Home ownership is the American dream, but few of us have cash on hand to buy a home outright. To make this dream a reality, many of us need to apply for a personal mortgage. Whether you’re a first-time home buyer or looking to refinance your current home, understanding what this type of mortgage is, what’s involved in getting one and the different options available is important.
To help make your home financing experience quick and painless, we’ve put together a personal mortgage guide that covers all the essentials you need to know, including:
What Is a Personal Mortgage?
A personal mortgage is a loan contract you sign with a bank or other lender to get the funds needed to buy your very own home. In exchange for the money, you agree to pay the lender back the principal amount and a certain rate of interest over a specific length of time.
The mortgage is secured by a lien on the house itself, which gives the lender a legal claim against the property. If you don’t make the payments as agreed, this mortgage lien gives the lender the right to sell the property to recoup what you still owe through a process called foreclosure.
Sources and Types of Personal Mortgages
It can be confusing to understand the different types of personal mortgages available to you when you first learning about this lending option. To help you understand what these loans are and how they work, we’ll break some of this down and take a closer look at the most common kinds.
Main Sources for Personal Mortgages:
- Traditional lenders. These lenders are the largest source of mortgage loans used to finance owner-occupied properties. Traditional lenders include brick-and-mortar and online banks, credit unions and finance companies that offer mortgages direct to individuals who need funds to buy or refinance a home. The exact payback terms, interest rates and fees charged vary depending on the lender, the property being financed and the borrower’s credit history and income.
- Private lenders. An increasing number of individuals and groups of investors are offering long-term financing for owner-occupied homes. However, it is important to note that these private lenders provide only a fraction of the total mortgages written each year. Most commonly, private lenders use their own funds to make these loans and tend to charge higher interest rates and fees than banks and other traditional mortgage lenders.
Types of Personal Mortgages:
- First mortgage. This is the primary mortgage loan used to buy or refinance a home. It gives the lender first place in line as a lien holder on the property, so they have the first opportunity to foreclose and recoup their money if you can’t make your mortgage payments.
- Second mortgage. If you’ve paid down your first mortgage, you may decide to take out a second mortgage to free up equity that can be used for renovations or business purposes. Sometimes called home equity loans, second mortgages are riskier for lenders, so they usually have higher interest rates and fees compared to first mortgages. The risk is greater because if you default on the loan, a second mortgage holder can’t recoup their money until the first mortgage holder gets paid.
Government-backed mortgages. These are home loans subsidized by government agencies like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service. Government backing encourages lenders to approve loans at lower interest rates for first-time and low-income buyers. The down payment needed on such mortgages may be only 3.5% of a property’s purchase price or none at all.
- Conventional mortgages. These personal mortgages include all loans offered by traditional lenders such as banks, credit unions and mortgage companies that aren’t subsidized by a government entity. Applicants have to meet strict income and credit requirements and generally pay higher interest rates and fees compared to government-backed mortgages. Most conventional mortgage lenders expect applicants to have 20% of a home’s purchase price available as a down payment. In some cases, they accept a lower amount if the buyer agrees to pay private mortgage insurance (PMI) until they reach 20% equity.
How Much Funding Can You Get, and How Quickly Can You Get It?
The maximum loan amount you can get for a personal mortgage is directly related to factors such as the property’s location and appraised value, your income and your ability to make the loan payments, as well as your creditworthiness and other debt obligations. Most lenders set maximums they’re willing to approve, which may be as much as $3 to $5 million.
Getting the cash in hand from a mortgage isn’t a fast process — it can take several weeks to go from completing an application to signing the final loan documents. However, if you submit all the required documents quickly and have strong credit, your lender may give you conditional approval within three or four days.
What Lenders Look for in a Credit Profile
When you apply for a mortgage, lenders look at key factors of your credit profile to decide whether to approve your loan and to determine how much interest you’ll pay. These factors typically include:
Most lenders get a snapshot of your credit history using your FICO score from the three major credit bureaus. This number can range from 300 to 850, and higher is better. Lenders often want to see a certain score before they’ll approve a mortgage. For instance, Quicken Loans, SoFi and Bank of America all require a score of at least 620.
Your payment history tells a lender whether you handle credit responsibly and make payments on time. A history of missed or late payments or defaults on previous loans can raise a red flag with lenders and end up costing you more in interest, or worse, result in your mortgage application getting turned down.
Debt-to-Income Ratio (DTI)
This is the monthly total you pay out on debts in comparison to your gross income. The DTI ratio requirements can vary between lenders, but a high of 50% is often the cut off for mortgage approval.
Requirements and Documents Needed to Get a Mortgage
Most lenders have strict criteria that applicants have to meet before they’ll approve a mortgage. The requirements can differ from lender to lender, but in addition to an acceptable DTI ratio and credit score, they want a down payment that meets the particular mortgage program guidelines.
With a conventional loan, a 20% down payment is needed to avoid paying PMI. For a government-backed mortgage through the FHA, it’s as little as 3.5% down, while VA and USDA loans don’t require any down payment.
When you apply for a mortgage, you’ll need to complete your lender’s application form and sign a paper allowing them to pull your credit report. You’ll also have to submit a number of documents to demonstrate you qualify for the loan. What’s needed can vary depending on your lender’s guidelines and your personal situation, but they’re likely to ask for:
- Proof of identify such as your driver’s license or passport
- Two to three months of your most recent bank statements
- W-2s for the last two years
- Documentation of other long-term debts such as student or car loans
- Your most recent tax return, or the last two years if you’re self-employed
- Proof of funds for your down payment and closing costs
- Proof that you’ve purchased homeowners’ insurance
The Personal Mortgage Application Process
Applying for a mortgage is often the scariest part of buying a home. Knowing the basics of what’s involved beforehand can help you get prepared and can go a long way toward reducing the fear factor. The exact details will depend on the lender you choose and your personal financial situation. As a general guide, here’s a start-to-finish look at what to expect from the mortgage application process.
Choose a Lender
Before you begin looking at homes, it’s important to compare what lenders are offering in terms of interest rates, fees, service and reputation. Once you’ve found one you’ll be happy dealing with long-term, ask to be preapproved for a mortgage.
Get Preapproved for a Mortgage
Based on your income, debt level and credit score, your lender can tell you the monthly mortgage payment you qualify for and the maximum home price you can afford. You’ll get a preapproval letter that can help you target your home search and make it easier to put in an offer that sellers will take seriously.
Complete a Mortgage Application
Once you have an accepted offer on a home, send your lender a copy. They’ll ask you to complete a full mortgage application and advise you on the documents you’ll need to submit for the underwriting process. This process involves checking your income, assets, debts and credit score to judge your ability to repay the loan and determine the exact amount you’ll receive as well as the interest rate you’ll pay.
Have the Property Appraised and Title Searched
Your lender will request the appraisal and get the results. The appraisal includes details about the home and lists recent area sales to make sure it has enough value to act as collateral for your loan. The property’s title is also checked so your lender knows the seller owns it free and clear, so they can legally transfer ownership to you.
Close on the Property
At least three days before you’re scheduled to close on your home, your lender will send you a closing disclosure to review and sign. This outlines the terms of your mortgage, the costs you’ll pay at closing and any outstanding fees or charges.
On the day of closing, you’ll review and sign dozens of documents, including the mortgage agreement with your lender. You’ll also need to provide a cashier’s or certified check, or wire transfer the funds to your lender to cover your down payment and closing costs. These costs usually range from 2 to 5% of the mortgage amount and can include:
- Application, appraisal and attorney fees
- An escrow deposit for insurance and property taxes
- Lender origination fees and points
- Prepaid interest
- Title search and insurance fees
- Miscellaneous inspection, survey and credit report fees
The Costs of Getting a Mortgage
There are two big costs involved in getting a personal mortgage — closing costs and interest. Closing costs are all the various fees and expenses detailed above that you pay when you complete the purchase of a home.
The interest you pay to a lender over the life of a mortgage can add up to a much greater expense. How much you pay depends on factors such as:
- The interest rate you’re charged
- If you choose a 15-, 20- or 30-year mortgage or a 5/1 ARM
- Whether the interest rate is fixed and stays the same over the full term, or is fixed for only five years before becoming adjustable on a yearly basis
You’ll pay the highest interest rate for a 30-year fixed rate mortgage, but it offers the lowest monthly payment spread out over a longer time frame. Fixed-term, 15-year mortgages usually offer the lowest rates but have the highest monthly payments because they’re being paid back much faster. To see how big of a difference time makes on what you ultimately pay, let’s compare the monthly payments and amount of interest charged on two $200,000 mortgages:
- With a 30-year term at 4% interest, you’ll pay $954.83 per month and a total of $143,739 in interest.
- For a 15-year term at 3.75%, the monthly payment is $1,454.44, but the total interest is only $61,800.
The initial interest rate you’ll pay for a 5/1 ARM mortgage is usually somewhere in between 15- and 30-year fixed rates, but these loans come with the risk of an annual rate increase just five years down the road.
Example of Personal Mortgage ClosingCosts
- Purchase price: $325,000
- Down payment: $ 65,000 ($325,000*20%)
- Mortgage amount: $260,000
- Term: 20 years
- Interest rate: 3.5%
- Appraisal: $ 400
- Attorney fees: $ 750
- Escrow deposit: $ 3,300
- Lender origination fee: $ 1,300 (0.5%*$260,000)
- Discount points: $ 2,600 (1%*260,000)
- Title search/insurance: $ 1,100
- Prepaid interest: $ 373 (3.5%*$260,000*15/365 days)
- Misc. fees $ 625
In the above example, a home is purchased for $325,000. The buyer makes a down payment of 20% and takes out a conventional, 20-year fixed-rate mortgage for
$260,000. On closing day, the borrower must pay their $65,000 down paymentand approximately $10,448 in closing costs for a total of $75,448.
How Mortgages Get Repaid
If you have a fixed-rate personal mortgage, you’ll send your lender a predictable monthly payment that covers the principal and interest as well as your property taxes and insurance. If you choose a 5/1 ARM mortgage, the amount of interest you owe and your monthly payments can change annually beginning in the sixth year.
If you have a conventional mortgage and put less than 20% down, you’ll also have to pay .55 to 2.25% of your original loan amount annually in PMI premiums to protect the lender in case you default on the agreement. There’s no mortgage insurance payable on VA and USDA government-backed loans, but if you have an FHA mortgage, you’ll pay a monthly premium of .45% to 1.05% of the loan amount.
Pros and Cons of a Personal Mortgage
Unless you have loads of cash, owning a home and having a mortgage go hand-in-hand and share advantages and disadvantages. Applying for a mortgage can allow you to realize your dream of home ownership, help you build solid credit history and create equity that’s like having money tucked away in a savings account. On the flip side, making monthly mortgage payments is a big financial responsibility that you’ll be obligated to for the next 15 to 30 years. There’s also a risk that if you can’t make the payments at some point, you may lose the property to foreclosure.
Do You Need a Personal Mortgage?
If you’re ready to take the plunge into home ownership, but you don’t have the funds available to pay cash, or you’d like to free up equity you’ve built up in your current home and are looking to refinance, a personal mortgage is the solution.
Are You Ready to Find the Right Mortgage Lender?
With interest rates still near historic lows, there’s no better time to apply for a personal mortgage. If you’re unfamiliar with the mortgage market, getting knowledgeable help to find the right lender can save you stress, time and money over the long-term. At Lendzi, we offer a hassle-free application process, flexible borrowing options and easy-to-understand terms. We provide a personalized approach to financing that can simplify your search for a mortgage that perfectly suits your needs and budget. Contact us today to get started or fill out our online application form!
About MARK B
I have nothing but good things to say about CashOne's team. They have helped me in such critical situations when I felt suffocated.More articles by MARK B