Confidently navigate this process
If you take preparations (discussed in the article Thinking About Buying Your First House?) before making the purchase, the process of buying your first house will be easier to handle. When first-time homebuyers reach the point of submitting an application for a mortgage loan, it’s critical to have knowledge. Use these pointers to make the most of the mortgage loan application process.
Think about obtaining a mortgage loan before looking for a home.
Prior to beginning your home search, being aware of your loan options will help you because it will indicate how much a lender is willing to loan you to purchase a home. You can use this information to target properties within your budget. You can obtain a preapproval for the loan when you locate a lender and mortgage that suit your needs. This will expedite the loan application process when the time comes to submit an offer on a property, as lenders will already be in possession of the majority of the data required to proceed with the loan.
While a mortgage preapproval and a loan application are similar, they differ significantly. A preapproval is when a lender gives you a commitment letter or other paperwork and says they will lend you a certain amount of money to buy a house, under certain terms. With a preapproval, you obtain a clear idea of how much money you can obtain to purchase a home without having to specify the exact house you wish to buy. To get a preapproval, you will have to provide documentation. Identifying documents (state-issued ID, such as a driver’s license or passport), pay stubs from the previous 60 days, two years’ worth of federal tax returns, bank account statements (checking and savings), and any investment account statements (including retirement accounts) from the most recent quarter are among the items that lenders typically request. By acquiring a credit report, the lender will also investigate your credit history. Preapprovals are typically valid for 60 to 90 days. You should still compare loans to make sure you are getting the best value, even if you are not required to formally apply for one if you have been preapproved for one. A mortgage preapproval differs from a mortgage prequalification in that the former merely provides you with an approximate idea of the loan amount and terms that a lender may be willing to offer you based on estimated financial data that you submit.
Find the mortgage that works best for you
There are many different types of mortgages to choose from, and an important aspect of the process is to choose the mortgage that works for you now and in the future. When shopping for a mortgage, consider the type of interest rate (fixed or adjustable) and whether a conventional loan or a government-guaranteed or insured loan is best for you.
The interest rate remains constant, which sets the fixed rate mortgage loan apart. This means that regardless of the length of the repayment period—for instance, 15 years or 30 years—your monthly principal and interest payment will remain the same. (Nevertheless, if you include property taxes and insurance in your monthly mortgage payment and those expenses fluctuate, your entire monthly payment may still vary.) However, with an adjustable rate mortgage (ARM), the interest rate varies on a regular basis (e.g., once a year), and as a result, your monthly payment will usually adjust accordingly. Compared to fixed rate mortgages, adjustable rate mortgages (ARMs) sometimes have lower starting interest rates. However, as rates rise, so do your payments.
Think about how long you want to live in the home you’re buying before choosing between an ARM and a fixed rate mortgage. Generally speaking, borrowers who want to sell their house soon are more likely to gain from a low-rate adjustable mortgage (ARM) than those who want to stay in their house for a long time. Yet, depending on other considerations, an ARM may be a wise option for some borrowers. Make sure to assess your ability to afford your ARM loan payments in the event that the interest rate rises to the maximum amount possible while you are still the home’s owner.
A traditional mortgage loan or a loan guaranteed or insured by the federal government are further options. Government-insured or guaranteed loans are available from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA). These loans may allow borrowers to make smaller down payments than for conventional loans and generally have more lenient requirements than conventional loans (such as the minimum credit score required for approval). However, depending on your credit history, down payment, and other factors, rates and fees for these loans could be higher than for conventional loans. But, you will have to pay for mortgage insurance, which is an additional expense that raises your monthly payments and safeguards the lender in the event that you don’t make your mortgage payments.
Additionally, there are lenders that provide balloon payment loans, hybrid mortgages, and interest-only loans. Usually, these loans have low initial payments that rise over time. Make sure you comprehend the terms of the loan and any associated risks before selecting one of these loans.
Once you’ve chosen a mortgage type, compare rates for your loan online or by obtaining quotes from several lenders. Even for the same type of loan, interest rates and fees differ between lenders, so compare rates and don’t be scared to try to negotiate these costs.
Visit Money Smart – Your Savings for ideas on how to save money using worksheets to help you plan to save.
Knowing the monthly payment and the interest rate of your loan is not enough; you need to understand the major other costs and other terms of the loan. When you apply for a mortgage, the lender must provide you with a document called the “Loan Estimate” within three business days of receiving your application. The Loan Estimate provides important information about the loan offered to you by the lender, including a summary of loan terms, estimated loan and closing costs, and additional information.
Moving forward with the loan
The Loan Estimate merely illustrates the loan terms the lender can provide you with if you choose to proceed with the loan; it does not constitute an approval of the loan. If you choose to move forward with the loan, you will need to notify the lender and can get a formal “lock-in” from them. A lock-in ensures that you will pay the rate that was agreed upon, the duration of the lock-in, and any other terms that you specifically negotiated, like the total amount of “points” (fees) that you will have to pay the lender for the loan. (Generally speaking, the interest rate decreases as you pay more points.) There can be a cost associated with fixing the loan rate. If so, ask if the fee is refunded at closing.
Additional documentation proving the source of your down payment funds, cash reserves to cover the first few months of mortgage payments, and documents particular to your situation may be requested while your loan application is being processed.
Closing the loan
Closing is the last stage in the process. At closing, youll be required to have the agreed-upon funds, which could be used for the closing costs (including the escrow deposit, which is money that is set aside for a couple of months of property tax and mortgage insurance payments) and the down payment. The closing costs vary, depending on the type of loan you choose, and property type, but could be 2% to 6% of the loan amount. These costs generally include appraisal fees, attorney fees, credit report fees, title search fees, and property inspection fees.
See the FDIC Affordable Mortgage Lending Guide for additional information on mortgages. Additionally, the Consumer Financial Protection Bureau website offers useful mortgage information.
CFPB Mortgage Key Terms
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What credit score do you need for a house loan?
Generally speaking, 620 is the minimum credit score required for most mortgages. However, compared to conventional fixed-rate loans and adjustable rate mortgages (ARMs), government-backed mortgages such as Federal Housing Administration (FHA) loans usually have less stringent credit requirements.
What is the easiest loan to get for a house?
When purchasing a home, buyers with low credit scores ought to take into account an FHA loan, which is guaranteed by the Federal Housing Administration (FHA). The most widely available government-backed loans are FHA loans. Contrary to popular belief, FHA loans are not directly funded by the government.
Is it hard to get approved for home loan?
Many people are shocked to learn that a decent credit score is sufficient to qualify for a mortgage instead of a perfect one. An FHA loan can be obtained even with a credit score as low as 580. Credit scores as low as 620 can be used to obtain conventional loans if you have a sizable enough down payment.
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