Self Development

Mortgage in the USA: Beginner’s Guide

Buying your real estate in the USA is the thought that runs like a red thread in the mind of an immigrant from the moment he arrives in the country. After all, the marketing image of the American dream is represented by your own house with a perfect lawn, and therefore at some point, a person has a question: “Can I afford a mortgage on a house?”

Yes, if you have legal status in the country and a good credit history, you can count on a loan to purchase a home. However, obtaining a mortgage in the US can present several challenges. How to avoid them, where to start, and how to prepare for a mortgage on a house properly; an expert in personal mortgage insurance at Stellar Mortgage Corporation will help us figure out all these issues.

Table of Contents

Mortgage – where to start? Understanding the terms

To avoid getting confused in the terminology and components of a mortgage, let’s look at the basic mortgage terms that will help you get an idea of ​​the process of buying a home on credit. 

Basic terms you need to know:

⭆ In the US, a mortgage is called a mortgage and differs from a regular loan in that the property purchased with the bank’s money remains pledged to the bank. That is this type of loan secured by property, which until the full repayment of the loan, is the bank’s property. 

⭆ A mortgage company is a large bank or private financial institution that provides a loan secured by future real estate.

⭆ Down Payment – the amount the borrower makes independently from his funds when buying real estate.

⭆ Mortgage broker – a mortgage lending specialist who works with many credit institutions and selects the best conditions for the client.

⭆ Fixed interest rate(Fixed-Rate Mortgage) – the interest rate on the loan and, accordingly, the monthly payment amount remain unchanged throughout the entire loan period.

⭆ A floating interest rate (Adjustable-Rate Mortgage) is a rate that is fixed for the first few years of mortgage payments and then rises depending on the increase in the index in the financial markets. 

⭆ Mortgage refinancing is the conclusion of a mortgage agreement with another lender on the current property on more favorable terms for the borrower.

What should you know about the types of home mortgages in the US?

Several major residential mortgage lending programs in the United States can roughly be divided into the following categories:

Mortgage Loan Programs

These include: 

  • Government programs, such as those supported by the Federal Housing Administration (FHA) or Veterans or Military Loans (VA Loans), can be obtained without a down payment. 
  • Large mortgage companies provide ordinary mortgage loans with a down payment of 3% of the property’s value.
  • Private programs for borrowers at higher interest rates who find it difficult to show their income.

In addition to the three main types of mortgage loans, there are also various programs:

  • Jumbo Loans are mortgage loans in which the amount of funds issued against real estate collateral significantly exceeds the standard limits for conventional mortgage loans. Such a loan is taken for expensive housing.
  • The First Home Buyer Program is popular, with a minimum down payment of 3% for low-income people.

Interest rate

“Mortgage interest rates are fixed for the entire mortgage term of 10, 15, 20, or 30 years, or floating. 

In the case of a floating interest rate, then you take out a loan for, say, three years at a lower interest rate (usually, the floating rate is 1-2% lower), but at the same time, you take on the risk that when this period ends, the lender may revision of the interest rate on mortgages, and it can go up a lot – up to 10.5%. It’s all spelled out in the contract.”

Interesting fact:

In 2022, the US mortgage interest rate rose to almost 7%, the highest increase since 2001. However, mortgages in the US are still among the most affordable in the world. 

Additional service for the borrower

When choosing a mortgage program, the borrower must remember that mortgage refinancing is available to him. A person can use this service at any time after receiving a mortgage without penalties from the bank if the refinancing conditions are favorable for him. This process can significantly reduce your mortgage payment.

Important!

Refinancing a mortgage loan always entails additional costs for the borrower to apply for a new loan to refinance the previous one. The costs may be included in the amount of the new mortgage loan.

Conditions for the purchase of housing in a mortgage and requirements for the borrower

To purchase housing in a mortgage and get a favorable interest rate, a potential borrower is subject to several requirements that he must meet.

Who can apply for a mortgage on a house?

Both US citizens and non-residents can purchase housing on a mortgage. But it is more difficult for the latter to get approval for a mortgage, and the interest rate at which it is possible to take a loan can be 1-2% higher than for residents. Immigrants in the country based on political asylum (asylum) are treated as residents and entitled to a lower mortgage interest.

Important!

Obtaining a mortgage without a credit history or with a very small (from 580 points) credit scoring is difficult but feasible. To do this, it is best to contact a mortgage broker who can check the documents of a potential borrower and assess his chances of obtaining a mortgage loan.

Requirements for the borrower: 

  • Credit Score – credit history for at least one calendar year and an initial score of 650.
  • Age from 18 years old.
  • Official employment in the United States. 
  • Status in the country – citizenship, green card, work visa, asylum (asylum), etc.
  • Additional documents for obtaining a mortgage at the bank’s request, confirming the borrower’s solvency (bank statements, pay bills).

Requirements for the property:

  • The bank orders an independent, certified assessment of the property’s condition.
  • The bank is interested in the purpose of the property. Whether it is purchased for living, for rent, or as a vacation home. This will depend on the interest rate. 
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How many mortgages can you take out in the US?

“According to statistics, people move to the US every seven years. First, immigrants buy their first condo or small house. Then, as their income grows and their families expand, they buy a townhouse, then after 5-7 years, they take out a mortgage on a bigger house. In a lifetime, people can easily change 3-4 houses and take the same number of mortgage loans.”

A mortgage loan is tied strictly to the property. However, a person or family can have multiple mortgages in the US. For example, a borrower may leave his first small apartment with a rental mortgage and take out a house as a mortgage if his income allows him to take out another loan for a property. At the same time, the income from renting out the first apartment can cover the mortgage payment.

Things to keep in mind before applying for a mortgage

First: “Your credit history is what your mortgage interest rate will depend on in the first place.”

Second: If the potential borrower owns a business and is not just employed in the United States, then the bank will check the financial activities of his company and its income for the last two years preceding the date of application for a mortgage loan. 

Third: A mortgage loan in the United States can be issued by one of the family members, and then only his income will be taken into account, and a joint mortgage is possible for spouses. The entire family’s total income and each spouse’s credit history are considered in this case.

Fourth: “The bank evaluates the real estate type and the condition of the object. So in the first option, the interest rate on a condominium will be slightly higher than on a house. And in the second assessment, if something is not working properly in the house, then the bank will not finance such an object until it is fixed.”

Profitable mortgage: how to choose a bank with the best interest rate?

Mortgage loans are provided by all major American banks (Chase, Bank of America, Wells Fargo, HSBC, etc.) and non-banking financial institutions, such as private mortgage companies. We will discuss the advantages and disadvantages of applying for a mortgage through each method below.

Bank mortgage

One of the ways to get a loan to buy real estate is to apply for a mortgage in one of the leading US banks.

“The borrower must understand that the largest banks in the US do not just deal with private mortgage clients; they work with large companies such as Stellar Mortgage Corporation. It is much more difficult to get a mortgage at a bank; they are very clumsy, and their employees are not financially interested in getting you a mortgage.”  

When contacting a bank, it is important to weigh the possible benefits and risks:

Advantagesdisadvantages
Possibility to get a low interest rate or a special offer if you apply for a mortgage in a bank of which you are a client.Applying for approval to each bank separately, which can negatively affect the credit rating, since each request about the state of the client’s credit history can play a downgrade.
 Inflexibility towards the client, large banks have little interest in private clients.

? LIFE HACK

If you decide to apply to the bank, then to save time on trips in search of a mortgage with the best conditions, there is a mortgage calculator. It will allow you to make an approximate monthly mortgage calculation (taking into account rates, repayment schedules, and closing fees). This article provides an overview of six convenient and reliable mortgage calculators.

Mortgage through a broker

The conditions for acquiring housing in a mortgage from each bank or financial organization depend on many factors and are calculated individually. That is why borrowers turn to a mortgage broker. The specialist can choose the optimal rate for the conditions of each client and optimize and speed up the process of obtaining a loan. 

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Working with a mortgage broker distinguishes the process of obtaining a mortgage in the US from the CIS countries, where the client most often applies directly to banks for a loan. Working through a broker has several beneficial advantages:

Advantagesdisadvantages
A mortgage broker conducts a preliminary assessment of the borrower’s documents and his potential chances of obtaining a mortgage loan. In case of non-compliance with any criteria, the mortgage broker gives recommendations and builds a strategy to improve the financial situation of the client, his credit rating.It is necessary to choose a trusted mortgage broker who has been working in the market for many years and has proven himself in the field of mortgage lending.
A possible reduction in the period for obtaining a mortgage loan due to the preliminary preparation of documents for the borrower by the broker.Mortgage broker commission.
Customer oriented service. Brokers work on weekends and outside bank business hours. 

How to Increase Your Chances of Getting the Lowest Mortgage Interest? Expert Tips

It isn’t easy to exist without a credit history in the USA. It affects all areas of life, so a newly arrived immigrant should start building his credit rating. This must be done to obtain favorable mortgage conditions and a low-interest rate in a few years.

How to build a good credit score? 

  • Get several credit cards from different banks and do not violate payments.
  • Have 1-2 credits. For example, for a car.
  • Get a good job or get a profession in the United States. Often studies are counted as work experience.

How does it work in practice?

“Situations are different. Often a potential borrower needs more points in their credit history, and we build a path and advise on how to improve their credit history to get approved for a mortgage loan with a good interest rate. This is our daily work. And since we have rich experience and know how to calculate mortgage loans and which bank it is better to take a mortgage, our applications are always approved.”

What is the procedure for buying a home with a mortgage? Step-by-step instruction

The process of obtaining a mortgage loan in the United States consists of several steps, each of which must be given due attention. What does this process look like? I’ll tell you more about this.

Step 1

Choose a mortgage broker or financial institution. 

Step #2

Fill out an application with a broker for a preliminary assessment of the financial component of the borrower.

Step #3

The broker generates a credit report and obtains an assessment and approval from the client through the systems of Fannie Mae & Freddie Mac (the largest mortgage agencies in America).

Step #4

Getting pre-approved for a loan.

Step #5

Search for a property and an offer to the seller.

Step #6

Providing a full package of documents to a financial institution for applying for a mortgage.

Step #7

Real estate appraisal, insurance order.

Step #8

Verification of documents and approval by the bank / financial institution.

Step #9

Closing the deal with the signing of all legal documents.

Note. The process of obtaining a mortgage loan takes an average of 30 days. 

What are the costs of obtaining a mortgage in the US?

When applying for a mortgage loan, you need to be prepared for the following approximate payments, which will ultimately depend on the state in which you purchase the property:

⭆ Property valuation – $500-$750. ⭆ Mortgage broker commission – $1,495. ⭆ State registration fee – $200-$500. ⭆ Notary services for title insurance (Title Insurance). This is the insurance of the creditor’s interests in case of recognition of the transaction when buying real estate with a mortgage as invalid – $1,500-$3,000. ⭆ Sales tax depends on the state – from 0.00% to 2.00% of the property value. ⭆ Insurance policy – ​​$1,000-$3,000. ⭆ Payment of taxes on land and real estate from 3 to 12 months.

What do you need to know about the mortgage loan repayment mechanism?

A mortgage in the United States is the most important loan, the discipline of repayment of which can maximize the credit history. A single violation of the mortgage repayment schedule can bring down the entire credit rating of the borrower.

“If the mortgage payment schedule is violated, the borrower’s credit history is instantly destroyed. A person can have an excellent credit score, say, 750 points. But it can go straight to 550 with just two missed mortgage payments, and missing a third payment will take the rating down to 450. It’s important to pay your mortgage on time. The property can be taken away if four or more payments are missed.”

Is it possible to pay off the mortgage ahead of schedule? Does it make sense?

“You can pay off your mortgage early without penalty at any time. This does not affect your credit rating, but it is sometimes correct. And here, it all depends on the individual situation. For example, people want to retire without a mortgage loan, and this makes sense if they have ten years left before retirement.

Investing free money in the USA is much more profitable than paying off a mortgage loan. With a low-interest rate, investing in another property or buying a truck that will bring in thousands of dollars a year instead of saving $3,000 in mortgage interest is easier. If you have money lying idle in your current account and are not looking for ways to generate passive income, then I always advise my clients to close their mortgages.

And finally

A potential borrower needs to remember the following:

  • Contacting a mortgage specialist can help you choose the best conditions and interest rates for a mortgage and save time and costs.
  • You should set aside money in advance for real estate valuation and related payments.
  • Always keep an eye on your credit history; at least six months before applying for a mortgage, try to prevent deterioration of your credit history.
  • It is possible to refinance the mortgage or pay off the loan ahead of schedule. But it is better only to use these options if necessary.
  • The lender considers all the borrower’s income, not just wages (the amount of pension savings, income from renting out another real estate, and profit from investments).

Frequently Asked Questions About Mortgages in America

Does your credit score affect getting a mortgage?

— Yes, because the credit history is the first thing that the lender pays attention to when evaluating the documents of a potential borrower. A credit rating indicates the client’s solvency and discipline when making credit payments.

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How is a mortgage calculated?

– Mortgage calculation can be done independently using an online mortgage calculator, but only a mortgage specialist can give more accurate information on the optimal conditions for a borrower. 

How many mortgages can I take out on my home?

– Mortgage is issued strictly for the property. You can have multiple mortgages for different properties.

— What are the conditions for obtaining a mortgage in the US?

– Anyone can get it, regardless of status, but the interest rate will be lower for residents.

What is a good mortgage rate?

– This is an interest rate on a mortgage at 5-5.5% per annum.

What is the down payment for a mortgage?

– The Down Payment starts from 3% of the property value, but there are government programs without a down payment.

How long does it take to refinance a mortgage?

— There is no temporary ban on mortgage refinancing. This can be done at any time after receiving a mortgage loan. It is important to remember that this entails additional costs that are included in the mortgage loan.

Do other loans affect getting a mortgage?

– Yes. Before applying for a mortgage, it is important to have at least two paid loans and several credit cards with no default for at least six months before applying for a mortgage.

What do you need from a borrower to get a mortgage?

– The borrower needs to provide information about their employment or proof of their income for the two years preceding the application for a mortgage. If you own your own business, have a credit rating of 650 or more, and have legal status in the United States.

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