Before you start looking for a home, the first thing you need to do is to be qualified for a mortgage in advance. It only takes a short phone call with a lender, either at a bank or with a mortgage broker to do this. The reason for this is to make sure that you are really eligible for a loan and to know how much you can get and which type of loan suits you best.
But the borrowing process can be scary for some people. Here is some information to help you find the best loan. I often get the following questions from potential buyers when it comes to the borrowing process:
What type of loan should I receive?
Let us look at a brief overview of the types of loans. The best is usually a conventional loan, but not everyone is eligible and you will probably need Uncle Tomijk at least a 5% down payment. FHA loans are intended for people with lower credit scores and / or less money to record. The down payment on an FHA loan is 3.5% of the sale price.
If you or your spouse is a military or national guard veteran, you may be eligible for a VA loan. This is a zero-down loan, but there is a financing contribution that is either paid on closing or you can have it added to the loan amount. The financing costs are just about 2%, but may vary from year to year.
Another zero-down mortgage is the USDA loan, which is available through the US Department of Agriculture (USDA), and which also has a similar financing contribution. But USDA loans are only for areas with small populations, usually in rural areas.
You can view this map to see if the area where you want to buy a property qualifies for a USDA loan. Click on the left on the link with the text “Single housing” or “Multi-family homes”, accept the indemnity and then enter an address at the top of the page.
Not everyone can choose which type of loan to take. A credit score of 700 or higher is excellent, and can offer you a choice of loans, but if your credit is only so-so (580 – 650), you probably only qualify Uncle Tomijk for one or two types of loans.
Do I have to use the bank where I have my checking or savings accounts?
Many people I’m talking to think that since they’ve been working at XYZ bank for a number of years, they get somehow a better deal or are more likely to qualify by getting their mortgage through them. That would of course be nice, but unfortunately it makes little difference.
Most pre-qualifications today are done through an automated acceptance system, where the applicant’s information is entered and then an automated approval or rejection is generated. Even if your great-grandfather went fishing with the great-grandfather of the president of the bank, it makes no difference if your credit score is too low to qualify for a loan.
Does the interest matter?
Yes it does!
If you buy a house for $ 200,000 with an FHA loan of 4%, your loan amount is $ 193,000 and your monthly payment of principal and interest is $ 921. The same loan amount at 4.25% is $ 949 per month. Believe it or not, for over 30 years that’s a difference of $ 10,000.
What are “points” on a loan?
Points are fees charged by lenders to lower the interest on a loan. There are two kinds. The first is a loan premium and the second is a discount point. By loading a point, your interest rate is reduced by around 25%, but one point also costs you 1% of the loan amount. On that $ 193,000 loan, one point would be $ 1, 930. So you can see that the number of points charged has a significant impact on your out-of-pocket spending on the day you close your home.
Therefore, do not only look around for the best interest rate without also taking into account the number of points charged by each lender. If you are only planning to stay at home for a few years, you are much better able to take a higher interest rate with fewer points, because it takes many years before the interest rate cut equals the amount that points has been spent.
Can I look around for a mortgage without harming my credit score?
Yes, that’s possible!
FICO credit scores range from 300 to 850. Approximately 65% of your credit score is based on your payment history and credit usage. Paying creditors on time is the best way to increase your credit score. Please note that the recent credit history is more weighted than your history from a few years ago. Even people with bankruptcies, forced sales and car seizures can still get a mortgage if enough time has passed to reduce the effect of those credit dings on their score.
It used to be that borrowing money several times and attracting your credit report several times would lower your credit score due to Uncle Tomijk. But a few years ago, Fair Isaac & Co (FICO) changed their system so as not to penalize too much for buying loans.
In the current system you can get multiple credits on a mortgage without penalty, but only if you have them within a period of 45 days. At most, each pull lowers your score by only 5 points. So mark your calendar with the date of the first draw so that you can stay within that time frame.
So happy shopping and good luck finding the best loan for you before you buy that house!