Homeownership is a freedom that many people in the US yearn for. Statistics show that as of the 2022 Q1, the residential mortgage in the US totaled $11.8 trillion. That amount is expected to rise in 2023 as many Americans focus on owning homes.
Being a homeowner gives you some safety and accomplishment in life. However, homes are expensive, and you can only get one by applying for a mortgage loan.
This blog explains what you should know about mortgages and how and where to get them in the US. Most homeowners have depended on these loans to own homes. In addition, they also build equity while repairing their homes.
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Let’s dive into learning about mortgage loans in the US.
What is a Mortgage Loan?
A mortgage is a borrowing you get whenever you want to purchase a home or real estate. It’s usually a secured loan whereby the property you buy acts as the security against the loan.
When applying for mortgage loans in the US, you agree with your lender on the monthly installments you should be paying. The payment period of a mortgage loan ranges from 15 to 30 years.
Before you apply for mortgage loans in the US, you should first save money for a down payment starting from 5% to 25% of the home price.
Now, let’s see how mortgage loans work in the US.
How Mortgage Loans Work in the US
According to Freddi Mac, home prices will increase by 5% in 2023, and mortgage rates are still growing.
With these predicted changes, you should learn how mortgage loans work before you think of owning a home.
Once you apply for a mortgage loan, the lender helps you pay everything to the home seller. Afterward, you pay the loan in equal installments for 15 to 30 years. In addition, the lender requires you to pay a downpayment, usually 5-25% of the home purchase price.
Another critical thing to note is you can apply for a fixed-rate or an adjustable-rate mortgage loan. The interest rate of fixed-rate loans doesn’t change during the repayment period, while floating-rate loans change their interest over time.
Studying the current and previous mortgage loan rates is good before applying for a loan. If you want a mortgage and the rates are overly low, consider applying for a fixed-rate mortgage loan.
With adjustable-rate mortgage loans, you can suffer from paying high-interest rates in the future since the economy is not doing that good anyway.
As you continue to repay your mortgage loan, you gain home equity according to the percentage you’ve paid your loan. The good news is you can borrow another loan against the home equity percentage.
You should also know that your home is collateral for the mortgage loan you apply for. Therefore, if you don’t honor your repayment plan, the lender will repossess your home to recover their money.
Now, let’s see what you should have before applying for mortgage loans in the US.
Requirements for Getting mortgage loans in the US
- You should have a stable income flow.
Instead of risking your soon-to-be home to repossession, it’s good to establish your income sources before applying for mortgage loans in the US. You can devise several methods to make money to support your main hustle.
All mortgage loan lenders require proof of stable income before pre-approving your loan. They may ask for bank statements showing frequent transactions of income flow.
- Good Credit score
While you can get a mortgage loan with bad credit, building your credit score is advisable to get good loan rates. Most lenders love to work with individuals having 700+ credit scores.
Lenders usually perform a soft credit check to pre-approve your mortgage loan. However, this soft check has no impact on your overall credit score.
Once they are ready to lend you the mortgage, they run a hard check, which impacts your credit score.
- Valid identity documents ( ID and Social Security Number)
You should provide your identity documents, including a valid street address.
- You should provide details of other loans you are actively paying
If you have a long-term loan, such as a car or student loan, you should let your mortgage lender know about it. These details help your lender calculate how much you should pay monthly. Remember, they cannot leave you without any cash for upkeep.
- Active bank accounts
You should provide your lender with details of an active bank account. They will use this account to deduct the monthly installments.
- Federal Tax returns
Your lender will also need you to prove that you’ve been filing your returns. Otherwise, no would like to associate themselves with a tax defaulter.
- A budget for the Home you are buying
At least, you should figure out how much you want to spend buying your new home. This helps the lender to see whether you can afford to pay the installments once they give you the mortgage.
- Provide your W-2 or I-9 forms
Your lender will also request a W-2 if you have been an employee and an I-9 form if you are a freelancer or a contractor.
Since you know what you need to apply for a mortgage loan, let’s see the available types of mortgage loans in the US.
Types of Mortgage Loans
- Fixed-rate mortgage loans
These loans have a fixed interest rate during the loan repayment term. With a fixed mortgage rate, you’ll manage your income well because you will have a constant installment amount.
Fixed-rate mortgage loans are good when the economy is likely to go down. When the interest rates increase, they will not affect your repayment amount or the loan term.
However, you should be careful not to apply for a fixed rate when the current interest rates are high. It’s good to wait for the ideal time, when rates are at the lowest level, to apply for fixed-rate mortgage loans in the US.
But when the interest rates are high, it doesn’t mean you should not buy your dream home. However, you should apply for adjustable-rate mortgage loans.
- Adjustable-rate mortgage loans
As the name suggests, the interest rates of these mortgage loans are not constant. For instance, you can apply for a mortgage when the rates are 3.0%, but after a few months, the rates jump to 5.5%. When that happens, your lender will recalculate your dues using the new mortgage loan rate.
Statistics show that the average 30-year mortgage rate in the US rose from 2.96% in 2021 to 5.34% in 2022. That means those who had applied for an adjustable-rate mortgage loan had to pay 2.38% higher. But those who had applied for a fixed-rate loan in 2021 were not affected.
You can only benefit from this type of mortgage when you apply for a loan with high rates, and they reduce later. However, the money market is very unpredictable, especially in these times with a global pandemic.
- Conventional mortgage loans
Borrowers of conventional mortgage loans have no support from the US government. In this type of mortgage, some leaders offer conforming and others non-conforming mortgage loans.
A conforming mortgage loan adheres to rules that the Federal Housing Finance Agency (FHFA) has set. These rules include the standard interest rates, maximum loan amount, and credit score. For instance, since the house prices have increased, FHFA has increased the conforming loans to between $726,000 and $1,089,300.
The non-conforming conventional loan lenders do not follow the guidelines set by FHFA. They can lend to any highest amount they wish to and charge interest rates they wish to.
However, if you are not willing to take a non-conforming mortgage loan, you can take a Jumbo mortgage loan if you want a more expensive home.
- Jumbo mortgage loan
A Jumbo mortgage loan is a huge loan you can apply for if you want a costly home. Most realtors take Jumbo loans to finance their real estate projects.
In addition, if you would like to buy a home in New York City or San Francisco, you should consider getting a Jumbo loan since those are high-cost areas.
Jumbo loans have very strict eligibility criteria due to obvious reasons. For instance, before applying for a jumbo mortgage loan, ensure an excellent credit score above 800. In addition, you should have a low debt-income ratio and a huge cash down payment.
The US government has got you if you are financially struggling but want to own a home. You can apply for a government-issued mortgage loan to own a home.
- Government-issued mortgage loans
The US Federal government has a scheme where it insures home loans, such that anyone who wishes to own a home can get a mortgage loan. Yes, even if you have a bad credit score.
The government doesn’t lend you a mortgage directly. Instead, it works with some approved mortgage lenders in the US.
The US government works with three types of home loans: The FHA, VA, and USDA loans.
- The Federal Housing Agency (FHA)
These loans require paying a 1.75% insurance premium when applying for the loan. In addition, if you have a credit score above 580, you’ll pay a minimum of 3.5% as a downpayment. However, if your credit score is 500 to 579, you’ll pay a 10% down payment instead.
- The Veteran Agency (VA) loans
To get this mortgage loan, you must be a US veteran, an active military staff, national guard personnel, or a spouse to the recognized beneficiaries of VA loans.
Lenders of VA loans will not charge you insurance premiums. However, you’ll pay an upfront fee of 1.4% to 3.6%.
It’s possible to get a VA loan without a downpayment, but that depends on the lender you get. So you can research first before settling on a lender.
- USDA loans
The US government also backs up these USDA plans where you can buy a home in rural or semi-urban areas in your state. In addition, you don’t need a downpayment to qualify for a USDA loan. However, you should have a credit score of above 640.
You also should pay an upfront insurance premium of 1% and an annual premium of 0.35%.
Lenders of government-backed mortgage loans cannot repossess your home when you default on the mortgage. Instead, the government pays the lender your dues.
Mortgage Loan Repayments
While applying for mortgage loans in the US, you should ask your lender how much you’ll pay in monthly installments. You can use Bankrate’s free mortgage calculator to know how much down payment you’ll pay, monthly installments, and the loan term.
In 2022, New Jersey led in mortgage repayments, with the highest monthly installment being $2440 per homeowner. However, the average monthly installment in the US rose to $2012 in September 2022, according to MBA.
One thing to know about mortgage repayments in the US is that once you skip several installments, the debt becomes big and hard to repay. As a result, if your loan is not government-backed, the lender has the right to repossess your home.
Therefore, you should aim to apply for a mortgage once you have stable income streams. If you are wondering how to increase your income, you can try to earn money as a consultant in your field of expertise.
Knowing about mortgage loans, you can start saving money for a downpayment. In addition, you can start window shopping for your dream home in your desired location.
Feel free to comment below on your views on mortgage loans in the US. We will be glad to engage with you in the comment section.
Frequently Asked Questions
- What are the main types of mortgage loans in the US?
The main types of mortgage are fixed-rate and adjustable-rate mortgage loans. Fixed-rate mortgages mean the interest rates will be fixed throughout the loan term. Most lenders offer fixed-rate mortgage loans.
On the other hand, adjustable-rate mortgages change along the loan term according to the economy.
- How can I prepare to get a mortgage loan in the US?
You should ensure you have a stable flow of income, probably more than one stream. In addition, improve your credit score to above 700 for better interest rates. Don’t forget to save money for a downpayment, between 5-25% of the home’s purchase price.
- Can US non-residents get a mortgage in the States?
Yes, as long as you prove your residency and be eligible according to the mortgage eligibility criteria.