Step 1: Find Out How Much You Can Borrow
The first step in obtaining a new refinance or purchase home loan is to determine how much money you can borrow. If you’re planning on purchasing a home you should determine how much home you can afford even before you begin looking. By answering a few simple pre-qualification questions, we can calculate your buying power.
You may also choose to get fully pre-approved for a home loan which requires verification of your income, credit, assets and liabilities. It is highly recommended that you get fully pre-approved before you start looking for your new home so you:
- Look for homes within your pre-approved price range.
- Be in a strong position when negotiating with the home seller (seller knows your loan is already approved and you’re a solid buyer).
- Close your loan faster becuase we already have the loan documentation needed to submit to the lender’s underwriter.
What are LTV and Debt-to-Income Ratios?
The LTV (also known as Loan-To-Value ratio) is the maximum percentage amount of loan that a lender is willing to accept in lending on your refinance or purchase. Lenders usually lend a higher percentage of the value, even up to 100%, to creditworthy and strong borrowers. Lenders also take into consideration the maximum amount of loan your ratio of monthly debt payments (such as auto loans, credit cards, and personal loans) compared to your gross income. Rule of thumb states that your monthly payments should not be greater than 1/3 of your gross monthly income. Borrowers with high DTI ratios usually need to pay a higher down payment percentage in order to qualify for a lower Loan-to-Value ratio.
FICO™ Credit Score
FICO™ Credit Scores are used by all home loan lenders in their credit lending decision. It is a quantified measurement of creditworthiness of an individual borrower, which is derived from various math models created by Fair Isaac and Company. FICO™ scores reflect credit risk of the individual in comparison with that of general population. It is based on various credit reporting factors including your past payment history, your total amount outstanding debt, the length of credit history per trade line, and type of credit lines you have established. When you begin shopping around for a new home loan, when a lender runs your credit report it may affect your credit score. It’s recommended that you authorize the lender or broker to run your credit report only after you have chosen to apply for a home loan through their company.
Self Employed Borrowers
Self-employed borrowers often find there are greater hurdles to borrowing than an employed W-2 borrrower. For conventional home loan lenders the problem with lending money to a self-employed person is documenting their actual income. Applicants with W-2 jobs can provide home lenders with their paystubs, and lenders can verify the information through the borrower’s employer. When you don’t have traditional employment records, lenders must rely on the borrower’s income tax returns, which they typically require for 2 years.
Source of Down Payment
Home Loan lenders expect borrowers to have sufficient cash on-hand for the down payment, cash reserves, and other closing fees payable at the time of closing the loan. Usually, down payment requirements are made with funds from the borrowers. If a borrower does not have the down payment required they may receive “gift funds” from an acceptable donor along with a signed letter stating that the gift funds do not have to be paid back to the borrower.
Step 2: Select the Right Loan Program
Home loans come in many shapes and sizes. Deciding which home loan makes the most sense for you means understanding the benefits of each loan type. Whether you are buying a home doing a purchase or refinancing an existing home, there are 2 basic types
of home loans. Each has different reasons you’d choose them.
1) Fixed Rate Mortgage
Fixed rate mortgages usually have longer loan terms lasting 15 or 30 years. The interest rate and monthly payments remain the same for the term of the home loan. You would select a fixed home loan when you:
- Plan to live in home more than 7 years,
- Like the stability of a fixed principal and interest payment,
- Don’t want to run the risk of future payment increases with a ARM loan, and
- Think your income and spending will stay the same in the near future.
2) Adjustable Rate Mortgage
An adjustable Rate Mortgages (also called and ARM loan) also typically lasts for 15 or 30 years, just like a fixed rate loan. But during those years, the interest rate on the home loan changes and may go up, or down. That means you monthly payment may increase or decrease. You would select an AMR loan when you:
- You plan to stay in your house less than 5 years,
- Don’t mind having your monthly mortgage payment change (up or down),
- You’re comfortable with the risk of a payment increase in future, and
- Think your income will probably increase in the future.
By carefully considering the above loan term factors and seeking our advice, you should be able to select the home loan that matches your current needs, as well as your future goals.
Step 3: Apply For a Loan
Step 4: Begin Loan Processing
Although lenders conform to standards set by government agencies, loan approval guidelines vary depending on the terms of each loan. In general, approval is based on two factors: your ability and willingness to repay the loan and the value of the property.
Once your loan application has been received we will start the loan approval process immediately. Your loan processor will verify all of the information you have given. If any discrepancies are found, either the processor or your loan officer will troubleshoot to straighten them out. This information includes:
Is your income sufficient to cover monthly payments? Industry guidelines are used to evaluate your income and your debts.
What is your ability to repay debts when due? Your credit report is reviewed to determine the type and terms of previous loans. Any lapses or delays in payment are considered and must be explained.
Do you have the funds necessary to make the down payment and pay closing costs?
Is there sufficient value in the property? The property is appraised to determine market value. Location and zoning play a part in the evaluation.
In some cases, additional documentation might be required before making a final determination regarding your loan approval.
In order to improve your chances of getting a loan approval:
1. Fill out your loan application completely. You may use our online forms to expedite the process.
2. Respond promptly to any requests for additional documentation especially if your rate is locked or if your loan is to close by a certain date.
3. Do not move money into or from your bank accounts without a paper trail. If you are receiving money from friends, family or other relatives, please prepare a gift letter and contact us.
4. Do not make any major purchases until your loan is closed. Purchases cause your debts to increase and might have an adverse effect on your current application.
5. Do not go out of town around your loan’s closing date. If you plan to be out of town, you may want to sign a Power of Attorney.
Step 5: Close Your Loan
After your home loan is approved by underwriting, you are ready to sign the final loan documents (aka “Go to Closing”). You must review the loan documents prior to signing to ensure the interest rate quoted and loan terms are what you were promised. Also, verify that you and any other borrower’s names and address on the closing documents are accurate. The signing normally takes place using of a notary public to witness your signatures.
There are also several closing fees associated with obtaining a home loan and transferring property ownership which you will be expected to pay at closing. Bring a cashiers check or have your funds wired for the down payment and closing costs based on your lenders and title company instructions (if required). Personal checks are normally not accepted at time of closing.
Your home loan will normally “fund” shortly after you have signed the loan documents. On owner occupied refinance loan transactions federal law requires that you have 3 days to review the documents before your loan transaction can close.