Did you know that most of the world’s richest men made their wealth through real estate? Investors like Donal Bren ($15.5 billion net worth), Sun Hongbin ($9.2 billion net worth), and Stephen Ross ($7.6 billion net worth) created their wealth by investing in real estate. All of these successful billionaires didn’t inherit all of their money but rather used the resources they had to create this staggering wealth for themselves. You can do that too. Use this all-inclusive mortgage guide 2021 to buy real estate in North America with minimum initial financing.
What is a mortgage?
A mortgage is a loan that you get for real estate, usually homes, at a certain interest rate. Mortgages can be fixed or adjustable. The mortgage amount is settled and paid off by the end of the loan term.
Key terms for Mortgage
– Loan amount
The loan amount is 75 to 90% of the total value of the property.
– Loan term
It is the period within which the borrower is expected to pay off the loan amount back to the lender with interest.
It is the process through which the borrower pays back the loan over time. Most real estate loans are fully amortized, which means they are scheduled to be paid off at the end of the loan term.
– Interest rate
It is the amount of interest a borrower must pay on the loan. Usually, it is 3 to 8% for borrowers with a good credit score.
– Mortgage points
Mortgage points allow you to reduce the percentage of interest on a given loan.
– Mortgage rate lock
When you sign up for a mortgage, you have the choice to take either fixed interest or floating interest. The fixed interest will stay preserved until you can pay off the mortgage, while the floating interest rates change throughout the loan term. This is a tricky part of the overall mortgage application. Choose to lock in your interest only if you believe that interest rates are only going to rise.
Difference between principle, interest, and down payment
The principle is the actual value of the loan. For example, for a house that is worth $500,000, the loan amount can be anywhere between $350,000 to $420,000 with an interest of 2.79% to 3.99%. Interest is the additional money you pay on the loan. Most lenders offer 80% of the financing for the house. The 20% needs to be a down payment.
Down payment is the amount of money you will have to pay upfront. In North America, it is usually 5 to 20%. If your loan amount is more than $1 million, you will have to put down 20%. If it’s between 100,000 K to 900,000 K, you’ll have to pay 5 to 10%.
Types of costs included in a mortgage
Apart from the mortgage, there are several costs you may have to endure including:
– Processing fee, taxes, homeowners insurance, and other miscellaneous costs.
– If your loan amount is greater than 80% of your home’s value then you may have to pay private mortgage insurance. This insurance premium stops when you have 20% equity of your home.
– You may have to pay a separate fee if you have a membership of any property association.
Types of loans for mortgage in 2021
There are several loans you can choose from. The most common ones are:
Direct-issued government loans
These loans come from government agencies including the United States Department of Agriculture, the Federal housing administration, and the department of veteran affairs. They are for low-income families in rural areas who cannot afford large loans.
Insured government loans
These types of loans include loans funded by the government and by private companies. In the latter case, they are issued by a private bank and sold to Freddie Mac (Home Loan Mortgage Corporation).
Jumbo loans are very much like Conforming loans sold to Freddie Mac with the exception that the loan amount has to exceed the maximum loan amount. In the US, loans of $510,400 are considered jumbo loans. In certain areas $765,000 is the threshold for the loan amount.
These types of loans are not fully amortized; you will have to pay a single balloon amount when the loan term ends. This balloon amount can be refinanced so you don’t have to pay a hefty amount all at once.
A USDA loan
USDA loans are loans issued by the United States Department of Agriculture. They are a part of USDA’s rural development program that seeks to improve homeownership in rural communities by offering low-interest and down payment loans. For USDA loans you must:
– have a debt-to-income ratio of 41%
– use the loan for a primary residence
– must have a property in a rural area (less than 35,000 population)
– must not have income that exceeds a predefined limit
There are no credit score requirements for a USDA loan.
An FHA loan
FHA loans or the Federal Housing Administration loans are mortgages that can be availed through approved lenders throughout the United States. Just like USDA loans, an FHA loan allows borrowers to pay lower interest and down payments as compared to conventional loans. With this type of loan, you can get approved for a mortgage at a credit score of 500 with a maximum loan amount of $333,000 and interest of around 3.3%.
A VA loan
This type of loan is reserved for veterans and military members who want to own property. It does not require any minimum credit score or down payment. To qualify for the loan you must have served in the US Navy, Army, Marine Corps, or AirForce for 181 days (continuously) or 90 days during wartime.
Things to do before applying for a mortgage in 2021
Check the following before you head over to your lender:
- Your credit report. The first thing the lender will want to see is your credit report. Make sure that you have the highest possible credit in the past five years. The higher the credit score, the better your chances of scoring a mortgage.
- Check your debt to credit ratio. If your score is way too high, you need to take appropriate measures to bring it down. If there are inaccuracies in your report that are causing such a ratio, have those inaccuracies sought out with the credit bureaus.
- Decide between fixed and adjustable interest rates. If you are looking to have a stable mortgage payment, go for a fixed-rate mortgage. However, if you sense that interest rates may come down or change in a few months then choose adjustable. A fixed-rate, however, is the best option.
- Make up your mind about financing. Do you already have the money for the down payment? Or do you have just 5% of the 20% down payment? You need to figure out what you can afford before you go to the lender. Choose a property that is well within your range. The more you put down as a down payment, the less you will have to pay monthly, which will significantly reduce the interest too.
How much mortgage do I need?
You can easily calculate how much mortgage you may need by calculating your debt to income ratio. For most mortgages, this ratio sits at 43%. To calculate this ratio, add up all your debt payments due in a month and divide them by your monthly income after tax.
How to find the best mortgages in your area?
There are mainly three types of lenders: banks, mortgage brokers, and government agencies. Banks are by far the most prominent and notable lenders. They are best for conventional home loans.
Mortgage brokers can help you shop for the best rates as they work with different lenders.
Government agencies on the other hand are great if you are looking for a low down payment.
How to qualify for a mortgage?
No matter where you are in the world, applying for a mortgage usually requires the following steps:
- Complete an online application
- Provide income and identity documentation
- Provide personal finance statement
- Have the property you want to buy appraised
- Have the property inspected
- Review lender’s loan options and terms before closing
What type of mortgage should I get?
Mortgages usually are either fixed or adjustable.
This type of mortgage comes with an interest rate that remains fixed for the entire loan term.
With this type of mortgage the interest rate changes after a few years of the loan term. Adjustable mortgage rate depends on several factors including lender type.
Q: What if I don’t have any money for the down payment?
If you cannot afford any down payment, it doesn’t mean you can’t own a home. Simply, get a personal loan to pay off the down payment and then include that loan in your monthly debts. It may sound overwhelming, but it is better than paying rent. Your rent is not going into your property, but your mortgage and loan debt is. Whenever possible, invest in a mortgage, not rent.
Q: How to get a mortgage with bad credit?
It is possible to get a mortgage with bad credit if you are willing to pay a large down payment, have substantial cash reserves, and have a minimum income-to-debt ratio. There are some loans, such as USDA and FHA loans, that do not require a good credit score or any down payment and offer a lesser interest rate, but there are certain conditions that you have to meet to qualify for those loans.
Q: How do I get a mortgage in 2021 if I am self-employed?
You can still get a mortgage as a self-employed person, but a lot of lenders will see you as “high risk”. Since self-employment does not come with a steady income (for most), it’s hard to convince a lender to give you high loan amounts. But If you have a great credit score (above 700) and have a long-term relationship with a bank and a lender then you would be able to convince them. You will be, however, required to prove that you have enough money to pay off debt.
Q: How can I pay off my mortgage early?
In an ideal world, we all want to pay off our mortgage as early as possible. Or perhaps just by the house with cash. But that’s not possible for most of us. The only way you can pay off your mortgage early is by either increasing your net worth or prioritizing your mortgage over other debts. But if your debts include credit card debt and personal loans with high-interest rates, it is not recommended that you prioritize the mortgage no matter how bad you want to pay it off. Always pay off your high-interest debts first.
Q: How to get an easy mortgage in Canada and other North American countries?
In North America, the general rules for mortgage application are the same. You need to have a good credit score, enough funds, income statements, etc. to qualify.
Q: How long does it take to get the mortgage approved?
It can take anywhere from 11 to 25 days to get your mortgage application approved.
Q: What is a remortgage?
Remortgage means swapping your current mortgage with another lender. You can consider this option if your contract with the current lender has expired or you are in a different circumstance and want to find a competitive deal.
Q: Who is a conveyancer and do I need one?
A conveyancer is a legal representative who will finish the legal work regarding the buying and selling of your property. While it’s good to have a conveyancer, you don’t always need one, especially if you are borrowing through a bank.
Q: What are the types of fees I may have to incur on a mortgage?
The usual fees include:
– Valuation fee charged by the lender
– Solicitors fee (optional)
– broker and booking fee
– lender arrangement fee
When you set out to get a mortgage, your lender will inform you about the additional fees or taxes based on your state or region.
Q: Do I need any insurance with my mortgage?
You will need Home insurance with your mortgage to protect your most valuable asset. Most lenders insist that you get the property insured to ensure its protection during unpredictable times.
Buying your dream house is not an easy endeavour. But It’s not impossible either. If you want to own a house, start preparing for it. Get your ducks in a row; make sure you are not piling up debt. And if you have to choose between renting and mortgaging, go for a mortgage.
Next, learn how you can pay off debt without losing your home or other valuable assets.