Step 1 – Find Out How Much You Can Borrow
The first step in obtaining a loan is to determine how much money you can borrow. In the case of buying a home, you should determine how much home you can afford even before you begin looking. Get in touch with us and we can help you figure this out.
We can also get you pre-qualified for a loan.
LTV and Debt-to-Income Ratios
LTV or Loan-to-Value ratio is the maximum amount of exposure a lender is willing to accept in financing your purchase. Lenders are usually prepared to lend a higher percentage of the value to borrowers with better credit. Another consideration in approving a loan for a particular borrower is the ratio of monthly debt payments (such as auto and personal loans) to income. Rule of thumb states that your monthly mortgage payments should not exceed 1/3 of your gross monthly income.
Credit Scores are widely used by almost all types of lenders in their credit decisions. It is a quantified measure of the creditworthiness of an individual, which is derived from mathematical models developed by Fair Isaac and Company. A FICO score is supposed to reflect the credit risk of the individual in comparison with that of the general population. It is based on a number of factors including past payment history, the total amount of borrowing, length of credit history, search for new credit, and type of credit established.
Self-employed individuals often find there are greater hurdles to borrowing for them than an employed person. For many conventional lenders, the problem with lending to the self-employed person is documenting an applicant’s income. Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information through their employer. In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for two years.
Source of Down Payment
Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. Generally, down payment requirements are made with funds the borrowers have saved. If a borrower does not have the required down payment, they may receive “gift funds” from an acceptable donor with a signed letter stating that the gifted funds do not have to be paid back.
Step 2 – Choose The Right Loan
Home loans come in many shapes and sizes. Deciding which loan makes the most sense for your financial situation and goals means understanding the benefits of each. Whether you are buying a home or refinancing, there are two basic types of home loans. Each has different reasons you’d choose them.
1) Fixed Rate Mortgage
Fixed-rate mortgages usually have terms lasting 15 to 30 years. Throughout those years, the interest rate and monthly payments remain the same. Situations where people tend to favor loans like this include:
- Borrower plans to live in the home more than 7 years
- Borrower likes the stability of a fixed principal/interest payment
- Borrower doesn’t want to run the risk of future monthly payment increases
- Borrower thinks income and spending will stay the same
2) Adjustable-Rate Mortgage
Adjustable-rate mortgages (often called ARMs) typically last for 15 to 30 years, just like fixed-rate mortgages. But during those years, the interest rate on the loan may go up or down. Monthly payments increase or decrease. Situations where people tend to favor loans like this include:
- Borrower plans to stay in the home less than 5 years
- Borrower doesn’t mind having the monthly payment periodically change (up or down)
- Borrower is comfortable with the risk of possible payment increases in future
- Borrower thinks income will probably increase in the future
We can help you think about these factors so you can select a loan that matches your present condition as well as your future financial goals.
Step 3 – Start Getting Quotes
Start shopping around and get a quote from us!
Step 4 – Begin Loan Processing
Loan approval guidelines vary depending on the lender and the loan program. In general, approval is based on two factors: your ability and willingness to repay the loan, and the value of the property.
Once your loan application has been received, we will get the loan process started immediately. We will work to find one or more lenders for you. The lender will review your application and decide whether to approve your loan. We will verify information, work with you to iron out any discrepancies, help you respond to any questions the lender might have, and navigate the process to make it as smooth as possible.
During the process, we will gather information such as
Is your income sufficient to cover monthly payments? Industry guidelines are used to evaluate your income and your debts.
What is your ability to repay debts when due? Your credit report is reviewed to determine the type and terms of previous loans. Any lapses or delays in payment are considered and must be explained.
Do you have the funds necessary to make the down payment and pay closing costs?
Is there sufficient value in the property? The property is appraised to determine market value. Location and zoning play a part in the evaluation.
In some cases, additional documentation might be required before making a final determination regarding your loan approval.
In order to improve your chances of getting a loan approval:
- Fill out your loan application completely.
- Respond promptly to any requests for additional documentation especially if your rate is locked or if your loan is to close by a certain date.
- Do not move money into or from your bank accounts without a paper trail. If you are receiving money from friends, family or other relatives, please prepare a gift letter and contact us.
- Do not make any major purchases until your loan is closed. Purchases cause your debts to increase and might have an adverse effect on your current application.
- Do not go out of town around your loan’s closing date. If you plan to be out of town, you may want to sign a Power of Attorney.