If you think that deciding to purchase a home was a tough one, wait until you see what’s next! The very first step in the process involves revealing your finances to strangers and then waiting to see if what you’ve shown is acceptable enough to be given a loan for hundreds of thousands of dollars.
That’s pretty scary stuff, right? Fortunately, it doesn’t have to be. There’s a process to follow when applying for a mortgage and the first part of it involves shopping carefully for a lender to give you the loan to buy your house.
Where to find a mortgage lender
Mortgages are available from banks, credit unions, savings and loans institutions, private mortgage companies and individual mortgage brokers. Mortgage brokers are unlike the banks and credit unions in one important respect. The banks offer only their own loan products, whereas brokers work with multiple institutions and have access to an array of products. They are not beholden to any one lender and can shop around for a loan product from different institutions that might fit your particular circumstances.
There are a variety of loan types such as FHA loans, VA loans for US military veterans, conventional loans, home rehabilitation loans and many more. These different loan types can work for a variety of personal situations. The best way to narrow down the choices is to get referrals from your real estate agent, friends, neighbors and family. Personally, I like to give my buyers the names of two or three lenders to calI and speak with. It gives them the chance to interview the lenders and compare what they have to offer.
Meeting with the Lender
In order to qualify for the loan, it is important to be completely honest with your lender about your personal finances. They will verify everything you tell them anyway, so you might as well be honest and give them your entire financial picture. You should also be clear about how much cash you have on hand for your down payment, closing costs and other expenses related to the purchase. In addition they will pull your credit and ask for your financial documents such as IRS tax documents, pay stubs, bank statements etc. It is a great idea to have all these documents lined up when you first start thinking about buying a house. Based on the financial information you provide, your lender will prequalify you for a certain loan amount. And with that letter in hand, you and your real estate agent can go house-hunting.
Points
In this era of higher interest rates, ‘points’ have once again become a part of the borrowing lingo. You may be advised by your lender to pay for points, so it is a good idea to understand what it means. Some first-time borrowers can get confused by the term but you don’t have to. Below is the easiest-to-understand explanation I’ve found:
“Points are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can, in turn, lower your monthly mortgage payments. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).”
See how easy that is? If only everyone in the real estate industry explained concepts so clearly!
The Fees
The list of fees (included in your closing costs) can be lengthy and somewhat confusing. Do not be afraid to ask your lender to explain them to you. Some of the fees are negotiable, and here’s the Consumer Financial Protection Bureau to walk you through the process.
In 2015, the federal government decided to make getting a mortgage a little less complicated and easier to understand by the general public. “The Know Before You Owe” rule was intended to make mortgage disclosure forms clearer, simpler and easier to understand for homebuyers by combining several forms and statutory disclosure requirements into two forms – the Loan Estimate form and the Closing Disclosure.
The Loan Estimate – You will receive this within three days of the submission of your loan application. This form includes all the facts and figures having to do with the loan that you discussed with the lender. The figures, however, are not set in stone but they will give you a rough estimate to compare against those you receive from other lenders.
The Closing Disclosure – At least three business days before closing your lender is required to send you the Closing Disclosure. Yes, it looks very much like the estimate but these figures are set in stone unless you dispute them.
You have three days to peruse the form and compare it to the estimate. Have questions? Call your lender immediately to get the answers. Remember, you are about to close on the loan ― time is of the essence.
If all goes well you’ll sign a stack of papers and be handed the keys to your new home. Congratulations!
