How to Finance your Home Mortgage

Navigating the world of home financing can be daunting, especially for first-time home buyers. However, with the right information and resources, financing your dream home can become a realistic and achievable goal, whether you’re a young professional, newly married couple, or anyone venturing into homeownership for the first time

Types of Home Loans

The first thing you may need to do is understand the different types of loans, the ones you qualify for, and the which best matches your specific circumstances.

Conventional Loans

These are traditional mortgage loans offered by banks and lending institutions, typically requiring a higher credit score and a down payment of 3% to 20% of the home’s purchase price.

FHA Loans

Backed by the Federal Housing Administration, FHA loans are designed to help first-time buyers with lower credit scores and a down payment as low as 3.5% of the purchase price.

VA Loans

Reserved for eligible veterans, active-duty service members, and their families, VA loans offer favorable terms, including no down payment requirement and lower interest rates.

USDA Loans

Provided by the United States Department of Agriculture, USDA loans are aimed at rural and suburban homebuyers and offer low to no down payment option

Jumbo Loans

These loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac, making them suitable for financing higher-priced homes.

As of 2021, the conforming loan limit for a single-family home is $548,250 in most counties and up to $822,375 in high-cost areas. Therefore, any loan amount that exceeds these limits is considered a jumbo loan. Jumbo loans typically have stricter borrowing requirements and higher interest rates than conforming loans, which makes them more suitable for borrowers with high incomes and good credit.

Adjustable Rate Mortgages (ARM)

ARMs offer an initial fixed interest rate for a specified period, after which the rate adjusts periodically based on market conditions.

Fixed Rate Mortgage

With fixed-rate mortgages, the interest rate remains the same throughout the loan term, providing stability and predictable monthly payments.

Bridge Loan

Bridge loans are short-term loans that help homeowners finance the purchase of a new home while their current home is still on the market.


Assessing Your Financial Situation

Before starting your search, it’s ideal to carry out some self assessment to determine what you can afford based on your earnings, savings and disposable income. 

This is necessary considering potential lenders will conduct a Debt to Income Ratio (DTI) analysis when considering you for a loan, so it makes sense for you to be prepared when they do.

A self assessment should adopt the following steps:

  1. Checking your credit score for errors or discrepancies.
  2. Assessing your overall Financial stability by evaluating income and employment history.
  3. Calculating your Debt to Income Ratio [ DTI*]
  4. Determine how much down payment you can make. The larger it is, the better loan terms
  5. Evaluate your budget and how much you can comfortably afford to pay
  6. Shop around for a loan by studying the type of loans available to you
  7. Gather necessary financial documents to present upon request.

Applying and Paying back Your Loan

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Now that you determine what you can afford, the next logical step is to start applying to Lenders.

It is also important to consider at this point, your plan for paying back the loan within the specified time, considering your property is now the collateral for the loan.

Get started with the following steps:

    1. Assess your financial situation.
    2. Save for a down payment.
    3. Research loan options.
    4. Shop for lenders.
    5. Get pre-approved for a mortgage.
    6. Choose the right loan.
    7. Complete the loan application.
    8. Undergo underwriting and approval.
    9. Schedule and attend the closing.
    10. Make regular mortgage payments.s

How Lenders Determine Eligibility with DTI

What is a DTI

DTI stands for Debt-to-Income ratio. It is a financial metric that lenders use to assess a borrower’s ability to manage their debt obligations in relation to their income. DTI is calculated by dividing the borrower’s total monthly debt payments by their gross monthly income and expressing it as a percentage.

2 Types of DTI

There are two types of DTI ratios:

1. Front-End DTI Ratio: This ratio considers only housing-related expenses, such as mortgage payments, property taxes, and insurance premiums, divided by the borrower’s gross monthly income. Lenders typically prefer a front-end DTI ratio of 28% or lower.

2. Back-End DTI Ratio: This ratio includes all monthly debt obligations, including housing expenses, credit card payments, student loans, car loans, and other debts, divided by the borrower’s gross monthly income. Lenders usually prefer a back-end DTI ratio of 36% or lower.

Lenders use DTI ratios to assess the borrower’s ability to handle additional debt responsibly and determine their eligibility for a mortgage loan. A lower DTI ratio indicates a lower level of debt burden and a higher likelihood of loan approval. However, specific DTI requirements may vary among lenders and loan programs. It’s important to check with the lender to understand their specific DTI guidelines.

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