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Purchasing Your Home – What You Need To Know Before Applying
Buying a home and getting a mortgage is one of the most significant and important financial decisions you will make. It can be a great investment, but it is important that you buy the right house and get the right mortgage for you. Getting the right mortgage can save you thousands of dollars and lots of headaches. Buying a house and getting a mortgage can seem like an overwhelming process. Before you apply there are some things you should know.
Information Lenders Will Require
- Property Information – Your lender will need to know which sort of property you are looking at buying. For example, they will need to know whether the home you’re looking at is a condominium, a townhouse, or a detached single family home. They will also need to know if you will be using the home for your primary residence, a vacation home or a rental property.
- Income Information – Your lender will need to see proof of all your sources of monthly income including your salary, any commission or bonuses you may receive, etc. You may be asked to provide up to two years of W-2 forms, Federal Tax Returns, two recent pay stubs and other documentation depending on your income sources.
- Asset Information – Your lender will want to properly assess your overall financial situation and you will be asked to provide information about your assets. They will want to know about your investment accounts, bank accounts, automobiles, etc.
- Credit Information – Your lender will want to know about your current debts to properly evaluate your credit risk. They will want to know who your current creditors are, balances owed and the monthly payment of each account.
- Personal Information – Your lender will need some personal information to process your application. You will need to provide your lender with a copy of your driver’s license or similar documentation to prove your identity.
Your Credit Rating
When you apply for a mortgage your lender will check your credit report. A credit report shows a history of your payment history. It shows personal information, closed and active accounts, balance history, payment history, minimum payment amounts, credit line limits, public records such as tax liens and accounts sent for collection and who has pulled your credit report. The information in the credit report is provided by your creditors.
You will want to check your credit report before shopping for a home or applying
for a mortgage, because it plays a large role in whether or not you get approved
and what your interest rate will be. There are three major credit bureaus: Equifax,
Transunion and Experian. Each report may differ, which is why it is important
to check all three.
It is important to verify the report is accurate and to be aware of any negative items. You can access your credit report annually for free at www.annualcreditreport.com
Your lender uses your credit report to help determine your ability to pay back your loan. Accounts with late payments over 30 days, unpaid collection accounts, and accounts that are currently past due all will negatively impact your ability to get approved and your interest rate if you get approved. Before you apply, you will want to clear up as many of these negative items as possible. For past due and collection accounts simply pay the amounts that are past due or make arrangements to get current. If you have any inaccuracies on the information reported, file a statement with each credit bureau, as well as contacting the individual creditor.
What You Can Afford
One of the first things that your lender will ask is how much you are looking to borrow. It is important to know what kind of monthly payment you can afford before you apply or even begin looking at potential homes. Traditionally, your debt-to-income ratio should not exceed 36-38%. You can calculate your current ratio by adding up all of your monthly payments and dividing them by your gross monthly income. This ratio is a good guide to helping you ensure that you purchase a house you can afford.
Type of Mortgage
There are two basic types of mortgage loans: Fixed Rate Mortgage and Adjustable
Rate Mortgage loans. The Fixed Rate Mortgage offers a fixed rate and payment
amount for the term of the loan. You pay the same monthly mortgage payment from
the first month to the last month of the loan. The interest rate is fixed and
does not rise or fall with economic conditions. An Adjustable Rate Mortgage,
also known as a Variable Rate Mortgage, features an interest rate that rises
or falls along with the direction of interest rates. When the interest rate rises,
your monthly payment goes up. If the interest rate goes down, your monthly payment
goes down. Any time you consider an Adjustable Rate Mortgage it is important
to calculate what the monthly payment would be if the interest rate were to rise
to its highest possible level.
Down Payment Amount
The down payment on a home is a very important part of the mortgage loan. It is always a good idea to make the highest possible down payment when purchasing a home. The higher the down payment, the less you will have to borrow and the lower your monthly payments will be. Another reason to have at least a 20% down payment is it will allow you to avoid having to pay Private Mortgage Insurance premiums. Private Mortgage Insurance is designed to protect the lender in the event of a default by the buyer.
Get Pre-Approved Before Shopping for a Home
Getting pre-approved for your mortgage will make the home buying process much smoother and easier. It is important to get your pre-approval in writing. Real estate agents will be more willing to show you the houses you want to see and the sellers will take you more seriously if you have your pre-approval letter in your possession when you make an offer.
What to Expect Once You Apply
The lenders at New Frontier Bank have many years of experience and will walk you through each step of the process. Once you have submitted your completed application, the lender will discuss rate lock options with you. You can lock your rate upon loan approval or you can float the rate if you expect rates to go down. Your lender will send you a good faith estimate of costs related to the loan and purchase of the home along with other required disclosures. Read the disclosures carefully and call your lender if you have any questions. Sign and return the forms along with any other requested information to complete your file.
Upon loan approval, your lender will have an appraisal ordered on the property, order title insurance and a flood letter. Depending on occupancy rules of the municipality the home is located, you will need various inspections such as gas, radon, etc. Traditionally your real estate agent will assist you in this process. Generally a whole home inspection is at the discretion of the buyer, however it is strongly recommended.
As the buyer you will need to shop for homeowner’s insurance and if applicable, flood hazard insurance. Your lender will let you know if flood hazard insurance is required. The first year’s premium is due at or before loan closing. You will need to provide your lender with your insurance agent’s name and phone number. Your will also need to provide your insurance agent with the name and phone number of your lender.
Finally, ensure that your down payment funds are available prior to closing, change utilities into your name a day or two before closing and complete change of address forms so they are ready to be submitted after closing!