The What The How and The Where of Home Loans
So you are planning to purchase a new home, here is what you need to know. Buying a home will be one of the largest financial decision of your life because homes can cost hundreds of thousands or more. For this reason, purchasing a home requires a home loan because most people do not have the money upfront. What is a home loan?
Definition: What is a home loan?
A home loan, which is a contract, is a type of loan that is used to purchase a primary residence or an investment property. The deals are between a borrower and a lending institution financial such as a bank, mortgage and financial institution. With the home loan, the borrower transfers the title to the lender and the lender return it when the loan has been repaid. The home loan has a term of 10, 15, or 30 years.
A mortgage has the lowest interest rates of any other debt. Because of the low-interest rate and the terms of home loans, more people can get own a home. With the interest so low great deals are available to potential homeowners.
Interest rates are important because they can determine your monthly payment. They can be fixed, adjustable and a hybrid. In a fixed-rate mortgage, the interest rate does not adjust; they remain the same throughout the mortgage.
In an adjustable-rate home mortgage, the interest rate can change throughout the term of the mortgage. However, they are generally lower than the fixed-rate mortgage because the borrower bears the risk of higher interest rates.
What are home loan rates?
Home loan interest rate is a percentage of the borrower principle charge by the mortgage company to pay for borrowing the money. Fortunately for prospective homeowners, mortgage loan rates are lowest in decades. The cheapest home loan is beneficial because that means lower monthly payments. The current rates are hovering at or below 4% for a 30-year fixed mortgage and hovering below 4% for an a15-year fixed-rate mortgage. The 10-year and the 20-year provide lucrative interest rate as well. If you can lock-in any of these rates, you will be fortunate to have the cheapest home loan.
If you are a current mortgage holder, and you are looking to take advantage of the lower interest rates, a home modification is a great deal. A Loan Modification is a modification to an existing loan by reducing the interest rate or extending the term of the loan. There are popular government programs that allow homeowners whether you are in hardship or not to reduced their interest rate without refinancing. The program can take as little as 30 days to complete.
How do you get a home loan?
There is a step process in getting a home loan, and they are the following:
- Step 1: Choose your Lender
There many lenders available to meet your mortgage needs. It is important that you compare lenders. If you have a relationship with your local financial institution, that would be a great place to start.
- Step 2: Mortgage Pre-Approval
In the Pre-Approval process, the lender will check your credit report and your credit scores. They will also review your income, your assets and your debts to determine if you are a viable candidate for a loan. The lender can also tell you how much they are willing to lend you, and they will issue a Pre-Approval Letter. This step is vital because it allows you to narrow your search and prevent you from wasting time seeing homes you can not afford.
Once you receive your pre-approval letter, you can choose a real estate agent from the top real estate agencies available. You give a copy of the Pre-Approval Letter to your real estate agent and can shop with confidence for your new home.
- Step 3: Loan Application
The next step in the mortgage process is the loan application. The loan application is pretty straightforward because of a standardized form, which is the Uniform Residential Loan Application (URLA) is used. The form can be be found online, and it can be filled out online with the help of your real estate agent. You can fill out your personal information, and your real estate agent can provide details about the property.
- Step 4: Mortgage Processing
Mortgage processing is an essential step in the process, and it may vary from lender to lender. Loan processors will collect and review a variety of documents which include your bank statements, tax records, W2s etc. The loan processor will verify your income, assets and employment. They will also order a credit report and a home appraisal to determine the value of the property.
- Step 5: Mortgage Underwriting
The underwriter is the key decision-maker in the mortgage approval process because they have the authority to approve or reject your loan. To predict your ability to repay the mortgage, the underwriter will focus on three C's of underwriting:
- Capacity. Do you have the income and resources to pay your debts and your mortgage?
- Credit. Do you have a good credit history which is evidenced by your credit scores and credit report?
- Collateral. Does the market value of the property have sufficient collateral for the loan?
If all the conditions are not met, but they can be met or resolved in a timely manner, the underwriter can issue a conditional approval. Once all requirements are met, final approval can be granted.
- Step 6: Mortgage Loan Approval and Closing
Once the mortgage underwriter is satisfied that all the guidelines and requirements have been met, they can clear to close. Before closing all loan documents are sent to the title company of your choice. You as the buyer and the seller must review all the materials, and this can be done online before Closing. At Closing, all the necessary documentation must be signed. At Closing, you will receive the closing disclosure. This document outlines the final details of the mortgage, such as the loan terms, the projected monthly payments, the fees and other closing costs.
Where can I get a home loan?
There are four types of financial institutions available for issuing mortgages, and they are the following.
- Banks and mortgage bankers. This is one of the most popular institutions for obtaining a home loan.
- Credit unions. Credit unions offer home loans only to their members. Their home loans have lower interest rates.
- Mortgage lenders. Mortgage lenders are popular as well, and they offer a variety of financial services, and they can shorten the time frame of obtaining a mortgage.
- Mortgage brokers. Mortgage brokers can give you access to more options, but they can give loan directly.
So now that you know a little about home loans, you can start your search. Good Luck