- May 8, 2017
- Posted by: steve
- Categories: home loan, mortgage articles
If you’re about to buy a home for the first time, it’s important that you understand the process. Read here for 10 things to know about the home loan procedure.
In 2015 there were about 501,000 homes sold in the United States.
Homes are being sold every day. But if you are on the flip side of the coin, purchasing a home may seem daunting.
Most people don’t have the cash on hand to purchase a new home. So they must reach out to banks and institutions to secure a home loan.
If you are a first time homebuyer, you may be wondering about the home loan procedure.
We’re here to help you.
Read on to learn the ten things you should know about the home loan procedure.
1. Your Credit Score Actually Means Something
If don’t have any assets, you may not have focused much on your credit score before.
But be aware that your credit score means a lot.
After the financial crisis of 2008, banks have become more strict when approving mortgage loans.
You will definitely need to make sure that your credit score is high enough to secure a loan. A low FICO score can make you appear as a high risk to lenders.
Your credit score also affects how high your loan’s interest rate will be.
The higher your credit score, the lower your interest rate will be.
If your credit score isn’t ideal, you may want to take steps to improve it before you try to get a home loan.
Don’t have any credit? This isn’t necessarily a bad thing. This way, you will be able to start from scratch.
You may want to take some time to build some positive credit before you try to purchase a home.
2. Mortgage Lengths
Before you enter the home loan procedure, you should be aware of how long you will be paying back your loan.
There are generally two lengths of home loans. There are 15-year loans and 30-year mortgage loans.
Depending on which loan you choose, your interest rates may be higher or lower.
A longer-term mortgage is going to mean a higher interest rate for you. This is because a longer term is more of a risk for the banks.
So you want to take into careful consideration when you decide the length of your loan.
3. You Will Need a Down Payment
Getting a loan does not mean that you will forgo any type of financial responsibility.
Generally, conventional loans require at least a 20% downpayment. Depending on your credit score, you may require a higher down payment.
If you are able to put more down on a mortgage, you definitely should. This will reduce your interest rates and give you more equity.
A lot of people don’t have 20% of their mortgage saved up, so you want to make sure that you are saving to ensure you’ll have at least a small percentage of a down payment.
4. The Government Can Help
If you are having trouble securing a loan, there are government assistant programs you can reach out to.
Some of the government loans you can apply for:
- FHA loan – The Federal Housing Administration offers relief for those who are struggling to get a conventional loan. These types of loans work to help you get a loan if you aren’t able to secure a 5% downpayment. You should be aware that there are specific requirements that need to be met before you are provided an FHA loan.
- VA loan – The veteran’s administration provides loans to those who have served in the armed forces. Like the FHA loans, a VA loans also have strict requirements as far as the property and its location.
5. You Will Need Documentation
The home loan procedure is a relatively extensive one.
In fact, it may take some time to get all of the information together for you to even start the home loan process.
But in order to get the ball rolling on your home loan procedure, you want to make sure that you are prepared.
Many banks want a lot of documentation. This will include any bank statements, financial records, tax information, and paystubs.
When you decide to start the process, you should make sure that all of these documents are in order.
There is nothing like needing all the documentation the bank asks for, only to not be prepared.
Aside from financial records, you may want to disclose to your lender your life off the paper. Make sure that your lender knows whether or not you have switched jobs, if you are self-employed, or if you are already struggling with payments.
These factors are important for the lenders to know as they may be able to offer additional resources.
6. Debt Won’t Get You a Home Loan
The next step in our home loan procedure is to check your debt status.
We all have some types of debts.
But banks are very meticulous in looking at your financial history.
So when you are handing over those documents that show all of your financial information, be aware that they won’t skim through them. If you have any hidden missed payments or outstanding bills, they will be able to find them.
Any type of large debts will make you appear as a high risk to the lenders. This could potentially damage your possibility of getting a loan.
If your debt exceeds 35% of your monthly funds, you may want to reconsider starting the loan process until you’ve gotten the debt down.
7. You Can Switch Lenders
So once you’ve gotten a mortgage lender, you are now stuck with them.
Not the case at all. If you are able to get a better interest rate with another lender, there is nothing preventing you from switching.
If you are thinking about switching, you should also consider some of the fees that you may have to pay if you decide to move on.
8. Differing Interest Rate Types
Not all interest rates are the same.
When you are getting a home loan, you are given the option of which interest rate you would like.
There are fixed and floating types of interest rates. Fixed rates mean that your interest rate will be locked in at the rate that you initially chose the loan. However, when the market drops, you may be paying a higher interest rate than the market implies.
This can be easier for those homeowners who want to know exactly what their mortgage payment will be each month.
However, when the market drops, you may be paying a higher interest rate than the market implies. If you would like to take advantage of these lower rates, you will have to take the time and fees to refinance your mortgage.
A floating home loan (or adjustable rate mortgage) interest rate will depend in the fluctuation of the market.
And the market does fluctuate. In fact, these rates can change almost daily. It depends on the financial markets and many other economic indexes.
This is great because a home buyer can take advantage of the lower interest rates. But as soon as the market rates spike so does your interest rate.
9. You Can Negotiate
There are tons of ways that you can negotiate during the home loan procedure.
Many banking institutions are willing to work with you to get lower interest rates. While you won’t be able to negotiate several points, there is some working room.
Even if you get 0.25% off your interest rate, you are still saving yourself money in the long run. Even taking the smallest percentage off your interest rate can help.
Some other things you can negotiate:
- Penalty fees
- Property insurance
- Accidental insurance
- Loan discounts
Banks want you to choose them. So they will be willing to work with you if they know they will be getting your business.
10. Shopping Around Is an Important Home Loan Procedure
Just like purchasing anything else, you should shop around for the best deal.
First and foremost, know that there are plenty of lenders for you to choose from.
It just depends on what you are looking for. You want to take into consideration the fees that each lender will charge you, and what their interest rates are.
If you find a deal with one lender, make sure that you read all of the fine print. Things like “no fee” loans often come with their problems. A lot of times your fees will be lumped into your mortgage payment.
Make sure that you are aware how each lender will work as far as their policies. Your new home is a huge investment, and you don’t want to rush into anything without knowing all the information.
Buying your first home is an exciting new adventure.
But it can also be overwhelming, especially if you aren’t aware of all of the ins and outs of the home loan procedure.
There are many things to consider when applying for a home loan. These things can include your financial situation, your credit score, and the current interest rates.
Make sure that you are fully aware of how your mortgage loan will work before you sign the dotted line.
If you have any questions when you begin the home loan procedure, reach out to us. We will be able to give you expert knowledge and advice.