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Let’s say you’ve decided to start looking for a house. According to the latest report from the National Association of Realtors, home sales hit an eight-year high in September—up 12 percent year-over-year, with more than 5 million homes sold during that period. With interest rates still at relatively low levels, now may be a good time to purchase a home, but if you’re going to do it, you need a mortgage loan. Here’s what you need to know about getting one.
The first step of applying for a mortgage loan is to fill out a loan application, which includes providing information regarding your employment status, income from all sources, and other personal data that may help determine your creditworthiness. If you have been employed at the same place for over two years with an income that exceeds the monthly housing payment that you will require, you are likely to be approved for a loan.
The next step is for your lender to perform a credit check on you. This step assesses your ability to repay the loan and helps lenders determine if they should offer you their best rates or terms. If your credit score is low, it would be in your best interest to seek out a loan officer with smaller lending institutions, since they are more likely to offer you financing options even if your credit score is 550. Lord Mortgage offers and accept 550 and up credit scores.
Once the lender finishes their evaluation process, they will be able to give you an offer that varies depending on the current market rates and your credit score. If the offer is within your budget, then it’s time for you to sign the contract, so your lender can proceed with finalizing the loan.
There are a number of ways to finance a mortgage loan. Let’s take a look at how it works and the differences between each type:
1) Conventional Loan: A conventional loan is usually made by a bank or lending institution, and is the most popular way of financing a home purchase. Conventional loans offer 95% financing because lenders require the borrower to pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your loan, but after a set point in time (usually between 2-3 years), you can request to have your PMI removed.
2) FHA Loan: A fha loan is also a government-backed program that allows a borrower to make a down payment to buy a home with only 3.5% down. These loans are available to almost all borrowers .Interest rates on an fha loan are typically lower than other types of loans because they offer insurance protection to lenders in case the borrower defaults on the loan.
3) VA Loan: VA stands for veterans affairs, and is another government-backed program for veterans or active members of the military. There is no down payment required to fund this loan, and borrowers are able to finance 100% of the purchase. VA loans offer low interest rates because they are backed by the US government, which means lenders take less risk in case you default on your loan.
4) Conforming Loan: A conforming loan is another type of conventional loan that meets certain guidelines set by Fannie Mae and Freddie Mac, two government-backed agencies that are the main source of conforming loans. Any loan that meets these constraints is considered a conforming loan. Conforming loans usually require 20% down payment because lenders require private mortgage insurance (PMI). PMI protects the lender in case you default on your loan, but after a set point in time (usually between 2-3 years), you can request to have your PMI removed.
5) Subprime Loan: A subprime loan is another type of conventional loan that may encourage people who don’t qualify for other types of loans, or require lower credit scores. These loans typically come along with a higher interest rate.
6) Interest-Only Loan: An interest-only loan is a type of mortgage that only pays the interest owed, and your principal amount remains the same throughout the term of the loan.
7) Balloon Loan: A balloon loan is a type of mortgage that requires the borrower to pay off the remaining balance at a later date, usually between 2-5 years after closing.
8) Interest-Only ARM: An interest only adjustable rate mortgage (ARM) is a type of mortgage that only pays the interest owed, and your principal amount remains the same throughout the term of the loan.
9) Negative Amortization Loan: A negative amortization loan is a type of adjustable rate mortgage (ARM) that includes a lower interest rate and higher monthly payments at first, but gradually increases over time. This means your monthly payment may be lower than usual at first, but the amount owed will continue to grow instead of decrease.
10) Cash-Out Refinance: A cash-out refinance allows you to access the equity you have built up in your home. You can use this money to fund renovations or other capital investments, pay off credit card debt or other debts, or use the money for anything else. These loans are typically offered at a higher interest rate because you are borrowing from your home equity instead of from the bank.
11) Reverse Mortgage: A reverse mortgage is a special type of loan that allows people aged 62 and older to borrow money against their home equity without having to make any monthly payments. The money that is borrowed will then be repaid when the home is sold or upon death.
A lender typically offers a range of interest rates depending on your creditworthiness and for how long you wish to repay the loan (that is, the term). You can choose the term you want, but if your credit and income are good, it might be wise to take a shorter term in order to pay less interest and save thousands of dollars.
Loan origination is defined as the process by which a lender gathers the documentation and information required to facilitate the finalization of a mortgage loan file. Loans are either originated through correspondent channels—where lending companies use third-party originators to produce loans that will be underwritten, purchased or securitized—or direct channels , where lenders produce loans that they retain on their own books for secondary market transactions.
Loan prequalification and loan preapproval are the first steps in the mortgage origination process. Lenders with correspondent channels who purchase loans typically require borrowers to be prequalified before they will accept a loan application. Those with direct channels often require borrowers to be preapproved before submitting an application.
Loan applications vary depending on the borrower’s needs and the type of mortgage he or she is seeking. Application forms can range from a single-page form for a simple refinancing to a multi-page form for a purchase transaction. Loan applications include the borrower’s personal information, the property address and description, estimated value, description of any construction or remodeling plans, and financial data (employment status, income, assets).
The underwriter reviews the loan application to make sure all required documents are included. The underwriting process can take anywhere from one day to several weeks, depending on the complexity of the transaction and the amount of documentation the lender requires.
Once all documents are collected and reviewed by an underwriter, they are sent to a loan approver who reviews them for final approval.
After the loan file is approved, it is sent to a closing agent who finalizes the transaction by attending a closing—or settlement—where all terms of the loan are agreed upon and signed off on . After signing the paperwork, the borrower will receive his or her copy of the executed mortgage. If applicable, the borrower will receive a final recorded copy of the mortgage.
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