properly inspected.
Part of the mortgage loan process is also having an appraisal done on the property. Your lender wants to know that the offer you just made and got accepted is a relative offer. By this I mean they want to know that the money they are giving you for this loan is in fact close to what the property is worth.
If the property does not appraise for the purchase price or loan amount, then the buyer and seller have to go back to negotiating through their respective agents. Make sure you check out ways to save money on housing costs as well for tips.
The last step in getting a mortgage loan is to go to closing and sign documents. This is the official act where your mortgage is funded. Transfer of ownership takes place and payments are calculated from that date. The Seller receives his proceeds from that date and the buyer starts making payments from that date.
Saving Money with a Mortgage
Now that you officially a homeowner and have a mortgage loan, there are ways to save money. If you were not fortunate enough to live at home in your mom’s basement, you were probably renting somewhere. There is a chance that your new mortgage loan amount you are paying for your house is less than what you were paying for rent.
Over the last few years it has been a seller’s market for real estate. As a result, rents have also been pushed high as well. If you chose a fixed term mortgage loan, your payment is locked in. No need to worry with rents rising anymore.
Additionally, now that you have itemized deductions, you might be able to get bigger tax refunds back. A lot of people who rent are not able to do itemized deduction because they don’t have enough things that qualify. As such, most will take the standard deduction.
However once you have a mortgage loan, there are all kinds of expenses that can add up to substantial amounts. Some of those include mortgage loan interest and property taxes. These two things alone can reduce your taxable income significantly. Before you were renting, you were paying high rents and didn’t have these deductions available. Now, you do.
By moving into your own house with a mortgage loan, you have also reduced the amount of taxes you will have to pay when you file your taxes. You also might receive a bigger refund now as well.
Becoming educated with the process and steps above will save you tons of head ache when you are ready to move out. The important steps of getting your credit in good shape, figuring out what type of mortgage loan you want, and saving for down payment are all necessary.
By following these 7 steps for getting a mortgage loan, you will be out of mom’s basement before you know it.