Home Loans: What You Need to Know

While it’s true that some lenders have made it more challenging to qualify for a home loan in the wake of the subprime crisis, a solid credit history and advance preparation will greatly increase your opportunity to turn your real estate dreams into a reality. The home loan primer that follows serves as a good starting point.

 

Fixed Rate Loan—Choose this option, and your interest rate and monthly payment will not change, unless you chose to refinance. When the economy picks up and interest rates start climbing again, you can rest comfortably knowing your monthly payment will remain steadfast. However, in return for offering that level of predictability, fixed-rate loans also come with higher interest rates attached.

 

Adjustable Rate Loan—With this option you’ll receive a lower interest rate than a fixed rate loan. However, that rate is only guaranteed for a select period of time (five years is typical today). After that introductory period, the rate (and your corresponding monthly payment) will start to rise or fall with the rest of the market (typically re-adjusting every 12 months). It’s a riskier option than a fixed-rate loan, but also generally less expensive in the near-term.

 

Hybrid Loan—As the name suggests, this option merges a fixed rate mortgage with an adjustable rate mortgage. The interest rate and monthly payment remain fixed for a specific period of time, then the loan converts to an adjustable rate.

 

Balloon Loan—This option features a fixed interest rate for the first five, seven or 10 years, but then the remaining balance of the loan must be paid off in full.

 

Government Loans—For individuals with low to moderate incomes (historically, that’s about one-fifth of borrowers), there’s the Federal Housing Association loan program. For active-duty military personnel, reservists and veterans, there’s the Veterans Affairs loan program. Both allow qualified individuals to obtain loans with lower interest rates, no pre-payment penalties, low or no down payments and gracious loan terms.

 

Before applying for any of the loans listed above, you’ll want to first determine what you can afford to comfortably pay back. While you may be capable of qualifying for a large loan, if you suspect making the monthly payments will be a stretch down the road, you’ll be far better off borrowing something less.

 

The general rule of thumb: Make sure your monthly mortgage payment is less than 30 percent of your gross monthly income.* However, for a true analysis of your borrowing power, plug the particulars of your financial situation into one of the online mortgage calculators available at mortgageloan.com/calculator.

 

Plus, be sure to factor in all the other major expenses that come with owning a home, such as property taxes, utility costs, homeowners insurance and general maintenance/repairs.

 

Home-loan lenders are less willing to take chances today—which means, in order to qualify, your credit history will need to be above average. The good news for responsible money managers: The better your credit score, the lower your down payment and monthly payments.

 

According to the Department of Housing and Urban Development:

 

›› A credit score of 640 to 660 is typically the minimum requirement today.

›› A credit score of 700 to 720 will allow you to qualify for the better loan rates.

›› Credit scores of 750 and higher will allow you to access lenders’ best rates.

To determine your score, get a copy of your credit report from Experian, Equifax and TransUnion. Why all three? Because, if the scores differ, the bank will typically use the lowest one. Alert the credit bureaus if you see any mistakes, fix any problems you discover, and don’t apply for any new credit until after your home loan closes.

 

Before getting serious about your hunt for a new house, you’ll want to choose a lender and get pre-approved for a mortgage (not just pre-qualified— which is a cursory review of your finances—but pre-approved for a loan of a specific amount). Pre-approval lets sellers know you’re serious. Most importantly, pre-approval will help you determine exactly how much you can comfortably afford to spend.

Finding a lender and the best rate 
One of your best resources for finding a reputable lender (and a competitive loan rate) is your real estate agent. Family and friends are always good to ask, but your agent regularly interacts with these professionals and has a deeper understanding of their individual strengths and weaknesses. 

Getting the process started is easy. Begin by checking your credit score and determining how much you can afford to borrow. If the numbers look promising, ask your agent to recommend a reputable lender (or broker) who can walk you through the pre-approval process.