As someone who has experience in the lending industry, I want to share some helpful tips that can set someone up for success when it comes to getting a home loan.
1. Know what your lender needs to start the preapproval process and the loan process. Your lender should provide you with a checklist of items that you need to gather and bring to the lender in order to start either of these two processes. If they don’t give you a checklist, then ask for one, even if that means the lender needs to hand write each item down for you. For a preapproval, most lenders are going to ask for a loan application, authorization for release of credit information, income verification, asset verification, and identification. After you have the preapproval the key item that your lender needs to start the loan is going to be the Purchase and Sale Agreement also known as the PSA. Your lender is also going to ask you who you want to use for your homeowner’s insurance and who you want to use for your title company, if it’s not already listed on the PSA. There will be several other questions your lender should ask you too, such as if you want escrows collected, which is the property taxes, homeowner’s insurance, and PMI (if applicable).
2. Know when you get to lock in the rate. Different lenders lock in the rate at different times. Some lenders lock in the rate at the time that you get a preapproval. Some lenders lock in the rate at the time that you apply for the loan. Other lenders might lock in the rate at the time the loan is approved by the underwriter. Also, know the length of time the rate is locked in.
3. Plan to have an in-depth conversation with your lender about what you want to do and your particular situation. There could be things that your lender needs to know about you in order to avoid time consuming mistakes later. For example, are you currently going through a divorce? Is a trust going to be involved with the purchase? Where are the funds for the down payment coming from? Where are you looking for a home? What type of home are you looking for? These are examples of things that you need to discuss with your lender before making an offer on a home. You need to be open and honest with your lender so they can make sure that any issues are addressed in the beginning of the loan process and don’t cause problems later.
4. If you know that you’re going to be looking to buy a home in a few months then get prequalified. The prequalification is a little different for different lenders. Most times what prequalification means is that you talk to your potential lender about where you’re at with your gross monthly income, monthly liabilities, and funds available for down payment and closing costs. With this information, your prospective lender can determine your housing ratio and debt ratio and will then be able to tell you approximately how much you could qualify for without needing to pull your credit. This is usually more of a simple, non-formal, conversation. Once the lender knows your financial situation, they can give you a loan estimate, which will show you approximately how much closing costs are going to be, how much you will need to bring in at closing for your down payment, what your loan payment is, and what your estimated property taxes, homeowner’s insurance and if applicable, PMI is going to be.
5. Be prepared financially before you get a home loan. One aspect of being prepared is to pay off as much debt as you can prior to applying for a home loan. Payoff and close credit cards, pay off the last little bit of that car loan, and get rid of as much debt as possible. There are several reasons that I suggest doing this. The first reason why I suggest this is buying a home with a lot of other debt is going to stress you financially. And I don’t want anyone to be in this kind position. I’ve heard over and over that the number one reason for divorce is money problems. If you want to stay out of money problems don’t get yourself into more debt than you can handle. The second reason I suggest paying off as much debt as you can prior to buying a house is because I’ve seen time and time again people not be able to qualify for the loan they needed to buy the house they wanted. In most cases that I have witnessed this, the borrower had recently purchased a new vehicle and had a huge car payment. The car payment pushed their debt ratio too high to qualify for the loan. In these cases the borrower had to pass up buying the home they wanted and put home buying on hold while they paid down debt. So, let me repeat myself, don’t put yourself in a poor financial position by taking on too much debt! Another way to be prepared is make sure that you have an emergency fund of 3 to 6 months of expenses in a savings account prior to getting a home loan. This, again, is to make sure you have a financial buffer incase of unexpected expense, which, if you’re buying a home, I can guarantee you, you’re going to have plenty of these. And keep in mind that your emergency funds should be different than you down payment funds. In other words, don’t wipe out your emergency funds to use as your down payment on your home.
6. Know what PMI is, if it applies to you, and when it will go away. PMI stands for private mortgage insurance. It’s basically an insurance that is paid by the borrower, typically on a monthly basis, that protects the lender in case of default on the loan. PMI is usually required on loans where the borrower is putting less than 20% down. Most of the time PMI goes away once the LTV reaches 80%. LTV means loan-to-value, in other words, the ratio of loan amount to the original value of the home. This value could either be the appraised value or the sales price. The lender typically goes with whichever of these two values is lower. Also, an option that might be availed to you is getting a new appraisal and then basing the LTV off of the new appraisal in lieu of the old value. A borrower would do this because the new appraisal could value the home much higher than the old value. Make sure to ask a lot of questions to your lender if PMI applies to you so that you know the exact details.
7. Ask your lender what the fees are for additional payments to principal or paying off your loan. You don’t want a lender who is going to charge you a fee every time you make an additional payment to principal. I recommend paying off your home as fast as you reasonably can. Paying off your mortgage early can help you to put more money away for retirement and education costs for your children. If you want a really great system for paying off your mortgage early you should check out the Speedpay Strategy that I created to help people pay off their mortgages faster.
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