Everything You Need to Know About Applying for a Home Loan
Buying a home is probably the biggest purchase you’ll make in your lifetime, and you don't want to leave any room for error. Getting it right means understanding the mortgage process, from start to finish. From what you need to do before buying to the questions you have to answer as you complete the process, here's everything you need to know about applying for a home loan.
What to Do — and Avoid — Before Applying for a Home Loan
Many people don’t realize their financial habits in the year or two leading up to buying a house can impact the loan application process. You need a decent credit history, so it’s important to pay your bills on time and avoid opening too many lines of credit. You want to pay off as much debt as possible to minimize how much of your income is dedicated to paying other lenders, and your taxes must be current so your lender can check your income and tax returns for the last few years. Keep in mind that a larger down payment improves your chance of getting the home you want, so start saving as soon as possible.
You should avoid making other big purchases around the time you apply for the loan. Changing jobs, maxing out credit cards and co-signing on other people’s loans can also be problematic. Finally, if you’re planning to marry someone with bad credit, you may want to do it after you buy your house.
Do Your Homework
Besides financial preparation, you need to learn more about the market and loans in general by doing a little homework. Start by taking a look at the market in the area where you want to live. Is it a seller’s market or a buyer’s market? What are current prices, and what are they projected to do in the future? It’s also important to do some research on lenders before choosing one. If you work with a real estate agent, he or she may recommend someone, but you should still do some independent research. Take a look at your own personal financial situation and estimate the house payment — and corresponding home value — you can afford each month.
Documents You Need When Applying for a Home Loan
Gathering documents and keeping them handy during the loan process is important. Your lender generally wants to see at least two years of tax returns, along with pay stubs, W-2s and other proof of income. They also want to look at a few months’ worth of bank statements to make sure you have enough cash on hand to pay your mortgage each month. If you have never purchased a house before, you may be required to provide your rental history. If your parents or other relatives are helping you with your down payment, you may need written confirmation that the money is a gift.
What to Expect from Your Lender
In addition to documentation, your lender will want to know where you work, how much you make and how long you've worked there. They also want to know how much debt you have, how much you have in savings and other assets, and what type of down payment you can make. The property type, location, value, and intended use — year-round residence or vacation home — are also important factors for lenders to consider.
What Is PITI?
There are four components to most mortgages: principal, interest, taxes and insurance (PITI). Principal is the actual amount you want to borrow from your bank. Interest is how much the bank charges you to borrow that money, and the higher the interest, the higher the monthly payment. Taxes are property taxes collected by your local government, and insurance pays for the home coverage that protects your home from fires, disasters and break-ins. Keep in mind that low-risk borrowers generally pay taxes and insurance separately.
What Are the Steps for Applying for a Home Loan?
Now that you're prepared to apply for a home loan, it’s important to understand the steps involved. Start by getting preapproved for a loan. Real estate agents and home sellers prefer to work with buyers who are preapproved. It also gives you a better idea of what you can afford from a lender's perspective. A preapproval requires basic financial information to determine how much a bank might be willing to lend you. Once you find the home you want to buy, make an offer and then begin the actual application process. During processing, an underwriter examines all the documents to make sure everything is in order and then approves or declines the loan.