EDUCATE YOURSELF BEFORE APPLYING FOR A LOAN
It is important to get the right information before applying for a loan. People are often misled by rumors and myths about the loan process. Here are some helpful guidelines for effective borrowing.
Research your credit history by requesting a copy of your credit report. You may do that by contacting one of the three national credit reporting firms-Equifax (800-685-1111), Trans Union (800-888-4213) or Esperian (888-397-3742), or by searching the Internet-many websites now offer a free credit report. This report documents your credit history and current status of your credit standing. If there are any discrepancies you will want to take care of them before applying for a loan. A lender will evaluate your application based on your FICO score, which is compiled from a series of questions about your credit report and your debt-to-income ratio. To figure out your debt-to-income ratio, divide your monthly payment obligation on long term debts by your gross monthly income.
Next be aware of what could affect your loan. If you have good credit and your monthly income far surpasses your monthly debt obligations, you most likely will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, you may not get the lowest interest rate. If you are buying a new home, consider how much you can afford for your monthly payment. It is important that you do not overextend yourself when buying a home.
Once you've done your homework then you can begin to look for a lender. There are a lot of institutions that make promises but do not always deliver, so you should shop around and look for not only the best rate, but also a local banker who has a good reputation for service.
The next step to take is to educate yourself on the different types of loans. Compare the advantages and disadvantages of each and get an idea of what type of loan would work for your particular circumstance. Your banker can guide you through all the loans available and help you determine which one suits you. You will want to be sure to determine the total loan costs. You might think that the lower the interest rate the better the loan. This may not be the case. There are usually closing costs associated with every loan, so you need to take the closing costs into account when comparing loans. So your interest rate could be low and your closing costs high, and consequently, your total cost may be more than you anticipated. If you plan to stay in your home for a longer period of time, you may consider paying "points" to "buy down" the interest rate. Points are deductible, and usually the lower interest rate will more than pay for the points over time.
Finally once you have determined the program that best suits your needs compare your options in writing. In addtion to requesting a Good Faith Estimate from more than one lender ask for the APR. This will allow you to compare apples to apples. Last but not least ask upfront which fees may be waived some employers and loan programs may make you eligible for different discounts.
Reprinted from the Sandhills Real Estate Section of the Pilot.
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