Once you’ve decided to buy a new home, there are a number of things you need to do before looking at houses. In order to make an offer on a home, you need to be pre-approved by a mortgage company for the amount of your offer or higher. Whether or not you can get pre-approved for the loan amount you need will be partially based on your credit rating. Checking your credit score, and correcting any mistakes, is an important first step in getting the best interest rate on the mortgage for your new home.
The three credit bureaus are required to provide individuals a free copy of their credit score once every 12 months. Visit www.annualcreditreport.com to view your credit score and to get information on how to file a dispute if you find a mistake. Taking care of any mistakes in your credit score before applying for a loan or looking for a home will save time and help you move through the process much more quickly, without any unpleasant surprises.
Once you have your credit report, and have fixed any errors, it’s time to shop for a loan. First and foremost, you must determine how your mortgage payment will fit your current budget and, to some extent, your future obligations 15 to 30 years down the road. Lenders are apt to put your loan application in the best light and qualify you for as much as they are willing to lend, which can be more than you can afford. It’s up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month.
Along with your mortgage payment, don’t forget to include related insurance, taxes, homeowner association dues and any other costs rolled into the mortgage payment. Use the McKee Homes loan calculator to get an estimate of your monthly payments including mortgage, insurance, and taxes. It’s not accurate to the penny, but will give you an approximate monthly payment based on the loan information you enter in the input fields.
There are many different types of loans available so it’s a good idea to know which type of loan will work best for you.
Conventional Mortgage. This is the most commonly used type and usually has the best rates. You’ll typically need at least 10% of the purchase price for a down payment and good credit. A conventional loan can be for 15 or 30 years.
FHA Mortgage. Thought of as the first time home loan program but is actually available to anyone and is more forgiving of lower credit scores. Includes a government charged funding fee of 1.75% which must be paid up-front. This amount goes back onto the loan amount after the buyer makes a 3.5% down payment. There is also a 1.25% annual fee for mortgage insurance on this loan. The interest rates are not as attractive as a conventional mortgage, but qualifying for the loan isn’t as tough either. Not all lenders can offer FHA Mortgages.
VA Loan. Zero down payment loan. You must be an active duty military service member or a veteran to qualify and a certificate of eligibility will need to be granted. VA loans include an upfront charge of 2.15% VA Funding Fee for first time use and 3.3% VA funding fee for multiple use.
USDA Rural Housing Loan. Zero down payment loan. The USDA mortgage loan can only be used in designated areas and towns, but their definition of rural is fairly flexible. You will probably need to ask your lender if a particular home or area qualifies for a USDA loan.
Adjustable Rate Mortgage (ARM). These have rates that start out lower than the current rates, but can change after one, two, or five years – usually upward! Many home owners got into trouble when their rates went up faster than expected on their adjustable rate loan.
When you are ready to shop for a loan you can choose between direct lenders and mortgage brokers.
Direct lenders have money to lend and make the final decision on your application. Brokers are intermediaries who, like you, have many lenders from which to choose. Lenders have a limited number of in-house loans available. Brokers can shop many lenders for each lender’s available loans. McKee Homes’ preferred lender is SunTrust Mortgage, Inc. who provides excellent home financing services, competitive pricing, and local processing and decision-making.
In addition to choosing the source of your loan, you’ll also have to check on loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal and others. Ask your lender for a list of all the fees and terms of any loan you are considering so that you know all the costs and make intelligent comparisons between loans. Download our First-Time Home Buyers overview for a step-by-step guide to the mortgage process.
Once you have chosen a lender, they will supply you with a list of all the documents you must submit in order to secure the loan. They will ask for information such as your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses, etc.). The lender will run a credit check to determine your credit status, but you will have to supply additional documentation such as paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation. If the lender deems you creditworthy, they will likely hire a professional appraisal to make sure the value of the home you wish to buy matches the asking price.
Knowing the process involved in obtaining a home loan, can help you be prepared, so when you find the home of your dreams, you won’t miss out on the opportunity to put in an offer and get the loan you need to finance your new home.