Baton Rouge home financing guide

Everything you need to know about taking on a mortgage

Navigating the home-financing process can be daunting for even the seasoned home buyer. But it doesn’t have to be.

Affordability is at an all-time high with low interest rates on long-term money and flexibility with lower down-payment options, says Cary Lambert, PrimeLending’s Baton Rouge branch manager. “Right now is the best borrowing environment we’ve seen in several years,” he says.

Here’s what you can expect if you take on a mortgage:

Credit: Your credit score is one of the most influential factors in securing a favorable rate on your mortgage. The higher your credit score, the lower your risk, and the lower your risk, the lower your interest rate. Your credit history is generally determined using payment history, amount owed, length of credit history, new credit inquiries and types of credit. A credit report merged from each of the three major credit bureaus will be evaluated, according to Lambert. “Credit, capacity, capital and collateral are the four major factors to establish overall stability and credit worthiness,” he says.

Applying for a loan: You’ll need to provide several types of documents when applying for a loan, although this varies with the type of loan. “Documentation will be required to prove income and assets, so be prepared to provide copies of your last two years’ W-2s or tax returns and all pages of bank statements,” Lambert says. Also, a third-party appraiser will physically inspect the property. The appraisal report compares homes that sold within the past six months that are near your property and have a similar style, living area square footage, number of bedrooms and bathrooms, and amenities. The loan-to-value amount is calculated off the lower of the purchase price or appraised value. This could be a good thing if the property is valued at or above purchase price. However, if the value comes back lower than purchase price, the buyer could be forced to make up the difference in cash if sellers don’t agree to renegotiate. “A good practice to protect yourself as a buyer would be to state in the purchase contract a contingency on appraised value at or above sales price,” Lambert says.

Down payments: How much you need for a down payment depends on the type of loan, your situation and your eligibility. Down payments typically are paid in cash, due at closing and based on a percentage of the home’s selling price. If you make a down payment of at least 20 percent, you do not pay mortgage insurance. The amount of money this could save you varies depending on the terms and type of your loan. For example, Lambert, says, your savings could range from $50 to $350 per month for up to 10 years, depending on a down payment of 3 percent to 19 percent. “Some government loans require mortgage insurance for the life of the loan,” he adds.

Your debt-to-income ratio affects your eligibility for a loan. For example, if a loan program uses a 28/36 qualifying ratio, you can spend no more than 28 percent of the monthly gross income of everyone included in the loan application on a monthly mortgage payment and no more than 36 percent on your overall debt. So, if you make $100,000 a year, you couldn’t spend more than $2,333 a month on your mortgage and $3,000 on your overall debt.

Loan term: The most commonly used repayment schedules are 15- and 30-year mortgages. Although the monthly payments on a 15-year mortgage are higher than with a 30-year loan, the 15-year loan usually offers a lower interest rate. As such, you pay considerably less interest over the life of the loan. “Everyone’s situation is different, especially comparing first-time homebuyers and seasoned veterans,” Lambert says. “I would say 90 percent of first-time homebuyers will choose a loan product that requires mortgage insurance and seasoned homebuyers probably will 50 percent of the time.”

Closing process: At closing, you review and sign all loan documents, including deed of trust and the promissory note. You’ll also need a cashier’s check to cover closing costs. Those in attendance typically include you and the seller, both parties’ real estate agents and attorneys (if you have them), the closing agent and a notary public.

—MEREDITH WHITTEN