Buying a house is a major investment, and with the high cost of homes around the country, it usually represents a major outlay of money for a consumer. Therefore, it should come as no surprise that, according to recent statistics, nine out of 10 homebuyers finance their purchase with a mortgage loan.
If you are a prospective homebuyer and are considering applying for a mortgage loan, there are a number of things you need to know before you begin the application process. You can learn about them here.
What Is a Home Loan?
A home loan, otherwise known as a mortgage, is a loan that is secured against newly a purchased property or piece of real estate. Of course, as with any type of loan, with a home loan the borrower must pay back the funds within a specified timeframe. It is extremely important to pay the loan back in a timefly fashion because if you don’t, you could lose your house. The mortgage is usually paid back in the form of monthly payments that include taxes, interest, insurance and the principal.
How to Apply for a Home Loan
The process of applying for a home loan can be stressful if you don’t research it before jumping into it. The first step is to compare several available properties to get a feel for the market. When you start viewing properties, take a notepad with you to write down pros and cons, a camera to keep track of the properties you see, and a criteria checklist. Mortgage books, newspapers, websites, real estate agents, financial planners, mortgage brokers and consumer seminars are all available to assist you along the way.
Evaluate Your Budget
Determine how monthly loan repayments will fit into your current budget. Lenders can put your loan application in the best light and give you more money than you can afford or need. Along with your mortgage payments, don’t forget taxes, insurance and other related costs. Some lenders only require a 5 percent down payment. Be aware that less money down means higher monthly payments.
Choose the Right Type of Loan
There are several types of mortgage loans you can choose from, including fixed-interest mortgages, adjustable-rate mortgages, balloon mortgages, 5/25 mortgages and two-step mortgages. It is important to select the type that can work for your situation.
If you opt for a fixed-interest mortgage, the interest rate will remain the same throughout the entire life of the loan. This means that you will know exactly how much you have to pay every month. Fixed-interest mortgages are the most popular type of home loan.
If you go with an adjustable-rate mortgage, the interest rate will change every year. This type of home loan can offer either a one-year, three-year, five-year or 10-year interest rate period.
What You Will Need
You can apply for a home loan online through a mortgage lender or go directly to the bank. The lender will explain the next steps of the loan application process and answer any questions that you may have. In order to apply for a home loan, you need the following documents:
- Proof of identity
- Proof of income
- Divorce papers (if applicable)
- Documentation showing the amount of debt currently owned
- Balance sheets and tax returns for the self-employed
- Pay stubs
- Three months of investment statements
- Documentation showing your bank information
Closing the Deal
The lender will check your credit report and look at your FICO scores. Depending on your situation, they may also check a few things like property valuations. They will then send the documents making you an offer of a loan. In some states, home inspections are done before closing the transaction. Once your loan is approved, you can make an offer on a home. Review the papers you are asked to sign, deposit your down payment funds into your account, and then close the deal.