One of the most important steps you must take when preparing to buy or build a home is to secure a mortgage. For many homebuyers, securing a mortgage can seem overwhelming; but knowing what to look for and where to apply ahead of time can make the process of preparing for your mortgage application relatively simple and stress-free.
Mortgage Broker or Bank?
The two most popular ways to secure a mortgage are to talk to a mortgage broker or a bank. While going through a bank is the most common choice for buyers, speaking with a mortgage broker may have some benefits.
A mortgage broker will work with many banks and private lenders to find the right mortgage for you. In addition to shopping around for the best rates, brokers can be beneficial to buyers who have less-than-perfect credit and are having difficulties securing financing through their bank. One of the key things here is a mortgage broker pulls your credit report once and uses that to do the shopping for you.
When working with a home builder, you're going to want to inquire about their preferred lender. Quite often builders have a working relationship with certain banks or lending institutions; making the mortgage process much easier if you use their preferred lender.
If you decide to venture out on your own keep in mind that every time you talk to a new bank, your credit report will be pulled which counts as a hit on your score.
Different Types Of Mortgages
There are several types of mortgages available. The type of mortgage you apply for will ultimately be based on whether you purchase a new or resale home. In most cases, mortgages are classified as Draw Loans and Traditional Loans, each having separate subcategories.
Traditional Mortgage
A traditional mortgage is your standard loan: you apply for the loan and then pay once it is approved. These loans are available for different repayment lengths and payment structures. If you are purchasing a newly built house, condo, or townhome, your mortgage may be referred to as a completion mortgage. This is the same type of loan as your traditional mortgage and you would start paying for this once you took possession of the home.
Draw Mortgage
If you desire to build your home, you can apply for a draw mortgage. This type of mortgage allows you to access or “draw” money at certain intervals during the building process to ensure contractors are paid and the house is being completed on schedule.
There are two categories of draw mortgages: Self-Build and Turn Key.
Self-Build Mortgage
This type of mortgage is designed for those who wish to be the contractor in charge of building the home. This type of loan will provide you initial funding to purchase the land and begin the building project. During specific intervals, you will be able to receive more money to pay for sub-contractors and supplies. Each increment received must be verified by an inspection to ensure that the home is being built.
Once completed, the mortgage will convert to a standard loan.
Turnkey Mortgage
This mortgage type works much the same way. However, instead of the owner acting as the contractor, they hire a professional contractor to complete the home for them. Draws work in the same manner as the self-build, and will require inspections to receive payment for supplies and future draws. Most lenders, however, place a time limit of one year for the completion of the home on turnkey projects.
Once the home is complete, the loan converts to a standard mortgage.
What You Will Need To Apply For A Mortgage
There are a variety of items you should put together when you’re ready to take this step:
Financial Documents
Most lenders will require that your employer provide a letter of employment that shows you are an active employee. You will also need recent pay stubs and the past two Notice of Assessment forms to show that you are actively paying taxes. In addition to these documents, you may also need to provide banking information and investment information.
Credit History
Your lender will take out a credit report on you to determine your credit history. You should know your score before applying for a loan. Your credit score will determine three things: the type of loan you receive, if you are required to carry mortgage insurance, and your interest rates.
Property Inspection
Your lender will require a certified property inspection to be completed before authorizing a loan. If this is a new property, the land will be evaluated. If it is a previously owned property, the house will need to be examined and signed off on before loan approval.
Down Payment
You will need to provide the lender with information about your down payment. Depending on what's been agreed upon, your down payment will be a minimum of 5% of the purchase price for a first-time home buyer or 20% if you are not.
Applying for a home mortgage doesn’t have to be a struggle. Know your options. By gathering information ahead of time, you can avoid unnecessary stress and get yourself into your dream home that much sooner.
