Getting your finances in order is one of the most important steps when buying a home. Good credit means a better loan with a better interest rate, which means you can afford more house. The first step is to make sure your credit is in order and then to make a budget based on your income to debt ratio. The lender (a broker or bank loan officer) will then take you through the pre-approval process, and then depending on what you can afford, will give you a loan. There are many types of loans – Adjustable rate, FHA, and more. It’s up to you to determine which type of loan is best for you.
How much can you afford?
Monthly gross income, credit, credit history, and the down payment amount are all factors in how much you will qualify for. To understand how much you can afford, many use what’s called a debt-to-income ratio. In general, your monthly mortgage payment, including principal, interest and taxes should not exceed 28% of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense. This is often called the front-end ratio. This information varies and you should consult a licensed loan officer to confirm it’s accuracy.
The back-end ratio includes things such as car payments, previous debt, child support, credit cards, student loans and condo fees. This number should not exceed 36% of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.
Once you've narrowed the lender field to a short list of finalists, it's time to compare their offers.
10 key questions to ask your loan officer Here are the
10 key questions to ask at application time to help you find the best overall mortgage loan. If you have already selected a lender and are ready to apply, make sure you have the answers to these questions first.
1. What is the interest rate on this mortgage? To determine exactly what you'll pay over the term of the loan, you need to know the rate. Rates change quickly, and if your credit is less than perfect, you may not be offered the lender's lowest figure. To effectively compare different lenders' programs, ask for the annual percentage rate (APR) of the mortgage interest, which is generally higher than the initial quoted rate because it includes some fees. But beware: the APR found in advertisements can be misleading. Mortgage lenders don't always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points and fees may end up comparing apples to oranges.
2. How many discount and origination points will I pay? Lenders may charge prepaid mortgage interest points to lower your interest rate or other points that have no benefit to you at all. Find out how many you'll be expected to pay and which kind of points they will be.
3. What are the closing costs? Mortgages come with fees for various services provided by lenders and other parties involved in the transaction. You want to know what those fees will be as early as possible. Lenders are required to provide a written good-faith estimate of closing costs within three days of receiving a loan application.
4. When can I lock the interest rate, and what will it cost me to do so? Your interest rate might fluctuate between the time you apply and closing. To prevent it from going up, you may want to lock the rate, and even points, for a specified period. Ask your lender if lock fees apply. Also, research what the experts are expecting rates to do.
5. Is there a prepayment penalty on this loan? There may be a prepayment penalty on your loan. Some penalties are 1 percent of the loan amount, others are equal to six months' interest, some apply only when you refinance or reduce the principal balance by more than 20 percent, and some kick in if you sell your home. Find out the duration of any penalty period and how the penalty is calculated. Some lenders offer lower interest rates to buyers who accept prepayment penalties.
6. What is the minimum down payment required for this loan? The rate and terms of your loan will be based on a down payment figure, typically 5 percent to 20 percent of the buy price. If you can put more money down, you may be able to lower your rate and improve your terms; if you come up short, you may be required to get mortgage insurance.
7. What are the qualifying guidelines for this loan? These requirements relate to your income, employment, assets, liabilities and credit history. First-time homebuyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans. 8. What documents will I have to provide? Most lenders will require proof of income and assets before approving your loan, and may require other documents as well. Buyers with excellent credit may qualify for a no-documentation or "nodoc" loan, but they can expect to pay a hefty down payment and higher interest rate.
9. How long will it take to process my loan application? The answer will depend on a number of variables. When the loan business is brisk, underwriters get backed up, verification takes longer, appraisals move slower and other bottlenecks develop along the loan pipeline. Lenders may say two weeks, but 30 to 45 days is probably more realistic in most cases. You'll need their best guess to determine how long to lock in your loan.
10. What might delay approval of my loan? If you provide the lender with complete, accurate information, the loan process should run smoothly. If the underwriter discovers credit problems, however, there could be delays. Make sure you notify your lender if you change jobs, increase or decrease your salary, incur additional debt or change marital status between the time you submit an application and the time the loan is funded. Put these 10 questions to your leading candidates and compare their answers. The results should lead you toward the mortgage lender that is right for you.
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