Obtaining a mortgage is the critical first step to when you buy a home. Still, it can be more complicated than contacting a lender and signing on the dotted line.
Before completing a mortgage loan application, it is important to understand the different types of mortgage loans available to you. Each type has its own characteristics and qualifying requirements. Some of the most common include:
Interest rates vary based on the mortgage type. Still, they usually have fixed or variable rates, each with advantages and disadvantages. While obtaining a variable-rate mortgage might secure a more favorable introductory rate compared to fixed rates, you are also susceptible to rate fluctuation risk as rates become adjusted up or down based on an index throughout the life of the loan. A fixed-rate mortgage that has an interest rate that does not change throughout the life of the loan, is most predictable but the rate tends to be higher.
Before a loan is approved, mortgage lenders need to evaluate whether you can repay your loan in full (plus any interest that accrues). They will ask for documents to show that you are trustworthy and have the financial means for repayment.
The first piece of information is proof of identification, such as a government-issued identification card, a state driver’s license or a passport. Lenders want this type of personal information to prove that you are who you say you are.
Lenders want to know that you have the means to afford your monthly payment during the lifetime of your loan. You will be required to provide proof of income, such as a recent pay stub (within 30 days) and the Form W-2 for the past two years.
Your proof of income lets lenders know that you currently have an income. Still, your state and federal tax returns will provide a broader perspective of your financial health. Generally, you will be asked to provide tax returns for the past two reporting years. This document helps demonstrate your ability to maintain a steady stream of income over a period of time and give lenders the confidence that you can fulfill your mortgage obligation.
Lenders typically ask for two months’ recent bank statements as evidence to the source of funds to be used towards your down payment, closing costs, and mortgage payment reserves.
Mortgage payment reserves are extra liquid assets you can use to meet your mortgage obligations. The payment reserves requirement varies depending on the loan purpose, property types, credit scores, debt-to-income (DTI) ratio, and the loan program.
It is important for lenders to have a good understanding of your debt obligations. This helps lenders determine the debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to pay monthly debts that helps indicate your borrowing risk. Typical debt obligations include debts such as credit card payments, student loan payments, car payments, child support, alimony, mortgage obligations on other real properties owned, etc.
Your credit history shows how well you manage the repayment of debts. Lenders will request access to your credit history to assess whether you have a strong record of repayment and how well you manage your debts. For conventional loans, you generally need a credit score of at least 620 to qualify. Government-sponsored loans — like those from the FHA or VA — usually have lower minimum credit score requirements. Jumbo loans usually have a higher requirement on credit history and credit score.
Your rental history is another critical piece of the puzzle when determining your creditworthiness. You might be asked to provide the name, phone number, and address of your past (and current) landlords. The lender may contact them to complete a Verification of Rent (VOR) to confirm if you have made your rent payments on time.
The process of gathering the documents you need can be complicated and tedious. Cathay Bank is here to help you stay on track and ensure you get an excellent experience.
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This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.