All About Mortgages
Very few first time buyers pay for their home outright. They need loan financing to pull it all together. First you save up the down payment (no less than 5% of the purchase price) and you borrow the rest with a mortgage.
What is a mortgage anyway?
A mortgage is basically a loan used for real estate transactions in which the property is essentially collateral for the loan. If you don’t make the payments, the bank/lender can seize ownership of the property.
Because mortgages entail a large amount of money and are backed by a physical asset, they allow most people to borrow money at a relatively low interest rate and pay it off over a specific term, typically five years.
No mortgage – no home
Let’s first make sure you are strong enough to qualify for a mortgage. If you can’t do that, then nothing else matters. (Unless of course you can afford the home outright and do not need financing)
What do lenders want to see?
1) They want to know your employment and income history. Are you in a stable job or still under probation? How much gross income do you make and how does that compare against a possible monthly payment for your mortgage, property taxes, utilities, and perhaps condo fees.
They also assess any other monthly obligations you may have – like student loan, car and credit card payments, etc. They want to be sure you can cover these too.
2) They want to assess your credit history and see if you have demonstrated an ability to manage credit responsibly. Ironically, if you have managed till now with no credit cards, or maybe one little one, you will not be nearly as attractive to the lenders as someone who has been around the block more.
They want to see that even when you have credit available to you (from several sources); you can handle it and manage it just fine.
I cannot overstate the importance of a strong credit history. When your credit score rocks – like 750 or more, lenders are looking for ways to make this deal work – as opposed to finding excuses to shy away from it.
In fact, with a very high score, lenders will often relax the income requirement rules to some extent – meaning you may qualify for a mortgage amount otherwise not possible.
By the way, your application may just need a helping hand in the form of a guarantor or c-signer – someone more established who is willing to show their faith in you and guarantee you will honor a mortgage commitment.
3) They want to know if you have the funds to make the down payment and cover the closing costs. The minimum down payment these days is at least 5% of the purchase price. (More if the price exceeds $500,000)
You must demonstrate you have saved up this money – or that you will be gifted the money from a relative. (Note gifted – not loaned)
For closing costs, lenders typically want to see you have 1.5% of the purchase price – so on a $600,000 home they want to see $9,000 set aside.
4) The lender cares very much about what you are buying and where it is located. Some locations are too remote. Some homes are too run down. God forbid you unwittingly buy a grow-op house!
So are you ready for a mortgage?
You can ask your mortgage broker to see if you would qualify for a mortgage in the price range you are thinking of. People refer to this as a pre-approval. Be careful here – the truth is a pre-approval is not a cast iron contract. And it is pre approving you, not the property you may end up trying to buy.
But it’s definitely worth something – if your broker says no way you are ready, you can be pretty sure you are not. And you will learn what you still have to do to get ready for prime time and when that will be.