Home Loan | Preparing For That Big Investment
Shopping for a new home can be a lot of fun and it is easy to let your imagination run wild as you take in all of those spacious backyards, renovated kitchens, and luxurious living rooms that you’d love to see yourself living in one day soon. However, before you get too carried away, it is important that you first find out how big of a house you can actually afford.
A mortgage is a type of loan, provided by a bank or other lender, that allows you to be able to buy a house. Mortgages are essential for most home-buyers since most people don’t have enough cash on-hand to buy a home outright. Below we will look at some tips and tricks concerning a home loann and refinancing.
Why You Should Get Your Home Loan Pre-Approved
It’s a good idea to start searching for mortgages before you search for your new home. In most cases, you will want to get pre-approved for a home loan. Pre-approved basically means a lender says you will qualify for a mortgage up to a certain amount. By getting pre-approved, you achieve two goals. First, you indicate to sellers that you can afford to buy a house and that you are serious about making an offer. Second, you will know how much you can actually afford to spend on a house, thus helping you narrow down your choices considerably.
Required Documents For A Home Loan
A mortgage will likely be the biggest loan you ever take out, so it shouldn’t be surprising that you will need to provide lenders with quite a bit of paperwork when you apply. Your proof of income is especially important, which can be shown with last year’s W-2 form, a recent pay stub, and last year’s tax return. Also, if you have other forms of income, such as alimony, child support, or a side hustle (such as from Uber or Airbnb) then you will need to provide proof of that as well.
The lender will also need to see what your assets and debts are. Assets, such as retirement accounts, savings, investments, and real estate, will give lenders more of a sense of security knowing that even if you lose your job you’ll still be able to keep up with payments. Debts, meanwhile, such as student loans, credit cards, alimony and child support obligations, and so on give lenders a more complete picture of your financial situation.
Certain lenders may require additional paperwork, such as IRS forms to ensure your tax returns match up with what you have told the lender. Certain mortgages, such as those for veterans or those with poor credit, will require additional paperwork.
Current Home Loan Interest Rates
When looking for a home loan, you typically have three main options: banks, other lenders, and mortgage brokers. Many people go to their bank first in order to get a mortgage since the bank will already have a good idea of what the applicant’s finances look like. Keep in mind, however, that banks tend to have stricter lending requirements than other lenders, so if your credit rating is less than stellar you may want to move on to a nonbank lender.
A nonbank lender, such as a credit union or online lender, tends to be more flexible with who they’ll lend to. While you may not get any of the bells and whistles that you might enjoy with a bank mortgage, you will be able to get approved with a lower credit rating or lower down payment than the banks would consider. On the downside, however, you will also likely have to pay higher interest rates. Some online lenders in particular have developed a bad reputation for unethical practices and if you ever feel like you may have been the victim of mortgage fraud you should contact the Federal Trade Commission to lodge a complaint.
Finally, a mortgage broker won’t actually provide you with a mortgage, but they are knowledgeable about the different mortgage options out there and they typically work with many different lenders. Mortgage brokers are a good idea if your situation may make you eligible for a nonstandard mortgage. For example, the Department of Veteran Affairs guarantees home loans to veterans while the Federal Housing Administration backs mortgages for first-time home buyers who may have low or little credit.
What Are “Points” In A Home Loan?
One great way to reduce your interest payments is through mortgage points, which are also known as discount points. One mortgage point is equivalent to one percent of your mortgage. So if you have a $100,000 mortgage you can pay two mortgage points, which would cost you $2,000, upfront to help you lower your interest payments. Mortgage points are especially advantageous for those who have longer term mortgages. Another great way to lower your mortgage payments is by offering a larger down payment.
Other Possible Hidden Fees With A Home Loan
Unfortunately, mortgages, whether it’s your first mortgage or for refinancing, are notorious for their hidden fees. Some hidden fees can include a prepayment penalty, an underwriting fee, processing fee, and base origination charge. While many of these fees seem small, usually between 0.5 and 2 percent, they can quickly add up. The good news, however, is that in many cases they are also negotiable. Other fees, such as taxes and escrow charges, tend to be non-negotiable.