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The first time you are getting a loan, it can be confusing what all is needed and how to start. This outlines the steps to getting a loan from picking a lender to closing.
1) Picking a Lender.
Comparing lenders can be daunting. All the components of a loan including the interest rate, origination fee, points, and other miscellaneous fees are hard to sort through. Fortunately, you can get the Annual Percentage Rate (APR) from each lender for each of their programs. The APR is basically an interest rate calculated with the base interest rate plus all the closing costs, so basically, if you have zero closing costs, then the interest rate and the APR will be equal.
Zero closing costs would be great, but it is typical to have an origination fee of about 1%, credit application fees, document preparation fees, and the appraisal fee. When comparing rates, the lower the interest rate, the less interest you will pay over the life of the loan. When comparing the APRs, you are comparing the interest rate plus the closing costs. This is helpful because some quoted interest rates may seem low until you realize that the lender is charging you a point (1% of sales price) for that better rate. If you are comparing APRs as well as interest rates, the APR will show as being much higher than anything without points.
There are of course other reasons to weigh in when choosing a lender. Local lenders tend to know the local real estate market better and are familiar with the state laws for lending. Having a responsive and reliable lender is always invaluable because you are going to count on your lender to get you through the underwriting process in a timely manner.
2) Deciding which type of loan is best for you.
To figure out what loan program fits your needs, a lender is a helpful guide. You can speak with one to get a grip on what programs might work and then call around for rates for that program from other lenders. In general, the different type of loans are: 30 year fixed, 15 year fixed, and ARMs (adjustable rate mortgages).
The fixed rate loan programs have the monthly payments fixed. The ARMs are typically fixed for a certain amount of time and then adjusts along with the prime. For example, a 5 year ARM has a fixed interest rate (and hence monthly payments) for 5 years and adjusts for the remainder of the loan life. Most of the ARMs are amortized over 30 years, which means the monthly payments are calculated as if you are paying the loan off in 30 years. So, in the 5-year ARM case, the interest rate will adjust for 25 years. Most people refinance or sell the property before the 5 years are up so that they do not have to deal with the adjusting interest rate.
3) Submitting your mortgage application.
Once you have picked you
r lender, you will submit your loan application. This is usually personal information including your social security number, salary, recurring debt, and savings. They pull your credit score and figure out your debt-to-income ratio. With these two pieces of information, they can find which loan programs you qaulify for and which might work best for you.
4) Getting a Pre-Approval Letter
Once you have submitted your mortgage application, you can get pre-approved. This will provide you with a letter from your lender that basically says your debt-to-income ratio and credit score qualify you for the loan program. This letter is helpful to have when you put in offers to show that you are a strong, qualified buyer. Many listing agents will advise their sellers to not even accept an offer unless it is accompanied by a letter, especially in good markets, where as a seller, you do not want to tie up a property with an unqualified buyer.
5) Processing Your Application
At this point, the application has been just the buyer’s word, and now the lender will need to proof of all the income and debts you had provided, so they will ask for documentation like bank statements and w2s. These statements are verified.
6) Underwriting the Loan and Final Approval
At this point, you have found a home and want to get the loan. The lender will need to send the house contract and your documentation to underwriting to basically give final approval. As well, the lender will have an appraisal on the property to assess its value. This ensures to them that if for some reason the property goes into foreclosure and they end up owning the property, that the value will still cover the amount owed on the loan. The lender will also need to approve the survey. This is to ensure there are no major encroachments on the property. And in addition, they sometimes require flood certificates or wood-destroying insect certificates, depending on where you are located in the country. These again ensure the property is not a disaster waiting to happen. These are all precautions the lender takes before allowing funding on a property because they want to not get stuck with a worthless asset, but it is also another assurance for the buyer that the property is decent.
7) Funding and Closing
Once the sellers and buyers have gone to closing and signed all the papers, including the Settlement Statement showing all the fees and loan amounts, this paperwork is submitted back to the lender. The lender will then double check everything was signed and give a final funding number. This number allows the funds from the lender to be released and the property is funded! The process is complete and you can now enjoy your home, just remember to make your monthly mortgage payments.
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