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Buying a home, though thrilling, is a challenging financial decision. Only a few have a mountain of cash to buy a home outright. Most homeowners rely on mortgage loans.
According to Statistics for Mortgages 2023, 63% of homeowners in the US have mortgages. Mortgage rates increased to 7.76% for 30-year fixed-rate mortgages and 7.03% for 15-year fixed-rate mortgages by November 2023.
One should know that borrowing money for a home is a commitment that stretches over several years. Thus, it is crucial to understand how it works to avoid headaches in the future.
As a Greater Alliance Credit Union member, we want you to understand how this works.
In this article, we will break down what mortgage loans are, the application process, and the types of mortgages available. Let’s start.
What are Mortgage Loans?
Mortgage loans allow you to purchase or maintain real estate with the agreement that the property will be collateral. You will repay the loan plus interest over a specified period, commonly 15 or 30 years.
The regular payments you make are split into two parts: one covers the actual amount borrowed (the principal), and the other is the cost of borrowing (interest). Your new home is not entirely yours until the mortgage loans are paid — it acts as a lien against the property. Lenders can foreclose or take the property from you if you fail to make payments.
The process of getting a mortgage involves three crucial steps:
1. Application
2. Pre-approval
3. Closing
The Process of Getting Mortgage Loans
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Application
The first step is to submit a mortgage loan application. This is where you officially express your intent to borrow money to purchase a home.
- Detailed information about your financial situation, employment history, assets, and debts.
- Your loan application goes through underwriting – a thorough evaluation of your employment stability, income, and other financial factors. Lenders want to ensure you have the means to repay the loan.
- You may be required to submit various documents to prove your financial capability, such as pay stubs, tax returns, bank statements, and other relevant financial records.
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Pre-approval
With a mortgage loan pre-approval, you signal to sellers and real estate agents that you are a serious and qualified buyer.
This can give you a competitive edge in a hot housing market where multiple buyers may be vying for the same property.
- It helps set a realistic budget for your home search, save time, and prevent disappointment over homes outside your financial reach.
- Having undergone some underwriting process during pre-approval, the actual loan processing may be expedited. This can be particularly advantageous in situations where a quick closing is desired.
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Closing
It results from your hard work and marks the official transition from homebuyer to homeowner. Here is what happens during the closing stage:
- You will be required to make a down payment. You pay a percentage of the home’s purchase price upfront. The down payment size can vary but is often between 3% to 20% of the home’s value.
- It involves the legal transfer of ownership from the seller to you, and you officially become the property owner.
- You will encounter a stack of documents that require your signature. These documents outline the terms and conditions of the mortgage loan, your responsibilities as a borrower, and other legal aspects of the transaction. Read and understand each document before signing.
Mortgage Loan Rates and Options
You can get a mortgage depending on your choices from banks, credit unions (like Greater Alliance), online lenders, or mortgage brokers.
Consider comparing mortgage loan rates because the tiniest difference can significantly impact your overall payments. These options allow you to find the best mortgage with your homeownership aspirations.
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Conventional Mortgage
They are offered by a private lender or banks that may demand a modest 3% down payment but require careful adherence to strict debt-to-income ratios. While they offer flexibility, meeting these criteria is vital for eligibility.
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Fixed-rate Mortgage (Predictability)
Your interest rate remains constant throughout the loan term of 15 to 30 years. There is a sense of financial security with no surprises, and you’ll always know what to expect each month. In New Jersey, the interest rates for fixed mortgages are 7.31% (30-year) and 6.74% (15-year).
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Adjustable-Rate Mortgage (Flexibility)
ARMs have interest rates that can change based on market conditions. Suitable for short-term savings if initial rates are lower but be prepared for fluctuations.
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Government-backed Loan
It opens doors to homeownership for those with lower credit scores or smaller down payments. These mortgage loans offer more lenient credit requirements and reduce down payment options. Several types of government-backed loans are:
Federal Housing Administration (FHA Mortgage): Offers a more accessible 3.5% down payment and lenient debt-to-income ratios ideal for first-time buyers and those with limited funds or lower credit scores.
Veterans Affairs Mortgages: Exclusive to veterans, guaranteed by the U.S. Department of Veterans Affairs, VA loans honor military service with favorable terms, including a unique 0% down payment opportunity for rural areas. However, a funding fee at closing is 1.25% to 3.3%.
USDA Mortgages: Designed for rural living, USDA (U.S. Department of Agriculture) loans offer a 0% down payment and no credit score option to promote homeownership in less populated areas. But they do have guaranteed fees.
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Jumbo Loans
It is one of the nonconforming mortgage loans for high-end real estate. Jumbo loans finance an amount exceeding the standard limits of the Federal Housing Finance Agency, set at $766,550 for much of the U.S. in 2024. They often require a strong credit history of 680 or higher and a down payment of 10% to 15% or more.
As of December 13, 2023, the average 30-year fixed jumbo mortgage loan rates are 7.37%, down from last week’s 7.48%.
Final Words
Buying a home is important, so ensure you’re on the right path to owning one with suitable mortgage loans. Take a step closer to your dream home with Greater Alliance Federal Credit Union. Contact us today!