It’s a crazy, mixed-up world out there when it comes to selecting a lender to provide your home loan. How do you know which one is right for you? Working with a qualified real estate agent is a good place to start. Because experienced agents have worked with many clients who have financed homes, they know which financial institutions and loan originators in those institutions have served their buyers well in the past.
So, our first recommendation is to identify an agent you are comfortable working with and ask that agent to suggest a few home mortgage lenders. Some buyers think they should work with their own bank, but that may not be your best option depending on your bank’s interest rates and fees.
There are many types of banks and mortgage companies. Some financial institutions are local (and therefore relatively small) while others serve larger regions. A few serve clients nationwide. Some are primarily focused on banking, others are focused on lending, and some on both.
As a first-time borrower, you want a loan originator who will educate you from the outset about the process of borrowing. It is in your best interest to find someone who will communicate with you either in person or over the phone, rather than restricting your communication to email communication.
When comparing loan products - and keep in mind every lender has a variety of products - there are two aspects for comparison: the interest rates and the fees they will charge to provide the loan. You will want to compare the loans offered by two or three different lenders to see what might be best for you. When selecting a lender, bear in mind ‘biggest is not always best' and there is a good reason.
The large lenders may not be familiar with the nuances of our market area. They have protocols and procedures which are designed to protect the lender from making a risky loan. Local lenders know our market area and they know the professionals who provide the array of services homebuyers need to successfully complete a transaction. And, perhaps most importantly, you will primarily have one individual to work with from start to finish.
Pre-approval is broken into two parts. Pre-qualification is a great first step, but it doesn’t mean the bank is ready to loan you money. Going through a pre-qualification process is a good way to determine how much home you can actually afford. A pre-approval, on the other hand, means that the lender is ready to offer you a loan (under terms, of course). The lifetime of pre-approval can vary but generally lasts for 30-60 days at the specified rate, which means that the interest rate that the lender offers you at the time of pre-approval will be a close estimate as to what you can expect at closing.
Both of these processes are going to put your budget under serious scrutiny, so be prepared to provide a full rundown of your finances. That includes bank statements, credit cards, credit scores, income, and assets. All of these items give the bank a pretty clear idea of what they’ll be willing to loan you.
Your credit score is a critical element when it comes to getting a loan. It determines your interest rate, and in most cases, whether or not you can get a loan altogether. Certain loans require certain credit scores, so be sure that you do your research before applying. Be aware that getting pre-qualified or pre-approved will require a “hard” credit check and will drop your credit score by a few points. There are a number of ways to check your credit before subjecting it to the lending process, and we recommend it. An experienced loan officer can review your credit score and help you find ways to improve it if needed.
A very important consideration as you begin working with a loan officer: be totally and completely transparent about every financial aspect of your situation. Holding back any information on the front end may result in the loan being denied later in the process.
A second important consideration during the closing process: do not make a significant purchase that requires you to spend cash reserves and/or borrow more money. Doing so will have a negative impact on your ability to finance your home.
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Underwriting is the final process that leads to your loan either being approved or denied. It happens after the contract is in place, the loan application has been executed, the appraisal has been completed, and just before the closing occurs. The underwriter may ask your loan originator for documentation or information they have not already received.
Why did you close that credit card last year? Why weren’t you employed during a specific time? While pre-approval indicates you are a good candidate for a loan, underwriting is the final and most important test. The underwriter is the lender’s “gatekeeper” and the underwriter knows their job is at stake if they approve a risky loan. The loan isn’t approved until the underwriter is satisfied.
Appraisers are trained and licensed to provide independent, substantiated opinions of the current market value of a property. In most cases, the buyer will be responsible for paying for the appraisal. Depending on the lender and type of loan, it can either be paid at the time you make a loan application, at the closing as a cost of the financing or built into the cost of your mortgage. The costs of appraisals vary, be they are generally in the range of $400 to $600 dollars, depending on the size of the house and the city in which you live. An appraisal will determine the current market value of the house you have agreed to purchase. The appraisal is ordered by the lender to give them a basis of how much they are willing to loan you. And the work of the appraiser is totally isolated from all other individuals involved in the home buying and financing process to keep it purely independent and professional.
It’s important to note that a lender will not lend more money than a house is worth. If an appraised value is lower than the purchase price you and the seller have agreed on, you may need to renegotiate the price with the seller. But, the seller may not agree to a lower price. If a house appraises far lower than the listed price, it doesn’t mean that you’ll get it for that price. And if a house appraised higher than the listed price, it doesn’t mean that the bank will give you more money. This is another reason a qualified REALTOR® provides value. First, they will help you evaluate the current market value prior to you making an offer to purchase and entering into a contract. Second, they can advise you on how to proceed if you run into an issue like this.