Securing a Home Loan
One of the most important decisions you can make when you buy a home is choosing a lender and a loan program that meets your unique financial needs.
Keep in mind that our affiliate, All American Home Mortgage, offers you a discount of $1,000 on appraisal and closing costs as well as best in class services and fee pre-qualification under the Big Commission Rebate Program.
Your lender can pre-approve you for a loan before you start your search for a new home. The benefits of being pre-approved include:
- You may uncover errors in your credit report, which you will be able to fix before you submit a formal loan application.
- You will learn how much you can afford to spend on a home, since we can tell you how much you are qualified to borrow.
- You will know approximately what your new loan payments will be when you complete your purchase.
- You will have a competitive advantage over other bidders who did not obtain pre-approval. All other things being equal, the seller will chose the offer from a buyer who demonstrates they have the ability to obtain financing and complete the purchase.
What is the difference between being pre-qualified and pre-approved for a loan?
Pre-qualification is the process of determining how much money you will be able to borrow when you buy a home. The lender will ask you how much you make and how much debt you are carrying, and calculate the amount of the mortgage for which you are likely to qualify. The lender is not committed to giving you the loan until you complete an application and the loan is reviewed.
Pre-approval is a more formal process, which includes submitting a completed application with supporting documentation describing your income, debt, assets and liabilities. The lender will verify your credit standing through one of the credit bureaus and give you a firm commitment for financing based on the review of your application.
What does it take to qualify for a loan?
When you apply for a home loan, the lender is obligated to follow procedures that ensure that you have the financial ability and credit history to meet your loan obligation. The lender must also ensure that the amount you plan to pay for the property can be independently verified by the appraisal. To verify these and other facts, the lender follows established guidelines as they collect and evaluate information about the loan.
What do lenders consider when they evaluate a loan?
It depends on the particular loan you’re applying for. Some loans have more stringent guidelines than others. In general, though, here are some things a lender will look at when they approve a loan:
- Your credit: Lenders will obtain a credit score from one of the three main credit bureaus. If you score meets a certain threshold, you will qualify for the loan.
- Your income: Your lender wants to ensure you have enough income to make the payments on the loan. They may verify your income by requesting federal tax forms or by verifying (with your permission) the income you claimed with the IRS, by requesting a copy of a pay stub or by contacting your employer.
- How much debt you have now: When you complete your loan application you list all of your outstanding debts. The lender will verify this against information provided by a credit bureau. In some cases, you may be required to pay off some debt in order to qualify for a home loan.
- Your employment status: Lenders may verify that you are employed by seeking verification directly from your employer. If you are self-employed, they may request tax forms filed by your business.
- The value of the property you want to purchase: While you and the seller may have agreed on a sales price for the property, the lender will independently verify the market value through an appraisal or other form of property valuation. If the property does not appraise at the price you and the seller agreed, you may be asked to come up with an additional down payment or renegotiate the price.
What is the lender obligated to provide you?
Lenders are required by law and by the policies of those who invest in mortgages to give you equal opportunity to finance a home regardless of your age, sex, race or ethnicity.
Lenders are obligated to provide you a good-faith estimate of your loan closing costs. One thing to note about a good-faith estimate is that it is an estimate. It may be difficult for a lender to estimate what your exact costs will be, but they can usually provide estimates that are reasonably close to the actual costs.
Lenders are required to disclose to you any relationships they have with companies providing services that are required to close or insure the loan.
If a lender plans to sell the rights to service your loan, they will also disclose that possibility to you when you sign your loan documents.
What are points?
Points include charges applied by the lender based on the loan amount. When applied by a lender they usually represent a sales commission taken by the lender for originating the loan. Points also include interest charges borrowers may elect to pay up front in order to lower the interest rate of the loan (these are called “discount points”). One point is equal to 1% of the loan balance.
What’s the difference between the interest rate and the annual percentage rate?
The annual percentage rate, or APR, is what your interest rate is after all financing costs and fees have been added to the loan amount and the interest rate is recalculated based on the new loan total. This is the number you should use when you compare different loan rates, programs or lenders.
When you compare the APR between loan programs or lenders, be sure you know what fees are being added to the total cost of the loan so you have a basis for comparing the APR numbers. Here is a breakdown of the fees that lenders may include in the APR.
The following fees are typically included in the APR:
- Pre-paid interest
- Loan processing fee
- Underwriting fee
- Document preparation fee
- Premiums for private mortgage insurance
The following fees are occasionally included in the APR:
- Loan application fee
- Mortgage life insurance (which pays off the mortgage loan in the event the borrower dies)
The following fees are not typically included in the APR:
- Title fee
- Escrow fee
- Fees for attorneys
- Notary fee
- Document preparation (charged by the escrow company)
- Fees for home inspection
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
What can you expect to pay in fees?
The exact amount depends on the size of the loan, the value of the home you are purchasing and how competitive the loan market is when you buy. But here are some typical charges:
- Points: If your lender charges you points on your loan, you can expect to pay approximately 1% as a loan origination fee.
- Appraisal: On a home purchase, the appraisal fee is usually $500. It can be higher for luxury homes.
- Credit Report: Usually $55.
- Tax Servicing Contract: This one-time fee covers the services of a company who will monitor the tax payment status to ensure all property tax payments are being made for the life of the loan.
- Recording Fee: This fee covers the cost charged by the local Recorder’s office to record the transaction in the public record.
- Escrow: Escrow companies typically charge $500 or more to process the escrow on a home sale.
- Title Insurance: The exact amount depends on the amount of the loan, the value of the property and whether or not you want a homeowner’s policy that will protect your interest in the property in the event the title company made a mistake when they authorized the transfer of title. Expect to pay at least $450.
- Document preparation: Your lender may charge a $100 fee to prepare your loan and disclosure documents.
- Private Mortgage Insurance: If you are borrowing more than 80% of the value of the property with a first mortgage loan, your lender will usually require you to obtain private mortgage insurance to protect them if you default.