Getting A Home Loan

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You've been looking online at homes online and now you are ready to make the jump into the process. Where do you start? One of the two biggest things you need to do when you are ready to get serious about looking for a home is finding out exactly what you qualify for. You do that by contacting a lender and getting a pre-approval.

Before you go out and start looking at homes you need to know what you can afford. The worst thing you can do is fall in love with a property only to find out that it is outside your budget.  Even before you contact a real estate agent  you should reach out to a lender and start the process for a pre-approval. This will tell you what price range you should look in and will give you an idea of what to look for.

Mortgage calculators are a good place to start online when you are just browsing around, but your mortgage payment is more than just the loan and interest repayment. You will have the loan, interest, property taxes, Insurance, and depending on your down payment PMI (Private Mortgage Insurance), which is required on all loans with less that 20% down.

A lender will take all of this into consideration when they are figuring out what you can afford, and getting you a pre-approval letter to take to your agent.

What is a pre-approval?

A pre-approval from a lender is a way to show sellers that you are qualified to purchase the home. Your lender will look into your credit history, income, debt and more to determine  what you should be able to afford. It is not a guarantee that you will get a loan but it shows that you are likely to be approved. Your lender will give you a letter stating the amount you are pre-approved for and any stipulations that come along with that.

Pre-Approval Benefits:

  • Shows that you are capable of purchasing the property
  • Allows you to make an offer as soon as you find the house you love
  • Most sellers request one before accepting an offer, and they are required for all REO properties

It is not a very complicated process to get started. Most lenders will be able to take your information over the phone or online.  Before you call or submit an application, make sure you do your research. It is not a good idea to send your information to a bunch of lenders and see what you get back. This can negatively effect your ability to get a mortgage. Check out their rates, give them a call and ask them about the process and find the lender that will give you the best rates and will help you get through the loan process smoothly.

What Is a Pre-Qualification?

While these terms are sometimes used interchangeably, a pre qualification is different than a pre approval.  A pre-qualification is typically not as in-depth of a look into your ability to qualify for a mortgage, and doesn't require the income and other documentation that a pre-approval does.

Pro's of a pre-qualification:

  • Can let you know approximately what price range you should be looking in.
  • typically easier as they don't require the in depth documentation

Con's of a Pre-Qualification:

  • Not as accurate of a estimate on what you can afford
  • May not qualify for the house you want when a deeper look into your situation is made
  • Does not make as strong an offer when against a pre-approval in a multiple offer situation on a home
  • Relies on your information vs a credit check and income documents to establish credit worthiness and their may be things you didn't realize pertaining to your credit report or type of income.

This is a good first step in the process of looking for a home, and it doesn't hurt to get one from a lender to see where you should start looking. Also depending on the lender they may use the terms interchangeably so it is always best to talk to the lender and find out more information about their process and what they do.

Mortgage types and what you need to know:

  • Conventional Mortgage- This type of mortgage is the most common type of home loan. These loans usually have the best interest rates, and require good credit and at least 10% down payment, sometimes more.  Conventional mortgages are normally 15 or 30 year loans or "interest only" when you pay nothing towards the principal amount in your payment.

"Interest only" loans  may have a slightly lower monthly payment but you are not paying off the loan balance when you make your payments.

FHA Mortgages-  These loans as sometimes referred to as first time buyers loans, but are actually available to anyone. Down payment requirements for these loans are lower, typically  are 3.5%, and they can be more flexible with lower credit scores than a conventional mortgage.

Interest rates are not as low for FHA loans vs. a Conventional loan, but qualifying for the loan is easier. Take a look here to see the top 7 things you need to know about FHA Home Loans.

An FHA Mortgage are what most people consider a "first time buyers loan". Not all lender are able to offer them so if this is what you want to do make sure the lender you choose can make this type of loan.

VA Loans- These loans are available to veterans and carry some other stipulations in order to qualify. Not all lenders will be able to write these types of mortgages. You can find out more about VA loans here in our post "Zero Down, Does It really exist?"

USDA Rural Housing Loan- This type of mortgage is only available in certain areas and towns, but the definition of "rural" is more flexible than you think.  These loans have special restrictions on what homes qualify and where they can be used but they may be a great option if the home qualifies. You can find out more details in our post "Zero Down, Does It really exist?"

ARM or Adjustable Rate Mortgage- These loan types may start out with a lower interest rate but will change after 1, 2 or 5 years and most lily upward! ARM's got may home owners into trouble when their interest rates shot up faster than they expected. It is always a good idea to talk to your lender about the benefits and risks involved with this type of loan.

203K Rehab Loans- These loans allow you to finance large expenses involved with fixing up a home that is need of help.These loans require some extra steps so make sure you talk to you agent and lender about the process before you decide to embark on this journey. You can find out more details about what to expect in our post "How does a 203k Loan Work?"

Mortgage Insurance- Okay, this isn't a mortgage type, but it is something that you need to know about! If you are putting less than 20% down on a home, you will be required to have PMI or Private Mortgage Insurance. This  protects the lender in case you default on the loan and stop making payments. The cost will vary depending on the loan type so be sure to ask your lender  about it so you know exactly what the costs are. When you get 20% equity in your home, contact your lender to find out how you can get rid of the PMI. this will save you money every month on your payments and allow you to pay more towards your loan!

 

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