Applying for a mortgage can seem overwhelming – many people don’t know where to begin. With so many different types of mortgages out there, where do you even start? Let’s look at some of the basics and break it down to a simplified approach.
How do I apply for a mortgage?
- The first step is to get pre-qualified. This involves a simple meeting, whether by phone or in person, with your bank or mortgage officer. You’ll provide a brief snapshot of your financial picture and they will give you an idea of the mortgage for which you will most likely qualify. There’s no running of your credit report and there’s no obligation.
- The second step is to get pre-approved. This is where you’ll fill out a 1003 (see #3 below) and provide all the necessary financial documentation to your mortgage lender. From there, they’ll be able to give you a better idea of the amount and interest rate you’ll qualify for.
- The industry standard for applying for a mortgage is the 1003 mortgage application form (pronounced ten-oh-three). This form details important information such as income, debt, assets and expenses and it is used by the majority of lenders when making mortgage application decisions.
Who/What are Freddie Mac and Fannie Mae?
- The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are both Government Sponsored Enterprises (GSEs), which means the government backs them, but they are not part of the government. Fannie Mae and Freddie Mac don’t directly offer mortgage loans but instead buy the mortgages from banks, credit unions, and other financial institutions so that they, in turn, can lend to more homeowners. Even after the mortgage is sold, the original lender can often still be the servicer for the loan.
What are the different types of mortgages out there?
- Conforming Loans are loans that conform to Fannie Mae and Freddie Mac guidelines, usually in reference to the size of the loan. The current limit in Florida for conforming loans is $548,250 and is expected to remain at this level through 2021.
- Non-conforming loans are loans that are higher than the conforming loan limit. They cannot be purchased by Fannie Mae or Freddie Mac. A non-conforming mortgage is also known as a jumbo loan.
- Jumbo Loans are mortgages of more than $417,000. This amount can vary depending on location – always check with your county. Florida, in general, tends to have much higher caps. Jumbo loans are typically used for large, single family homes.
- Conventional Mortgages are loans that are not insured or guaranteed by the federal government. These loans typically need 20% down but can go as low as 3% in certain cases. They may have either a fixed or adjustable interest rate.
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- A Fixed-Rate is when the interest rate is set when you take out the loan and it does not change.
- A Hybrid ARM is when there’s an initial fixed rate term and then the rate of interest becomes adjustable after that to reflect market conditions.
- An ARM (adjustable rate mortgage) is a type of mortgage where the interest rate varies throughout the life of the loan depending upon market conditions.
- Government loans primarily aim to make home ownership affordable to lower-income households and first-time homebuyers by having the government subsidize the loan, making it easier for borrowers to get better interest rates and protecting them from defaulting on payments. Some types of government loans are:
- VA Loans which are offered to eligible American veterans or their surviving spouses, usually with long-term financing and 0% down.
- Federal Housing Administration (FHA) loans are insured by the federal government to reduce the risk if a borrower defaults on the payments. These loans typically require 3% down.
- USDA loans, also known as the USDA Rural Development Guaranteed Housing Loan Program, are loans offered by the US Department of Agriculture to rural property owners, usually with 0% down.
Applying for a mortgage doesn’t have to be overwhelming. Getting the right person to help who knows the ropes is key!
