Choosing Your Financing

Purchasing a home can be a very exciting experience. At times, however, it can also be very stressful if the financial part of the transaction is not under control. Having a clearer understanding about the lending process will give you a greater peace of mind as you pursue funding options and make decisions about your home purchase. The subject of lending naturally raises questions such as “How do I go about borrowing money?” “What determines whether or not I get financed?” and “What types of loans are available?” The answers to these questions and others will help you prepare to make one of the largest financial commitments in your lifetime.

Where Do I Start?

One of the most important prerequisites to buying a home is to determine how much you can afford and how much money you can borrow from a lending institution. The amount of money that you have saved toward the purchase of a new home will affect both of these outcomes. A good lender or real estate agent will help you determine how much you can afford. Choosing your lender and securing your financing options is often referred to as pre-approval. Sitting down with a lender to determine how much you can afford and what your financing options are will save you both time and frustration. Not only will this process help you determine how much actual money is need for such items as a down-payment and other related costs, but it will also give you greater negotiating leverage with the seller. This can be especially true in situations where the seller has received multiple offers for the home. Your pre-qualification status may allow you to make an offer sooner than other buyers that have not been pre-qualified. In fact, many realtors will not show homes until a buyer becomes pre-approved as they do not want to waste a seller's time in the event that the buyer has trouble securing financing.

What Types Of Loans Are Available?

Home mortgage loans are classified into conventional and government insured loans. Each has its own down payment and interest rate requirements. Down payments for a conventional loan can be as little as two or three percent. Some interest rates may be higher for loans made with smaller down payments. In addition, putting down less than twenty percent may require you to purchase Private Mortgage Insurance (PMI) which protects the lender in the event of a foreclosure. Government insured loans are broken down into two categories: Federal Home Administration (FHA) and Veteran Administration (VA). Each of these has its own set of restrictions or limits and down payment requirements can vary from zero to five percent.

What Do I Have To Know About Interest Rates?

Interest rates can be either fixed or variable. A fixed rate is self-explanatory and means that the rate will not change for the life of the loan. This guarantees that the interest portion of your monthly house payment will stay the same from month to month. This is often a preferred choice, especially when interest rates are low, because it locks in the interest rate. Some borrowers prefer variable rate mortgages (ARM's or Balloons). The advantage of a variable rate mortgage is that the interest is typically lower at the front end of the loan which lowers the total monthly payment during the early years of the loan. The disadvantage is that as the interest rate fluctuates from year to year (depending on the terms of the mortgage) so can the house payments. While interest rates can and do drop at times, more often than not borrowers experience an increase in the interest rate during the first few years to compensate for the low initial rate. Fortunately there are usually caps that determine how much the rate can increase. Consult your local lending officer to learn more about interest rates and loan packages.

How Do I Choose A Lender?

One of the most common home buying mistakes has to do with the selection of a lender and mortgage. In fact, research shows that the failure to obtain a suitable loan package ranks as one of the top three buying mistakes that consumers often make when buying a home. This mistake can cost hundreds or even thousands of dollars. Therefore, finding a mortgage company that meets your needs is a crucial step in becoming a successful and responsible homeowner. Here are some suggestions that can help you avoid a costly mistake:

Don't Rush Don't rush into signing the bottom line on a loan without looking around to see what kinds of loan packages are available. Different lenders offer different loan packages. Choose a lender who will help you find a loan that will meet your needs. It may be helpful to check with your realtor, friends, the Better Business Bureau or others you think will give you trusted advice on finding a lender.

Contact A Broker Contact a mortgage broker as well as a lender. Brokers often provide rates and mortgages options from a variety of lenders and can often help locate the best possible rate and plan to meet your needs. One thing to keep in mind with both brokers and lenders is who will ultimately service the loan.

Get A Good Faith Estimate

Get a written good-faith estimate from more than one lender or broker. A GFE provides you with an overall estimate of costs that you can expect to incur when closing on your new home. Obtaining good-faith estimates from a few different lenders will allow you to objectively compare one home loan estimate over another.

Review Your Estimates Review your good faith estimates carefully. Keep in mind that the costs of rates, commissions, discount points and other factors affect the total outcome of the loan amount. Different lenders and brokers charge different fees such as origination fees. Similarly, advertised interest rates may be dependent upon paying points. Ask poignant questions when speaking to the loan originator to ensure that you are aware of and understand all the fees and charges associated with your loan.

What Can I Expect When I Visit A Lender?

The first thing you can expect is the loan application. As part of this process you may be asked to provide additional information such as W-2's, bank account information, credit card billing statements, proof of employment, etc. A lender assumes a risk by extending credit to a buyer. To minimize potential risk factors, they analyze your credit history. This gives them a better understanding of your ability to re-pay them after a loan is issued. If they uncover “red flags” they may opt to not offer you a loan to purchase you home. When analyzing credit history, lenders look for four main things: (1) the history of past credit (size and terms of past loans); (2) type of credit (real estate, auto, personal or other installments loans obtained in the past); (3) attitude toward credit (active accounts current, and recent bankruptcy or judgment); and (4) Lapses in employment or debt repayment (How many unexplained lapses are there, and for how long?) This information will help lenders develop a fair idea of just how you will handle your responsibilities once you have signed the contract for repaying the loan.