Buying a home is one of the biggest purchases you’ll make in your life.
Since most of us can’t pay this out of pocket, you have to go get a loan from either a bank or mortgage lender.
This can be a very long and demanding process and normally leaves many people unhappy because they are either caught off guard or did not spend enough of their own time trying to figure things out.
You first need to get a pre-qualification approval from a lender before you go shopping for that home. This is a letter from the lender indicating what amount of money you should be able to have loaned to you. A good basic guess is going to be 2 to 2.5 times your income.
Some of the basic information a lender is going to want is: your name, address, occupation and length of time in that occupation, and a credit check. This usually takes about 15 minutes or so. This is the easy part. Be sure to do it early on so that the shopping easier.
As noted in the comments, these days an actual pre-approval letter, which takes a bit more time, is required to proceed with a real estate agent.
Understanding Loan Types Once You Find Your Home
After you’ve found your property and need to actually get financing, you apply for the loan. There are so many different types of loans available that it’s almost like shopping at the grocery store.
- A Full Documentation Loan is what it sounds like. All of your information, income, employment, etc… has to be evidenced in writing and will be verified. The good thing about this loan type is that you will get the best loan and rate possible. This type of loan is easy for W-2’s but not for 1099’s. Meaning that if your income is from multiple sources and is not fixed, you might have a very difficult time with this.
- Limited Documentation Loans have less paperwork for you. The basics from your employment will get checked, but you will not get the best rates. This can still be a good choice though. For example, if you are a salesman and have a proven income, but can’t say what is will be or exactly how much, then “limited doc”, or “no doc” (discussed below) tend to be the easier options.
- No Documentation / Stated Income Loans are applications where you tell the lender how much you make and they do almost nothing to check it. These loans don’t have great rates comparatively because they have much more risk than a full documentation loan. If you have income from many different sources, then most times this is the only loan you can do even if your a millionaire.
Okay so there are different types of loans, now lets talk about the different programs, sometimes called loan products, available. The three basic loans discussed above can be mixed and matched with the different products below so you see how confusing things can start go get. We’ll start with the most common first and I’m only going to cover a few, there are hundreds of options so find what fits your needs.
- Fixed Rate Mortgage is the standard product most people know. You pay one price for thirty years. It’s pretty straight forward and can easily be placed on an amortization table. An amortization table just shows you where your money is going each payment. You might pay $50 dollars principal and $600 interest at the beginning and towards the end it would be reversed. These come in different lengths of time such as 30,15, or 10 years as well.
- Adjustable Rate Mortgage is a little different. The principal, or actual amount of the loan, will stay the same for the length of your loan, but the amount of interest you have to pay can change.
- A Balloon Mortgage is a payment plan where you treat the loan as if it were a 30 year fixed loan, but only for the first five years. In year 6 you have to pay off the rest of the entire loan. This can be a good loan if you know that you’ll be selling prior to 5 years.
Applying for the Home Loan: What You’ll Need
Alrighty, now that you know there are lots of products, lets get back to getting that loan. When you apply for that loan (we’ll be using a full documentation loan for the example), you want to have a complete financial history for the last two years minimum. You need to have all of your pay stubs, rent or house payment receipts, tax returns, and any other income. You will also need a proof of employment, proof of ownership of collateral (sometimes). These are to prove to the lender that he can give you money, and you can pay it back. Just think of a full documentation loan is proving beyond the shadow of a doubt that you can pay back your loan.
Your lender not only has to approve you for a loan, but also has to approve your intended property (the house you are buying). Heads up, your lender is going to want to know everything about the intended property such as any old loans, structure problems, structure type, single/multiple owners, and the list goes on. You normally don’t have to get all of this information yourself. Normally they will get the appraisal done, or have the land surveyed, you just need to be aware of what’s going on. Some lenders only give money for specific types of properties so make sure to give this information up front. I had a loan canceled on me because they didn’t read the property type until the final check and realized they couldn’t do the loan at all. That was extremely frustrating and I don’t want that to happen to you.
Every different lender is picky, picky, picky, and more picky. They will want things done certain ways and it’s just something that that company does. There will be hoops to jump through, but by keeping your financial history together and getting the right loan product for you situation, you can have a very positive and rewarding loan experience.
Clayton Collins is a husband and fire fighter who writes about Personal Finance and Personal Development over at Me Save Money