Shopping for a home loan is like shopping for any other large purchase; you can save money if you take some time to look around for the best price. Different lenders can offer different loan programs, interest rates and loan fees and, as a lower interest rate can make a big difference in how much home you can afford. Talk with your Real Estate Agent and several lenders before you decide. Most lenders need three to six weeks for the whole loan approval process, so if you have a closing deadline, you'll want to make sure your lender can meet it.
What's in a Loan?
The mortgage amount is the amount of money you borrow from a lender to pay for your house. The payment includes:
- Principal-the repayment of the amount you actually borrowed.
- Interest payment to the lender for the money you've borrowed.
- Homeowners Insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards. (Required by lenders)
- Property tax: -- annual city/county taxes assessed on the property, divided by your annual number of mortgage payments.
- Mortgage Insurance Premium-required by HUD/FHA on all loans. Also required by conventional lenders if you put less than 20% down.
When a lender gives you a mortgage, the property itself acts as 'security' for the loan. This means that if you don't repay the loan, your lender can repossess and sell the property to get their money back. So before applying for a mortgage you need to be sure that you can afford the payments.
As you read about the different loan programs below, keep in mind you may want to consider a loan program to suit your goals-such as how long will you be in your new home? Washington, DC statistics show that people in this area move up or out within years 4-7. If you are being transferred to this area for a fixed amount of time (such as military/government), you may want to consider an ARM because the interest rate will be less. However, if you're going to be in your home for a long time (at least ten years), you probably want to consider a fixed product.
Most loans are for 30 years, although in today's marketplace 15 & 20-year loans are also available, and some lenders are offering 40 year fixed loans. During the life of the loan, you'll pay far more in interest than you will in principal-sometimes two to three times more. Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments, and in the final years, mostly principal. (See Mortgage Calculator).
To prepare you for shopping for your loan check out some of the common types of mortgages (See Choosing the right mortgage program ). Each has positive and negative aspects, depending on your income level, how long you plan to own the home, and other factors. Ask your Real Estate Agent or mortgage lender to explain each option before you make a decision on what type of mortgage loan is best for you. See also Various Mortgages.
As you think about applying for a home loan, you need to consider your personal finances. How much you earn versus how much you owe will likely determine how much a lender will allow you to borrow.
To figure the mortgage payment, the lender will begin by asking how much you want to borrow. The maximum loan amount will be determined by the value of the property and your personal financial condition. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80 or 90 percent, and will expect a down payment making up the difference. If the appraisal is below the asking price of the home and your down payment, the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, you may need a larger down payment to make up the difference between the price of the house and its appraised value. This rarely happens if you are working with a top notch Agent.
When you meet with a lender, he or she will need documentation pertaining to your personal finances—your earnings, your monthly expenses, and your debts—to help gauge your willingness and ability to repay the mortgage. It is a good idea for you to prepare for you meeting with a lender by determining your gross monthly income. This will include any regular and recurring income that you can document. Unfortunately, if you can't document the income or it doesn't show up on your tax return, you can't use it to qualify for a loan. However, you can use unearned sources of income such as alimony or lottery payoffs. And, if you own income-producing assets such as real estate or stocks, the income generated from these sources can be estimated and used in your calculation. If you have questions about your specific situation, any good Real Estate Agent or loan officer can review the rules.
Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. If it is revolving debt, like a credit card, use the minimum monthly payment for this calculation. If it is installment debt use the current monthly payment to calculate your debt load. You don't have to consider any debt that is scheduled to be paid off in less than six months. Add all this up and you will have what we call your monthly debt service.
In a nutshell, most lenders don't want you to take out a loan that will overload your ability to repay everybody you owe. Although every lender has slightly different formulas, here is a rough idea of how they look at the numbers.
When evaluating your projected mortgage payment and existing debt some lenders might use ratios such as "28 and 36" to determine whether you qualify for the loan. In the case of "28 and 36," the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): the monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application.
Depending on your individual situation, there may be more or less flexibility in the guidelines. For example, if you are able to buy the home while borrowing less than 80% of the home's value by making a large cash down payment, the qualifying ratios become less critical. Likewise, if a rich uncle is willing to cosign on the loan with you, lenders will be much less focused on the guidelines.
Remember that there are hundreds of loan programs available in today's lending market and every one of them has different guidelines. So don't be discouraged if your dream home seems out of reach, your Real Estate Agent and your lender is there to help you realize your goal.
If your application is turned down, federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given--you may be able to find answers or alternatives that will satisfy the institution’s lending standards. Even if that doesn’t happen, understanding fully why the loan was denied may improve your chances with the next lender you visit.
When you file your application, ask the lender how long the approval process will take. The time may vary depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It’s common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA loans may take longer.
