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The Ultimate Guide to Mortgage Loans

January 25, 2021 by Space Coast Credit Union



The process of financing a home can be challenging, even for buyers who have purchased property in the past. New mortgage products continue to be introduced, and new lenders are in the marketplace, giving homebuyers more choices than ever before. It's no surprise that first-time homebuyers may not even know where to begin.

To help you navigate the process, we've put together this guide to mortgage loans, including the types of financing available, tips on choosing the best mortgage lender for you, and more.
 

The Advantages of Home Ownership

What comes to mind when you think of owning a home? Being able to knock down a wall to open up the space? Having the freedom to change the front door or windows? These are some of the obvious benefits of being an owner instead of renting a home someone else owns, but the advantages go well beyond aesthetics.

If you're just starting to consider becoming a homeowner, here are just a few of the benefits:

- Homeownership can help you build wealth. Historically, home values rise over the long-term, so if you plan to retain ownership of your home for many years, you should see a significant return on your investment.

- You also build home equity with every monthly mortgage payment. Every time you make a payment, part of it is put toward reducing the principal amount you owe on your mortgage.

- Owning a home can lower the amount of income tax you pay since interest on a home loan may be deductible. This is particularly advantageous in the earliest years of the life of your loan when interest makes up the majority of your monthly payment.

- A good record of making your mortgage payments on time can improve your credit score. That can translate into other financial benefits, such as qualifying for the best rates on other types of loans.


Types of Home Mortgages

A mortgage loan is one category where there's no one-size-fits-all. Several factors will influence the type of home financing that's right for you, such as how long you plan to stay in the home, the amount of down payment you have, what specific type of property you're seeking, and more. Below are the most common types of mortgages, and when each may be the best choice.


Conventional mortgage loans: The traditional, fixed-rate mortgage remains at the top of the list of the most common types of home loans. This loan may be right for you if you expect to remain in your home for a long time and want to have the most predictable principal and interest payments you can get. At Space Coast Credit Union, our 30-year fixed-rate mortgage and 15-year fixed-rate mortgage are popular choices, with down payments as low as 5%. These conventional mortgage loans also give you the option of making additional principal payments with no prepayment penalty, which can save you interest in the long run.

FHA loans: The feature that distinguishes these loans from other types is that they are insured by the Federal Housing Administration (FHA), which backs lenders in case borrowers default. FHA home loans offer affordable down payments—as low as 3.5% for some borrowers—and are often good choices for homebuyers with less-than-perfect credit. FHA mortgages do have some features that may be seen as drawbacks, however, such as restrictions on the type of property that can be financed with an FHA loan. To learn more about FHA loans from SCCU and whether one may be a good fit for you, we invite you to get in touch with our Express Mortgages team.

VA loans: Backed by the Department of Veterans Affairs, VA home loans are offered to active duty service members, veterans, widowed military spouses, and certain qualified National Guard and Reserve members. At SCCU, our VA loans offer a range of benefits, including up to 100% financing on purchases, no private mortgage insurance (PMI) requirement, and the same great interest rate regardless of credit score. You don't have to be a first-time homebuyer, and you can apply for another VA loan once your original VA mortgage loan is satisfied.

Construction loans: SCCU offers construction-to-permanent loans, which means only one application process and one set of closing costs is needed to convert your initial construction loan to a permanent loan once your home is complete and your builder is paid in full. Our Express Mortgages team will be happy to answer your questions and get your construction loan application started.

Adjustable-Rate mortgages: If a lower interest rate and payment are at the top of your must-have mortgage features, consider an adjustable-rate mortgage (ARM). These loans often have more flexible terms than conventional fixed-rate mortgages and include an option to convert them to a fixed rate later. It's important to keep in mind that "adjustable" means your rate and payment can increase or decrease at certain points in the life of the loan, so be sure to work with a lender who will explain every detail of this type of loan. SCCU's Express Mortgage Originators will be glad to discuss the features of our adjustable-rate mortgages, such as rate adjustment after three, five, or seven years and up to 95% financing.

At SCCU, we also offer our members additional types of home financing, including jumbo loans for home purchases over $550,000 and condo loans, which have special requirements. When you're ready to apply for your mortgage, be sure to ask about our no closing costs mortgage option that can help you save thousands of dollars on closing costs.


What Mortgage Lenders Will Consider

A mortgage loan is a significant transaction on both sides of the table: It's likely the largest purchase most consumers will ever make, and lenders need to see the right financial indicators in order to extend a large amount of money to borrowers in the form of a mortgage loan. So, what do lenders look at when you start the application process? Here are the main factors:

- Credit: When lenders see that you have a solid history of paying your bills on time, it's a positive sign that you will repay your new mortgage loan on time. They will also obtain your credit score and full credit history to ensure there are no red flags. Because different types of loans can have different credit score requirements—and credit scores often affect the interest rate for which you qualify—be sure to ask potential lenders how your credit score will factor into your mortgage loan options.

- Income: In addition to having a history of paying bills on time, having the means to make your mortgage payment is, of course, essential. Lenders will want to see that you currently have sufficient income from a reliable source and an expectation that you will maintain sufficient income in the future.

- Assets and liabilities: Even with a steady income and great credit score, lenders will still want to evaluate your bigger financial picture, which includes the assets you have on hand and the debts you owe, such as car payments and credit card balances.

- Debt-to-income ratio: The Consumer Financial Protection Bureau cites the debt-to-income ratio as the "number one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow." In short, this ratio is the total of all of your monthly payments on debts divided by your gross (not net) monthly income. Higher debt-to-income ratios can be an indicator that a borrower may have difficulty making monthly mortgage loan payments in the future, but each lender will have its own specific requirements to qualify for their mortgage products.


Pre-approval vs. Pre-qualification

These terms are sometimes used interchangeably, and each lender may have its own definition of pre-approval and pre-qualification. In general, however, pre-qualification comes first, followed by pre-approval. Pre-approval usually requires you to provide more in-depth information about your finances, such as tax records and proof of income.

At SCCU, our Express Mortgage Originators will assist you in getting pre-approved for a home loan, which will result in giving you documentation that demonstrates to sellers and agents that you have the credit needed for a successful real estate transaction. One advantage of this is that you may have an edge over other interested buyers since your pre-approval status can be an indicator that the transaction will go more quickly and smoothly with you.

We offer fast mortgage pre-approval decisions, both online and over the phone. Click Contact Us at the top of this page for the phone number for your area.


The Mortgage Lending Process

SCCU makes the home loan process simpler for our members, with mortgage experts to guide you from start to finish. The steps in the mortgage process include pre-approval, which includes submitting an initial application. Our Express Mortgage Originators will take a look at your credit history and overall financial position. You'll come away with a good idea of how much house you can afford before you go shopping. Keep in mind, however, that pre-approval is not the final loan decision.

Once you've found the home you want to buy, the complete mortgage application process kicks in. This is when you'll know just how much you'll be able to borrow. You'll need to provide detailed information that substantiates your income, bank account statements, tax returns and more.

When all of your application documents have been completed, your application file will be moved into processing. This is also when the home will be appraised to ensure its market value is in line with the amount of the loan. Your loan processor will collect more information to get your file ready for underwriting review and approval. Don't be alarmed if you get a request from our underwriters for additional information or clarifications—it's a normal part of the approval process.

With underwriting approval in hand, the next step is closing on your new home loan. Before the closing meeting is set, you'll be provided with a closing disclosure that specifies the final terms of your loan and all of your closing costs, so you'll know how much money you will need to bring to closing. At closing, SCCU will fund the loan to the seller in exchange for the title to the property.

SCCU will continue to service your mortgage for the life of the loan, from the time you close on it until it's paid in full. You'll have our expert customer service support anytime you need it. And, if you ever need to refinance or want to buy another property, we're here to help.


Mortgage and Real Estate Terms

Confused by all of the unfamiliar terms and acronyms in the world of home buying? You're not alone! Here are a few of the most common terms you're likely to encounter during the process of searching for and financing your home:

Amortization: This is the process of reducing the balance of or satisfying your mortgage debt with regular principal and interest payments over time. Your mortgage loan documents will include an amortization schedule, showing the amount of each payment that will be applied to reducing the principal and interest.

Closing costs: Certain costs and fees are associated with the process of obtaining a mortgage, many of them are payable at the closing table and some are paid prior to closing. Closing costs may include title search fees, appraisal fees, credit report costs, and more. You'll be provided with a full accounting of your closing costs, so there should be no surprises at your closing meeting.

Comps or Comparables: One factor that goes into appraising the fair market value of your property is an assessment of other similar properties. Homes within a close range of your desired property's location, features, amenities, and size that have recently sold are considered comps.

Deed: This document legally transfers ownership of the home from the seller to you at closing. In the process leading up to closing, lenders will verify that the buyer legally owns the property via a title search.

Escrow: When funds are in escrow, they are held by a third party until certain terms or conditions are satisfied. In a real estate transaction, for example, the funds a buyer deposits in escrow can be held there until an inspection of the house is completed and the results are satisfactory. In addition, in most cases, your annual estimated homeowner’s insurance and property tax obligations will be divided equally by 12 months. A portion of the annual obligations will be collected with each monthly payment and held in escrow until the obligations are due. At that time, the lender will pay the insurance and taxes from your escrow account.

Loan-to-value: The loan-to-value (LTV) ratio is the ratio between the principal amount of the mortgage loan and the appraised value of the property. A commonly desired LTV ratio is 80 percent or less.

Origination fee: New mortgage loan applications may have an origination fee that covers the costs of putting a new loan in place. This fee is a percentage of the total amount of loan, usually in the range of one-half to one percent.

Points: Qualified buyers may opt to lower or buy down the loan's interest rate by paying discount or mortgage points at closing. One point is equal to one percentage point of the amount being borrowed.

Private mortgage insurance (PMI): Mortgage insurance protects lenders if borrowers default on their mortgage loans. PMI is often a requirement when the down payment is less than 20 percent, and may be removed when equity in the home reaches 20 percent of the home's appraisal value at the time it was purchased.


What to Look for in a Mortgage Lender

Zillow offers these helpful tips for how to choose a mortgage lender:

- Shop around and talk with several lenders. The best mortgage rates are important, of course, but there are many more things to consider. Ask plenty of questions of each lender you're considering, such as whether they offer the specific type of loan you're looking for.

- Take note of how initial conversations or meetings go with lenders. Are they helpful, friendly, and courteous? Do they respond to your calls in a timely way? Do they take the time to answer your questions in detail and explain the finer points of home financing? The mortgage lending process has many moving parts and frequent communication points, so you'll want to feel like you're in good hands with people you can trust.

- Get loan estimates from each lender. These will include important details such as fees, the interest rate, a breakdown of your monthly payment, and more. Loan estimates are required by law to help you make clear comparisons between lenders.


Have you found a home you want to buy or are you just beginning to search for one? Whatever stage your home-buying journey is in, we'll be glad to discuss your financing needs and review your options. Start your application online, request a consultation, or give us a call:

Brevard: 321-752-2222
Broward: 954-704-5000
Miami-Dade: 305-882-5000
All other areas: 800-447-7228

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