As a potential home buyer who has only recently considered investing in a property, it might be confusing to determine how you go about applying and getting accepted for a loan.
The process might seem difficult at first, but if you are prepared then you’ll know exactly what you’re doing so that you can save as much money during the process and end up with a great home.
You may have already started the home buying process and are ready to secure your first home.
This guide will teach you how to apply for a loan so that you understand the process that you’ll go through in order to purchase the home of your dreams.
You can either be prequalified or preapproved for a loan, but both of them are not equal when it comes to determining how much you’ll receive a loan for from the bank. Prequalification for a loan means that a lender has taken a look at your assets, liabilities, and level of income and comes up with an estimate on the amount of money that you can borrow.
Getting prepared by a lender means that you have actually applied for a loan. The lender will take a look at your financial documents such as the amount of money you have in your checking and savings accounts, as well as your other assets and any liabilities that you have in order to prove to the bank that you have the amount of money that you say you do.
During the preapproval process you’ll be interviewed by a loan officer or go through an interview process online while filling out an application for the mortgage loan.
Before you meet with a lender to kickstart the loan approval process, you should collect the appropriate paperwork. Some documents you’ll need include:
- Bank statements from the past three months
- All financial account statements
- The most recent pay stubs for you and your spouse or partner
- Tax return W-2s for the past two years if you’re employed
- Two years of tax returns and profit and loss statements for the year if you’re unemployed
- A gift letter if you are using money you received as a gift to buy a home
The nice thing about being preapproved for a home is that you’ll understand the exact amount that you can pay for a home. It’ll let you know what price range of properties you should look at with your real estate agent and guide you on your search.
Being prequalified isn’t enough to make you a serious potential home buyer. If you’re really curious about what kind of home you can afford and you’re ready to commit to purchasing a home, then you’ll prepare all of the critical documents listed above so that you can secure a mortgage loan.
While you apply for a loan there are some key decisions to make that end up influencing how much you pay for the home. It’s best to beginning getting informed on the different types of mortgages available as well as how you plan to finance your home. Make sure that you know ahead of time:
The type of mortgage you want. This is something you’ll want to consider before you are preapproved for a mortgage. There are 9 main types of mortgages to choose from, which depend on your current monthly income, what you expect your monthly income to be in the future, what debts you have, what assets you own, and many other factors. These other factors include how many points you want to pay upfront and if you’re willing to lock into a fixed rate or if you want to gamble that interest rates will continue to drop in the future.
There are many different options for financing a home which really depend on your unique situation. What you should really consider when applying for a loan is how long you think you’ll stay in your new home, and the amount of risk that you’re willing to take once you have the loan. What kind of risk taker are you? A low risk taker should choose a fixed loan, a moderate risk taker might prefer a two-step loan, and a high risk taker could find that adjustable-rate mortgage is the correct option. Your loan officer will go over all of your mortgage options with you and help you select the one that matches your level of risk and your current financial situation.
Do you want to float the rate or lock in? You have a time period which is known as a float option, that gives you more time to decide what interest rate you’re locked into. Because interest rates change a little bit everyday, if you feel like rates could go lower in the future, you have the option to wait and lock in a rate sometime before closing. If you take the risk to lock in a future rate instead of locking it in when you are preapproved for the loan then you might end up saving money if you target a lower rate. However, if you feel that interest rates are as low as they’ll go for awhile then you are best off locking in the rate when you apply for the loan.
You can determine how long you have before you lock in a rate. The lender will only allow you to accept the mortgage rate that they offer for a certain period of time, and the longer that you wait to lock in, the higher the interest rate you’ll end up paying. Lenders normally hold a rate for 30, 45, or 60 days, so make sure you coincide when you choose to lock in a rate with the amount of time it’s going to take you to close on the property that you’re interested in. The more time that you wait to lock in a loan, the longer you have to submit everything that you need to begin the loan process. If you decide to have a short lock in time then you have to turn in all of the necessary paperwork on time or risk losing out on your loan.
Mortgage lenders are protecting themselves by only allowing you to lock in a rate for a certain amount of time. Interest rates go up and down throughout an average day and it’s difficult to determine when the mortgage rate will increase or decrease. It’s a privilege to have a longer lock in rate time and the longer you wait the higher of a risk you become and therefore you’ll pay more if you want a long lock in time. Even if you are purchasing a new property that isn’t going to close in a year or even two years from now, you should still wait until you are closer to the 60 day mark before applying for a mortgage loan.
During the preapproval process you also should know how many points you are willing to pay. One point is one percentage point of the loan amount and the more you pay in cash upfront at the closing, the lower your interest rate on the home. Although it might be difficult to come up with that amount of cash upfront, you not only save with a lower interest rate, but the amount of money you end up paying is tax deductible on your income taxes for the year. If you choose to amortize your points by paying them over the life of the loan then you will end up paying more money over the life of the loan. Paying points means that you are able to buy down the loan, while saving money in the process.
While you are being preapproved for your loan, the lender will show you a good faith estimate, which details every fee that you are likely to pay while purchasing a home. Sometimes this number is very close to what you end up paying, however since it is only an estimate, it can also be very different from what you end up closing at. Have your real estate attorney take a look at all of the fees the bank shows you, and if anything seems incorrect you should be able to fight the cost.
Remember to get a copy of every document you sign so that you know what the agreement is between you and the lender. This will help you if you ever need to prove the documents that you signed and signifies that you agree with the contract. Before you sign a document, make sure that you understand it. If you don’t, have someone else look it over and make sure that it is in your best interest. Ask as many questions and take as much time as you need during the process, because this is a significant part of purchasing a home.
Once you have locked in a rate and signed all of your paperwork, then you are ready to close on your home! The home search can be a long process depending on the market and how selective you are while deciding on your new home. Congratulations on completing the necessary steps needed to secure a home loan!