The initial step in securing a loan involves determining the amount you can borrow. This is particularly crucial when buying a home, as it's advisable to establish your affordable price range before beginning your property search. By providing answers to a few straightforward questions, we can calculate your purchasing capacity based on standard lender criteria.
You can also choose to undergo a pre-approval process, which entails verifying your income, credit history, assets, and liabilities. It is strongly recommended to obtain pre-approval before commencing your house hunt for several reasons:
Here's more information on Pre-Qualification:
Loan-to-Value (LTV) and Debt-to-Income Ratios: The Loan-to-Value ratio (LTV) represents the maximum amount a lender is willing to finance in relation to your purchase. Lenders often extend a higher percentage of the property's value, sometimes even up to 100%, to borrowers with good credit. Another key factor in determining the loan amount for a borrower is the ratio of monthly debt payments (such as car loans and personal loans) to income. As a general guideline, your monthly mortgage payments should not exceed one-third of your gross monthly income. Consequently, individuals with high debt-to-income ratios may need to make a larger down payment to meet a lower LTV ratio.
FICO™ Credit Score: FICO™ Credit Scores are widely employed by lenders to assess an individual's creditworthiness. These scores are calculated using mathematical models developed by Fair Isaac and Company in San Rafael, California. FICO™ scores gauge an individual's credit risk in comparison to the broader population. They consider factors such as payment history, total borrowing amount, credit history length, recent credit inquiries, and types of credit established. When you're in the market for a new credit card or loan, every time a lender checks your credit report, it can have a negative impact on your credit score. Therefore, it's advisable to authorize a lender or broker to access your credit report only after you've decided to apply for a loan through them.
Self-Employed Borrowers: Self-employed individuals often encounter more challenges when seeking loans compared to those who are employed. A key issue for conventional lenders is verifying the income of self-employed applicants. Employed individuals can provide lenders with pay stubs, which can be easily confirmed through their employers. In the absence of such verifiable employment records, lenders typically rely on income tax returns, often requiring two years' worth of returns.
Source of Down Payment: Lenders expect borrowers to contribute sufficient cash for the down payment and other fees associated with loan funding. Typically, down payments are funded from the savings of borrowers. In cases where borrowers don't have the required down payment, they may receive "gift funds" from an acceptable donor, along with a signed letter stating that the gifted funds are not expected to be repaid.
Fixed-rate mortgages typically come with terms of either 15 or 30 years. Over the duration of the loan, both the interest rate and monthly payments remain constant. Opt for this type of loan when:
Adjustable Rate Mortgages, often referred to as ARMs, also come with terms of 15 or 30 years, like fixed-rate mortgages. However, during the loan term, the interest rate can fluctuate, causing monthly payments to rise or fall. Choose this type of loan when:
By carefully evaluating these factors and seeking professional guidance, you can select the loan that aligns with your current financial situation and your future financial aspirations.
While lenders adhere to government-mandated standards, the specific criteria for loan approval can vary depending on the terms of each loan. In essence, loan approval hinges on two key factors: your capacity and willingness to repay the loan and the value of the property in question.
Once we receive your loan application, we initiate the loan approval process promptly. Our loan processor will meticulously verify all the information you've provided. Should any inconsistencies arise, either the processor or your loan officer will work to resolve them. This information encompasses the following:
Income and Employment Verification: We assess whether your income is adequate to cover your monthly payments. Industry guidelines are employed to evaluate your income and existing debts.
Credit Evaluation: We analyze your ability to repay debts on time by reviewing your credit report. We consider the types and terms of previous loans and scrutinize any payment delays or lapses, which require explanations.
Asset Assessment: We ascertain whether you possess the necessary funds for the down payment and closing costs.
Property Appraisal: We determine if the property holds sufficient value by conducting a market appraisal. Factors like location and zoning also influence this evaluation.
Additional Documentation: In certain cases, we may request further documentation before reaching a final decision on your loan approval.
To enhance your likelihood of obtaining loan approval:
Once your loan has received approval, you'll move on to the final stage, which involves signing the official loan documents. It's crucial to carefully review these documents before signing to ensure they align with the interest rate and loan terms you were promised. Additionally, verify that your name and address on the loan documents are accurate. This signing typically takes place in the presence of a notary public.
Furthermore, there are several fees associated with securing a mortgage and transferring property ownership, and you will be expected to cover these costs during the closing process. It's advisable to bring a cashier's check for the down payment and closing expenses, as personal checks are generally not accepted. Additionally, you'll need to present your homeowner's insurance policy and any other necessary documents, such as flood insurance, along with proof of payment.
The closing of your loan typically occurs shortly after you've signed the loan documents. For owner-occupied refinance loan transactions, federal law mandates a 3-day waiting period to review the documents before the loan transaction can be finalized.