From Qualifying for a Home Loan to Understanding your Monthly Payments
Whether it's your first home or you're a seasoned veteran in the real estate marketplace, the home loan process may seem like a daunting task to undertake, but it doesn't have to be difficult or confusing. Understanding the steps and terminology of the home loan process will make it much easier for you.
Table of Contents
Steps of the home loan process:
Here's a look at the home loan process and what it all means for you as a home buyer:
How do I qualify for a home loan?
The first step in the home loan process is qualifying for a loan. When qualifying for a home loan, there are several factors lenders take into consideration when determining how much money they can afford to lend you. Many people hold a misconception that the only thing lenders check is your credit score, and that a poor credit score means you'll never qualify for a decent, affordable loan. While your credit score and history are reviewed, other factors also affect the amount of money you'll qualify for in a home loan.
One of the bigger factors when qualifying for a home loan is income stability. Lenders want to know that you're making enough money to pay back your loan, and that your income is stable and consistent. Without proof of income stability, lenders will not feel comfortable offering you a significant home loan. Alongside income stability, your current debt is factored into the equation. Even with stable, consistent income, if the amount of debt you owe is great, it may be difficult to qualify for a home loan in the amount you want.
The next important factor in qualifying for a home loan is your credit. Your credit score and your credit history will be taken into account to determine whether a home loan is feasible for both yourself and your lender. The higher your credit score, the more a lender will feel comfortable lending you, and the better interest rates your loan will carry. Credit scores come as a surprise for many people; many assume their credit score is less than it actually is. However, even with a less-than-perfect credit score or credit history, programs are in place to help people improve their credit scores and get the home loans they need. Your credit score will determine the type of home loan that can be offered to you.
The third factor considered is the loan value related to the value of the house. Depending on the type of loan you are offered, there is a predetermined minimum necessary as a down payment. Your down payment will be calculated based on the value of the house and the type of loan you are receiving as a result of your credit score.
How much can I qualify for?
Before applying for a home loan, you might wonder how much you can qualify for. Often, the amount a lender will qualify you for is far greater than what you may feel comfortable paying on a new loan. When the numbers are determined, lenders generally tell you the maximum that you are eligible to receive based on your income, credit score and history, and the value of the home.
After learning what you can qualify for, it's easy to work your way down to a loan that you feel more comfortable paying. For example, we work with you to discuss your budget and plan for any future debts that you may incur. You could buy a house using the maximum level loan available to you, but if you later add a car payment or collect some unexpected medical bills or other debt, you'll be stuck struggling with a loan you're not able to afford, making you extremely financially unstable. While the amount you can qualify for may look much larger than you'd expect, make sure that you're comfortable with the terms of the loan before accepting it and purchasing your home.
The types of loans available to you will differ depending on your credit score. Lower scores direct lenders to certain types of loans, while higher credit scores direct lenders to different types. People will use tools, like Credit Karma, to get an idea of what their credit score looks like. Although it is a widely used tool, the score generated is often times not the actual score of the borrower. To receive an official credit score, you will want to use a mortgage professional to help you through that process.
When we determine your credit score, we use the information from three different credit bureaus merged into a single report to make it simpler and more efficient to determine the types of loans available to you. We can also provide guidance to help you reach a higher score (and a better type of loan) if your score happens to fall just below a specific qualification number. These actions may include paying balances down, canceling or closing old accounts, or simply waiting a few months for your credit score to replenish itself.
Even if you think it will be impossible for you to receive a home loan, there are options available to help many people. Often, people will believe their credit score is one number, but when we pull their scores from the three bureaus we use and merge the information into a single report, their score is higher than they expected. If it is lower than what we require for the home loan you need, we have tools and assistance to help you reach the correct score. If you do qualify for a home loan, we can provide guidance to help you increase your score to allow for loans with better interest rates and terms.
Misconceptions about credit and qualification abound in the world of home loans, and generally the only thing stopping people from getting a home loan is themselves. Forget the misconceptions and see what you can qualify for!
Determine the amount of money you can feasibly spend on your home. Take a look at your income and whatever recurring bills or debts you currently possess to figure out how much you feel comfortable spending. If you're not happy with the budget available to you or the properties offered that fit your budget, maybe it's best to wait a while and work on saving up your money until you can afford something that suits your needs and wants better.
We offer several online calculators to help you crunch the numbers and determine what loan amounts are the most affordable for you. If your budget isn't where you'd like it to be, don't fret! Take some time to determine what you can do now to increase your available budget. Figure out if there are any loans or debts you can pay off now to keep some extra monthly income in your pocket, such as car loans or credit card debt. Get caught up on your open accounts and save every bit you can, and your budget will grow in no time!
3. Loan Options
As we mentioned before, there are different types of loans that may be available to you, depending on your credit, income, and the value of the home you'd like to purchase. The Department of Housing and Urban Development and the Department of Agriculture and Rural Development both have handbooks available online to help you learn about and understand the different types of home loans, and what each type means.
The most common loans offered to home buyers include conventional loans, FHA loans, VA loans, and USDA loans. Understanding the types of loans will help better prepare you for qualifying and accepting a home loan. However, these handbooks are full of a lot of information and can be confusing. Don't be afraid to ask for help and advice in understanding the different loan options. For a quick, easy explanation of the most common loan types, check out this video from Phil Zastrow, our operations manager.
Loan Type Resources:
- FHA Handbook
- USDA Handbooks
- USDA Resource Page (Single Family Housing Guaranteed)
- USDA Income Limits
4. Down Payment
When you qualify for a home loan, understand what your down payment will be. The down payment is the amount of money you'll have to provide out-of-pocket to acquire your loan, and your specific down payment will vary from others depending on several factors.
What will I need to put down for a down payment?
The amount you'll need to provide as a down payment differs depending on the type of loan you're receiving. For instance, most typical conventional loans require a downpayment of 3-5%, while FHA loans have a minimum requirement of 3.5%. VA and USDA loans offer options for no down payment, but these loans carry restrictions that may make them unavailable to you.
What are my options for paying the down payment?
If the down payment on your loan sounds too high, consider some other options. For example, many home buyers, whether first-time, move-up, or repeat, receive financial gifts to pay their down payments. Using a gift as a down payment requires some leg-work, so make sure you understand what you need to do to properly accept and use the gift as a down payment; otherwise, your loan may be declined. For more information on using a financial gift to cover your down payment, check out this article from Realtor.com.
If receiving a financial gift is simply not an option, talk with your lender about some other options available to lower your down payment. For example, short term loans often require lower down payments.
When determining the cost of your down payment, keep closing costs in mind. Unless there is a seller credit explained on the purchase agreement, closing costs will also be included in the amount you'll need to have available for the closing.
5. Interest Rates
Like down payments, interest rates vary depending on a number of factors, such as the type of loan and the term of the loan that you're accepting.
How are interest rates calculated?
When determining the interest rate of your loan, we'll factor in your credit score, the type of loan, the loan amount, your income, and the loan value guidelines. After setting the rate (known as the "par rate") based on these factors, we have several options to help you reach an interest rate that's affordable and comfortable for you. We can lock in the rate, allow you to pay "points" to reach a better rate, or obtain credit from the lender if they choose a higher rate; we are never set with one single rate option, and there are always different rates available based on your individual situation.
6. Monthly Payment
Monthly payments also vary depending on a number of factors unique to your loan and situation. When we determine your monthly payment, we factor in:
- the loan's principal and interest
- house insurance (1/12 of the yearly amount)
- property taxes (1/12 of the yearly amount)
- mortgage insurance (if less than 205 due as a down payment)
- flood insurance (if the home is deemed to be in a flood zone)
- condo fees, homeowner’s association fees, etc. (taken into account but generally paid outside of the monthly home loan payment)
7. Choosing a Lender
When finding someone to finance your mortgage, it's absolutely crucial to choose a lender you're comfortable with. A home loan is generally not a particularly small amount of money, and the term length of your loan may be several years. Choosing the wrong lender may create issues down the road, and you may be trapped in a loan with a lender you aren't happy with.
Why choose Lend Smart instead of a big bank?
At Lend Smart, we work with you to get the perfect home loan based on your individual needs and situation. We have the ability to use 15-20 different investors and lenders to qualify you for a home loan. Some lenders are better for clients with perfect credit, some work with those who have lower credit scores or that fall in the middle. Some lenders may work better for clients who are self-employed. We have access to a multitude of lenders and investors to help find the perfect home loan for you.
When working with a big bank, your options may be more limited in this regard. If a bank doesn't like your specific file or can't work with you to find the perfect loan, they may not have other options for you and turn you down outright. With us, however, if one lender doesn't like your credit score, income, etc. and turns you down, we can send your file to a different lender to approve your loan. With us, you'll always have options.
Lend Smart is a local lender, and we're proud to help our clients at any time in any way possible. With big banks, you'll only be able to contact your loan officer during specific hours and on specific days. We give you our personal cell phone numbers, so if you have questions or concerns outside of our normal business hours, you can always contact us.