Things You Must Know Before Getting a Home Loan

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.

The views, thoughts, and opinions expressed in the author’s blog, podcast, posts, and other media belong solely to the author, and not necessarily to the author’s employers, affiliated organizations, associates, clients, or any other group or individual.

Pay Off Your Mortgage Faster with The Speedpay Strategy

I’m excited to tell you guys about a helpful tool called the Speedpay Strategy. It helps you to layout a plan for making additional payments to principle on your mortgage (or really any kind of loan). Its purpose is to help you pay off your mortgage faster than if you just made the minimum payment. Let’s take a look at what this tool is, when you should use it and what you should do before you use it.

Download the Speedpay Strategy in Excel.

What exactly is the Speedpay Strategy and how does it work? It’s a payment plan that uses increasing payments to principal that are based off of customized data that you input into the Speedpay Strategy Excel Worksheet. The Speedpay Strategy creates a schedule where each year the amount of what you pay directly to principal increase by a percentage of the original principal and interest payment. This allows you to anticipate how much faster your mortgage will be paid off and how much your monthly payment will need to be in order to reach your desired payoff date.

Why use increasing payments? One of the best parts about the Speedpay Strategy is the increasing payments. The reason this is a nice feature is because a person’s income tends to rise over time. Think about it, for most people, they will likely make more money next year than they did this year. So, it only makes sense to increase your mortgage payment, if you have a little more income, in order to pay your mortgage off faster.

I created a template for the Speedpay Strategy using Microsoft Excel and this template is available for free download on my website, buildwithkeegan.com. You can find it in the “Success Tools” section. As a side note, feel free to customize the Speedpay Strategy Template to fit your specific needs. To use the template from my website you don’t need to be a wiz at Microsoft Excel. First, simply download the template from my website and open the file. Please note, you will need the program Microsoft Excel in order to use the template. Second, enter in your loan information in the yellow boxes at the top left part of the screen. In this section, you will need to enter your original loan amount, which is the amount of loan that you started with when you either bought your home or when you refinanced. The next amount you need to enter is the current principal balance of your home loan. You can find this amount by either looking online, if you have online access to your mortgage, or by simply looking at the most recent mortgage statement available. Then, enter the amount of the original term. The original term is the number of months that you had at the beginning of the loan to pay back your loan. For instance, if you had a thirty year loan then the original term would be 360 months. Next, input the interest rate on your loan and the principal and interest payment amount of your loan. As side note, if you have a mortgage that requires bimonthly or biweekly payments then feel free to modify the Speedpay Strategy Template to accommodate your situation.

Once you’ve entered in your loan information, it’s time for the fun part! Enter in the percentage amount by which you would like your principle payment to increase each year. You can adjust this percentage up or down to meet your level of financial capabilities. You can also adjust this percentage to show you how long it will take to pay your loan off in a given amount of time. For example, say you want to pay your home loan off in 10 years. You would simply input different percentages until the loan balance is paid off within the 10 years as shown on the amortization schedule within the Speedpay Strategy Template. You can tell when the loan is paid off by looking at the “Loan Balance” column. When the loan balance hits negative and it is red, you know the loan is paid off.

If you want to put a little extra money to go to just the principal in addition to the Speedpay percentage then you can add that in the Speedpay Boost box. Whatever amount you enter will be added to the monthly principal payment amount for the entire life of the loan. For example, let’s say that you get a home loan and you know, right when you get the loan, that you want to put an extra 50 bucks towards the principal each month. Well then, you would enter the $50 in the Speedpay Boost box and this will show you paying $50 per month, every month, for the life of the loan, to just the principal.

Once you get all of the numbers entered into the Speedpay Strategy Template play with the Speedpay percentage and the Speedpay Boost amounts until you achieve a payment amount and a loan payoff date that you are comfortable with.

Next, let’s look at some recommendations on when you should use and should not use the Speedpay Strategy.

First, if you do not yet have an emergency fund of 3 to 6 months, you need to establish this prior to making additional payments towards your home loan. An emergency fund is crucial to keeping you from falling into high interest consumer debt. Most people who are living paycheck to paycheck use a credit cards, personal loans, and payday loans, in case of an emergency. This is a big mistake. In lieu of using short-term debt for an emergency, build up an emergency fund so you can pay cash for an emergency if you need to.

My second recommendation is that you eliminate any other consumer debt before using the Speedpay Strategy. After you’ve eliminated your consumer debt then you can start making additional payments to the principle on your mortgage. I recommend doing this because the rate on other credit items such as: credit cards, car payments, student loans, etc. typically have a higher interest rate than home mortgages.

My third recommendation is that you make sure to contribute to your retirement plan prior to making additional payments to your home loan principal. If you can contribute to your retirement plan and afterwards you still have room in your budget then great, do the Speedpay Strategy. If you are not contributing to your retirement plan, then you need to do this before starting the Speedpay Strategy.

Lastly, if you expect to live in your home for less than two years I suggest putting the Speedpay Strategy on hold while you put away money for the down payment, closing costs and moving costs on your next home.