From researching neighborhoods and school districts to juggling inspections and signing necessary paperwork, buying a home can be an overwhelming process.
Financing what is the largest purchase most of us will ever make can certainly compound that stress.
“The whole process, from application to closing, can be stressful,” said Tim Murray, Capitol Federal Savings Bank senior mortgage consultant. “Find a lender you are comfortable with, provide the requested documentation and ask questions.”
Murray recommends prospective buyers begin the financing process before they ever start looking at homes.
“I suggest gathering all of your income information, debt information, possible budget range, and to start thinking about a down payment,” Murray said.
Lenders use the information to prepare a prequalification document, which provides an estimate of the amount of mortgage for which you could be approved. This process can be done in person or via phone or e-mail.
Capitol Federal offers an online mortgage calculator at capfed.com that allows borrowers to see what they can expect to spend on a home loan and helps them select the best mortgage option for their situation.
If they qualify, borrowers can choose to take out a conventional loan, also known as an FHA loan, or a government-backed, or VA loan. Generally speaking, a conventional loan can be the less expensive option over the life of the loan. However, borrowers who begin with a lower credit score may be able to qualify more easily for a VA loan.
Consumers also will need to decide whether to take out a fixed-rate or adjustable-rate mortgage. Fixed-rate mortgages guarantee the interest rate will remain the same over the life of the loan and offer peace of mind that monthly payments will never change.
An adjustable-rate mortgage typically has a lower initial interest rate than a fixed-rate loan. The lower rate will remain the same for a specified number of years, usually three, five or seven. After that, the interest rate will change annually. According to Murray, adjustable-rate mortgages can be good for borrowers who plan to sell or refinance their home after the initial term ends.
Once the best mortgage option has been selected, borrowers can move on to the pre-approval process, which involves completing a loan application, requesting a credit report and gathering necessary financial documents.
“A strong pre-approval letter allows you to house hunt with confidence,” Murray said. “You know exactly how much money you will be able to receive from the bank, because your credit, income and assets are verified. Also, it will show motivation when putting in an offer and makes the rest of the paperwork easier at closing.”
Potential buyers who take out a traditional FHA loan can expect to need a down payment of at least 3.5 percent of the sale price of the house at closing. Capitol Federal has a minimum requirement of 3 percent down on conventional loans for borrowers with a credit score of at least 720.
In the event less than 20 percent of the sale price is put down as payment on the home, the borrower will be required to take out and pay for mortgage insurance, which protects the lender in case of default.
“It’s also important to note, the more you put down on your home, the lower your monthly mortgage payments will be,” Murray said.
For first-time buyers or anyone without an established credit score, the lender may require a larger down payment to qualify for a loan.
“If you haven’t established traditional credit, now is a good time to get started,” he said. “Banks want to see that your credit report includes a good payment history on at least four items for at least 24 months.”
Murray offers the following tips for establishing or improving credit ahead of applying for a mortgage loan:
-Keep credit card balances at less than half of your credit limit and make monthly payments on time.
-Diligently review your credit report and refute any inaccuracies that show up on your credit history by contacting the nationwide credit agencies.
-Within the first few months of being approved for a home loan, don’t open any new lines of credit.
-Only open new credit lines if you intend to use them.
-Don’t rush to close unused credit cards. The longer credit history is better for you.
Murray also urges borrowers to choose a lender carefully. With options that range from local banks to large, national financial institutions, choosing a local mortgage lender can have many benefits.
Smaller, local lenders often have knowledge about the local market and offer one-on-one customer service that may be lacking when applying for a mortgage loan online. You also run the risk that a larger institution will sell your loan immediately after you sign on the dotted line.
Shanna Sloyer is a freelance writer from Topeka. You can reach her at firstname.lastname@example.org.