In a seller’s market, starting the loan process before your home search may help you stand out from the rest of the potential buyers for a home. Certain steps and materials will be necessary to begin the loan process. Ultimately, this will also help the buyer discover what they can afford in the current market.
Find a lender that will help walk you through the process and get you started on the path towards what type of loan works best for you. The loan officer will need some information from you which includes an assessment of your income, assets, debts, and credit history to determine the loan
amount for which you would qualify. Your lender can give you an idea of how much you will need for a down payment based on the type of loan you want to enter into at the time. He or she will also show you the amount that you will have to pay towards mortgage insurance, hazard insurance and
property taxes which typically is added to your monthly mortgage payment.
You will need to pull some of your financial information. You will need to provide the lender with your gross pay before taxes and deductions, savings and other liquid assets available for the down payment and closing costs. You also need to figure in any debt that you currently have such as
outstanding loans, student loans, credit card debt, car payments, personal loans and other home loans if you have them.
It is important to know your credit score as well. Your credit history and rating will be taken into consideration when determining the principal amount you can borrow and the interest rate that you will pay. As a consumer, you are entitled to one free credit report per year from each of the 3 major credit report bureaus (Equifax, Experian and TransUnion). Make sure that all information is accurate on each report and that you can explain any items that may appear on the reports before starting a conversation with your lender.
What is Included in a Mortgage Payment?
A payment typically consists of up to 6 items:
1. Principal: Dollars used to pay down the mortgage balance.
2. Interest: Charge on money borrowed from the lender which is also tax-deductible.
3. Taxes: Property taxes that are paid to the county where your home is located. These are also tax-deductible.
4. Mortgage Insurance: This is money that goes to the insurance company to protect the lender from losing money if you default on the loan (not always required, depends on the loan type and loan to value).
5. Hazard Insurance: Insurance covering home and belongings.
6. HOA: Fees for the administration of your homeowner’s association to pay for community-shared responsibilities. (Note: Lenders do not collect these fees in the mortgage payment. If borrower is buying a condo, lenders will require content coverage insurance).
What is Pre-Approval?
A pre-approval is an actual written loan commitment by a lender after applying for a loan. This can give you an advantage over other prospective buyers interested in a property. Some offers may be contingent upon a buyer getting pre-approved first.
Lenders employ underwriters who assess your risks and approve your loan. There are numerous mortgage loans available with specific guidelines for approval but the basic criteria reviewed by the underwriter is very similar.
The underwriter will look at the following:
- Credit Score and Credit History - Focus on having a good solid 12-month payment history with no 30-day late payments.
- Employment History and Method of Income - Underwriter will look for 2 years of consecutive employment with “little” to no “unexplained” job gaps. Self employed borrowers should consult their lender for further details.
- Monthly Debts Compared to Monthly Income (Debt to Income Ratio or DTI) - This is calculated by dividing your monthly credit debts by your monthly gross income.
- Assets and Liquid Ability to Repay- Enough assets to pay for the down payment, closing costs,and pre-paids. Assets include checking and savings, CD’s and Money Markets, Stocks and Bonds, 401K and IRA’s, gifts from family and grants or loans from the government.
- Type of property you are buying.
- Use of the property such as owner-occupied, investment or second home.
Types of Mortgages
Fixed Rate: Same interest rate for the duration of the loan. You will have the same payment due each month until the loan is paid back entirely. Available in 30 year, 25 year, 15 year and 10 year loans.
Adjustable Rate Mortgage: This type of rate has fixed rate terms prior to the adjustment. The interest rate on this loan will adjust according to an index that goes up and down based on economic factors. It can be
set up with fixed rate periods ranging from monthly to 3, 5, 7 or 10 year terms, but is generally still a 30 year loan. Consult your lender for further details.
It is best to consult with your loan officer to find the best mortgage type that works for you and your current circumstances.