couple applying for a mortgage

Buying a Home on a Mortgage

Potential homebuyers in the U.S. mulling on whether to buy now or wait for prices to go down must know that economic analysts from Fannie Mae, the Mortgage Bankers Association, Freddie Mac, and the National Association of Realtors (NAR) predict that the median price of houses will increase between three percent to eight percent within this year. As of April, according to the U.S. Census Bureau, the average price of new houses was $435,400, and the median price was $372,400.

NAR observed that demand is continuing to rise as properties in April sold only 17 days after listing. In March, properties stayed for 18 days, while in April 2020, they stayed up to 18 days. The inventory of available houses this April number 1.16 million and represent only 2.4 months of supply at the current rate of demand.

While realtors state that some buyers are willing to pay in cash to grab the property they want, the typical homebuyer needs a mortgage to purchase a home. With the supply of available houses rapidly shrinking, potential homebuyers need to decide fast.

Current Mortgage Rates

Mortgage rates are now beneficial to borrowers. As of June 1, according to the Business Insider, the 30-year fixed rate was at 3.37 percent, and the 15-year fixed rate was at 2.44 percent. The 7/1 adjustable-rate mortgage (ARM) was at 4.2 percent, and the 10/1 ARM was at 3.8 percent. The 7/1 ARM has a fixed rate for the first seven years and can change after that, while the 10/1 ARM has a fixed rate for the first 10 years. The Business Insider recommends choosing fixed-rate mortgages over ARMs. Not only are the interest rates lower, but they also provide peace of mind with a set monthly mortgage payment.

The 30-year Federal Housing Administration (FHA) loan rate as of June 1 was at 2.86 percent, and the U.S. Department of Veterans Affairs (VA) mortgage loan rate was at 2.74 percent. Both government-backed loans have lower interest rates than the others. The FHA loan allows down payments of only 3.5 percent, and even those who went through foreclosures or bankruptcy can qualify. Eligible for VA home loans are servicemembers, veterans, and their surviving spouses.

The Business Insider considers mortgage rates still within historically low levels and advises borrowers that now is a good time to lock in a rate. Time’s NextAdvisor agrees and states that experts do not expect mortgage rates to go far beyond current figures in the following weeks or months.

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Applying for a Mortgage

Before applying for a mortgage, borrowers must first determine what they can afford to pay every month. This means tallying available monthly income against monthly expenses. They will then have a ballpark figure on the monthly mortgage payment they can take on. This does not automatically represent their loanable amount, though. Borrowers must also have enough savings to cover down payment and loan closing expenses, as well as maintenance costs on the house, with enough left over for contingencies. Also, the mortgage lender decides the amount of the loan.

Mortgage lenders will require proof of regular income such as pay stubs, bank statements, and tax returns. They compute the borrower’s debt-to-income (DTI) ratio, which is the sum of existing monthly debt payments and divided by gross monthly income. Most mortgage lenders require a DTI ratio of 45 percent or lower. In general, lenders also require a credit score of 620 or higher.

Most mortgage lenders require a down payment of five percent. If the borrower has a high credit score and low DTI, some lenders allow as low as three percent down payment. If the down payment is lower than 20 percent, though, the borrower has to take homeowners insurance.

In 2021, the Federal Housing Finance Agency increased the baseline of the conforming conventional loan limits from $510,400 in 2020 to $548,250. Depending on housing costs in certain areas, this can go up to $822,375. This means a conventional loan cannot go beyond the conforming limit set in an area. If the property’s cost is over the conforming limit, a borrower can apply for a conventional loan up to the limit and apply for an FHA loan for the balance.

Finally, a borrower must pay for mortgage closing costs, usually two percent to five percent of the loan amount. Larger loans have smaller percentages of closing costs. These include the broker fee, mortgage points, underwriting fee, title search and title insurance, escrow fees, home appraisal, and prepaid taxes and insurance, among others.

Shopping for the Best Mortgage

Searching for the best mortgage lender must come before searching for a house. While average rates are published, lenders have varying rates and closing costs. Borrowers must apply to several lenders who will then send back a Loan Estimate (LE). All lenders follow the same format showing the interest rate they offer, loan terms, and closing rates for the offer.

The borrower must compare rates and negotiate with lenders. Some lenders agree to cover part of closing costs or add them to the loan amount. This means lower cash out for the borrower. Once the borrower and the lender have agreed on terms, the borrower must ask for a pre-approval letter. The borrower can then go house-hunting.

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