Home Loan-Buying a home is the most important decision in a person’s life especially when you are a first time home buyer. While the search for a perfect house is exciting, the process of buying is very overwhelming. The most integral part of this process is choosing to get a home loan.
As a new buyer, you should be equipped with the basic jargon of mortgages and knowledge of the loaning process. Chances are you are going to have to deal with the question of home loan sooner than you expect.
We have gathered and simplified all the information about home loans that you need to know.
Types of home loan:
When selecting a home loan, you will come across various choices.
- Conventional Mortgage VS Government-Issued Mortgage.
- Conforming Loan VS Jumbo Loan
- Fixed-Rate Loan VS Adjustable-Rate Loan
We will help you familiarize yourself with these basic types of loans and their respective Pros and Cons.
Conventional Mortgage VS Government-Issued Mortgage
A Conventional Mortgage is the most basic and regular kind of home loan. A conventional mortgage is a home loan that is not insured by the Federal Government.
You can choose from convenient 10, 20, 30 and 40 years plans.
You can skip any mortgage insurance altogether by paying 20%down payment, this effectively saves your money.
However, with a smaller down payment, the seller might require mortgage insurance and this will add the cost of Private Insurance to your mortgage.
Conventional Mortgage is still your safest choice because of its simplicity and consistency.
A Government-Issued-Mortgage is a mortgage that is backed by Government Agencies. There are three types of this loan:
FHA- Federal Housing Administration- for people who cannot pay a higher down payment, FHA is a good choice. FHA offers simpler requirements and flexible credit score guidelines as compared to Conventional Mortgage.
USDA- US Department of Agriculture– assists people in buying homes and land lots in eligible rural areas.
VA- Veteran Affairs– helps US army military and their spouses in buying a house with much lesser interest rates.
Government-Issued Mortgage is ideal for those with lower credit scores and lesser money. However, you may check your eligibility and need more documentation for it.
Conforming Loan VS Jumbo Loan
A conventional loan has two sub-types that you will have to choose from Conforming Loan and Jumbo Loan.
A conforming loan is one that is within the home loan limit provided by Fannie Mae or Freddie Mac. As of 2019, the maximum loan limit is $484,350 for one-unit Family Houses.
A Jumbo Loan, on the other hand, is a loan that exceeds the Fannie Mae or Freddie Mac limit. It allows buyers to buy a bigger property in more expensive parts of the city. Such loans are a risk for lenders because of their huge sizes. Therefore, for a Jumbo Loan, the buyer needs a much higher credit score. Interest rates can also be higher in Jumbo Loans.
Fixed-Rate Loan VS Adjustable-Rate Loan
After choosing between a Conventional and a Government-issued mortgage, you will have to choose between a Fixed Rate Loan VS Adjustable Rate Loan.
A Fixed Rate Loan is one where you have the same interest rate and payment plan for the whole length of your paying period. This plan provides a secure choice for home buyers. With a fixed monthly payment plan, borrowers can relax and plan other financial decisions accordingly.
However, since the rate remains fixed, you might end up paying more in the end if there is a price reduction in the market.
Adjustable-Rate Mortgage Loan also called a 5/1 loan, is the type of loan in which you pay a fixed rate for a few years and then switch to paying a different rate according to the contemporary market.
This type of loan is a risk. You should only get it if you know your market and are comfortable in taking risks. On one hand, you may pay lesser with this plan. On the other hand, the price might hike and lead to a loan default.
We hope you are now familiar with the main types of Home Loans. Let us now talk about the process of getting a Home Loan.
Process of Getting Home Loan
The process of getting a Home Loan is complex and extensive. We have simplified the process in simple steps for you.
Pre-approval is the simplest part of the process of the loan. It ensures that your home search goes effortlessly. Pre-approval simply means that a lender has looked at your credit score, credit history and finances. It makes you a credible buyer in the eyes of the seller.
A seller will always choose a buyer who has got a pre-approval over one who has not. Moreover, when buying a house, getting a pre-approval helps you know where you stand financially. It enables you to make realistic budget limits when finding your perfect house.
While it is not an official step, it is still important both for buyers and sellers.
Pre-qualification is where it all gets real. For pre-qualification, a lender does a serious evaluation of your finances and financial history. The lender then determines how much you can pay in the mortgage.
Every lender work on its terms. And every borrower is dealt with differently. There is not a set rule of principals. However, most lenders look at two-key factors while determining your eligibility.
- Your ability to pay the mortgage- determined by your income, debts and financial stability.
- Your inclination to pay the mortgage- determined by your financial history i.e. your credit history, rent, and debt payment history.
At this point, you look at packages and prices, and your mortgage and plans.
Application and Processing
After pre-qualification, if you choose a lender, it is now time to submit your application. In this step, you have to submit all the required documentation to go with the application. After the submission, you are given a Letter of Estimate which provides written proof of the prices and plans you decided in your earlier discussions.
All submitted documents are then verified and proper processing starts.
At this step property evaluation and property, inspections are done, and Appraisal Reports (the valuation of a person’s right of ownership) are made
Underwriting is the key step in home loans. Underwriter reviews and evaluates the application and documentation. The underwriter then locks the interest rates. You and your lender will decide the final date of closing and a Title Insurance will be drawn.
Once the application is approved, the lender informs the closing attorney. In closing, you will have to sign the final documents. Make sure to review everything, and double-check all the documents.
The closing attorney then delivers the documents to the lender. At this point, the funding of the loan starts.
The process is overwhelming. But as a buyer, you need to educate yourself about all these steps so your home loaning and home buying can go smoothly.
We hope this information will help you start in starting your home loan process.