The following information provided is for the purpose of provoking thought and careful consideration about various financing options available. It is merely an explanation of the options to consider when purchasing a home or investment property.
Getting pre-approved is smart and it is the first step that you should take once you decide to purchase a home. All you are really doing is getting credit approved. You’ll have less stress and more confidence while home shopping because you’ll know exactly your price range. Also, you’ll have better negotiating strength with the seller when you can show them a pre-approval letter from the lender.
There are no hard and fast rules to answer all of the many questions you’ll be faced with. That’s because everyone’s situation is unique. What’s best for you will probably be different than the family down the block. The only way to know for sure what is in your best interests is to take a good look at your overall financial picture and your goals for the future. These are mandatory questions that you need to ask the loan officer before you decide to do business with them.
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Shop around and talk to several different lenders*. Take notes and compare what each has to offer. Costs can vary substantially from one lender to another… so do your homework! There is a lot that you should know before you rush down to your local bank. If you don’t know what you want, the loan company may put you into what they want for you… which may not be in line with your goals.
*Myth: You Can Hurt Your Credit Score By Shopping Around for the best Rates. This particular myth might have an ulterior motive. After all, if you don't know what the competition is offering, how will you know if you got a good deal?
Creators of scoring formulas know that smart consumers want to shop around for the best rates, particularly on autos and homes. That's why the FICO formula lumps all mortgage and auto related inquiries made within 14 days and counts it as one inquiry.
If you do your shopping for a mortgage in a concentrated period of time and get the loan before the 30 day window is up, you should be fine. Even if it takes a little longer than thirty days to get final loan approval, as sometimes happens with mortgages, you should be be okay if your rate-shopping was confind to a two week period.
What happens if you have bad credit?
Damaged credit is no longer the end of the world for homeowners and homebuyers. In fact, the majority of Americans have some adverse entry on their credit report of some sort, usually late payments or minor collections.
Negative and adverse credit entries do not stay on a person’s credit report forever. Normal consumer debt information such as late payments, past delinquencies, collection accounts and general credit information may remain on a credit report for only seven years.
There are non-conforming loan programs available that are more lenient on credit. In fact, some of these programs will refinance a borrower out of a current foreclosure or bankruptcy. Non-conforming loans are sold to the secondary mortgage market, but through private conduits, willing to accept high-risk borrowers-at a price.
Although most mortgages’ for bad credit borrowers are 30-year loans. The astute borrower should never consider them as long-term loans. They are only 30-year loans because the monthly payments are lower than those of a short-term mortgage.
Remember that as you continue to make timely payments on your new mortgage and other accounts. Your credit grade improves every year. Someone who may be considered D-credit today may be considered C-credit next year. That can mean a $100-$300 difference on the average monthly payment.
By refinancing as your credit grade improves, you can lower your interest rate and monthly payments. When your credit grade improves to A- or B+, you may qualify for the excellent interest rates offered by conforming conventional loans.
The Loan Process
Whether you walk into a bank, apply for your loan on the Internet, or a loan officer meets you in your home, all lenders require an actual application. The lender will want to verify certain information about the borrowers and will require additional information on the property e.g. an appraisal.
Borrower information will include verification of income and employment, assets, and credit history of the applicants. Some of this information will be provided by you, as part of your application process, example, you will be requested to provide copies of tax returns for 2 years, current pay stubs, and bank statements for asset verification.
If for whatever reason you cannot provide income, employment or assets on a convention mortgage you maybe be able to qualify for a "No Income Verification" Loan (NIV). This is just another alternative in financing.
During the processing your credit, assets, income and other determinants are checked and compiled. At the end, your loan is either approved with conditions or approved without conditions or declined.
When all conditions are met, your loan documents are drawn up and forwarded to the place of closing.
Do not make any adverse changes to your financial "picture" during this delicate time between approval and when funds are dispersed. Believing the "approval'' is the final stage or that the lender won't find out about the change in debt or income or other factors can lead to real headaches.
Often a lender obtains another credit report and may call your employer one last time before funding the loan.
The Interest Rate Lock Process
Sometime before your loan documents are drafted, you will "lock in" a interest rate for your loan with the mortgage source. The purpose of the lock is to allow you a loan at the "locked-in'' rate if the loan closes before the lock period expires, even if rates are higher at the time of funding.
Take into consideration the shorter the time period between the actual lock and the closing the cheaper the interest rate or points. It may cost more to get an extended lock rate.
Bankers versus Brokers
Some mortgage sources are direct lenders such as banks and mortgage bankers with retail establishments. Usually banks or mortgage banks will be competitive in one or several products, and will encourage their loan officers to sell these products to the consumer.
Direct lenders are captive to their own products. They will not provide unbiased advice or selection, since by doing so they will possibly risk losing your loan to the company whose product truly provides you the most value.
Brokers on the other hand can sell a variety of products, from multiple sources, and can be objective in their recommendations. Brokers represent a number of lenders and offer these lender's products through a wholesale arrangement.
If your loan is declined for whatever reason, you will need to begin the process again with another source. With a mortgage broker, you have another chance if one lender doesn't approve your loan. Which one should you use? Depends on your circumstances.
Understanding the loan process can minimize the likelihood of frustration during the loan transaction. Remember to work with a source that has established itself as a company with integrity that cares for the borrower throughout the experience.
Mortgage Qualification Calculator
This calculator will help you determine how much money you qualify to borrow. The results are informal. You will be subject to a credit approval from your financial institution taking into consideration existing debt load, amount of down payment, income and other variables.
Mortgage Payment Calculator & Amortization Table
This calculator will help you determine what your mortgage payments will be based on purchase price, interest rate and mortgage term, as well as other factors. The amortization table shows what the interest and principal payments will be over the term of the mortgage.
