The Home Loan Process
Most people want a home to call their own where they don't have to worry about eviction notices. However, home ownership has its perks considering the various misconceptions around mortgages. In this article, we are going to unpack the mortgage process and demystify the wrong ideologies to make that home ownership idea a reality.
By definition, a mortgage is a loan that a bank or financial institution advances to an individual to enable them to cover the cost of a home. This agreement, which is usually made in writing is a legal contract that shows that over an agreed period you will pay back the money with some interest on top. Mortgages in the United States are advances as commercial paper which is given as securities they are offered in different sizes depending on the borrower's credit score. The interest rates in the US market are usually fixed, but the packages vary depending on the financial institution you want to work with since the lending market is very competitive.
TIPS FOR APPLYING FOR MORTGAGE
- Know your credit worth. When applying for a mortgage, your credit score is a very significant factor. Before applying, it’s good to check your credit score for errors or unpaid accounts. The vital point to consider is your credit utilization ratio which is the amount of credit you use in comparison to your available credit limit. Do not just assume all is well, take your time and get that credit score and you can ask your realtor to help or your local banker if you are not conversant with the terminologies.
- Evaluate your assets. The idea zero-down payment is not a reality in the current economic conditions. At least not with the serious lenders. Thus as a potential homeowner, you need to have some cash saved to make a down payment. Different lenders have different rates and criteria of down payments. Do not settle for the first lender you get to ask around, and you might find a better deal.
- Get your documents in order. Most lenders ask for a few main pieces of paperwork. This includes the W-2 from past years, recent pay-stubs and a bank statement from your local bank.
- Know your worth. Even before the loan officer does their calculation, you have a tentative approximation of what you can afford. You merely need to do your math and know which class of house you can comfortably maintain financially. The general rule of thumb is the front end ratio (which is your monthly household expenditure) should not go past 28% of income and back-end ratio (which includes all debts and expenses) should not go past 36%.
Here the loan officer will require the person applying for a loan to provide all the necessary documentation such as:
- A credit report
- Pay stubs
- Federal tax return
- Two-months most recent bank statement reports.
Using this data, the loan officer can calculate the type of loan you can afford. A typical mortgage takes within 30 to 60 days. Therefore if you were looking to purchase a home earlier you need to start the process earlier.
After the pre-approval process, the loan officer then needs to carry out a pre-qualification which involves him asking you questions about your income and debt.
FINAL MORTGAGE APPROVAL
After the advancing institution has established that you are in a position to repay the mortgage, then you go no to the application stage where you fill out a form detailing your information. After the application form is processed, the bank will send you a loan estimate which outlines the details of your loan.
The estimate contains all the terms and unique features that might be attached to the loan such as any penalties on defaulting and the estimated costs of tax and insurance. After analyzing the document and when you feel comfortable with the terms, you then notify the loan officer your intent to proceed with the application.
After notifying the loan officer to proceed the underwriting phase takes place. This involves scrutiny of the borrower's documents and the property being purchased to ensure they meet the threshold set by the institution. In this section, the underwriter can request for 'special terms' to be fit for the mortgage to be advanced or give it a green-light. When the underwriter clears your application, then the final step is to close the deal by signing the paperwork, and the actual funding takes places a day or two after signing the papers.