Home Loan: The Ultimate Guide

Home Loan

The Home Loan Guide is designed to teach you everything you need to know to get any type of home loan, including a first mortgage, a second mortgage, a refinance loan, a home equity loan, a value line of credit. home equity, a debt consolidation loan and even a bad credit loan. Use this home loan guide to figure out what type of loan is best for you and what you need to do to get the best deal for YOU.

The most important thing is that you find a mortgage that suits your needs. To help you achieve this, The Home Loan Guide aims to educate you enough so that you are armed with the most powerful tool of all when you apply for your loan – the power of knowledge!

Determine the type of home loan you want.

The first step in getting a loan is figuring out what type of loan you need. Here is a list and brief descriptions of the most common home loans:

First Mortgage

The primary loan used to purchase a house or other real estate. The mortgage loan is secured (protected) by the lender who puts a lien on the house or property you buy with the loan. Senior mortgage loan programs offer the most flexibility of any loan. They can be fixed interest rate or variable interest rate and sometimes they offer a lot of great programs such as first-time home buyer rebate, no down payment, no closing costs, 100% loan. % (a loan at 100% of the value of your home) and pre-approved loans for potential buyers.

A refinance loan

A loan that replaces the original loan (s) on your property with a new loan. These loans can be used to lower your mortgage interest rate, gain equity in your home (by taking out a loan that is larger than your original mortgage), or to consolidate several home loans you may have on your property. A refinance loan has the same terms as a traditional mortgage loan.

Second mortgage

A mortgage loan secondary to the first mortgage. This means that if you don’t pay off your loan, a first mortgage lender would have the first rights to the property before the second mortgage lender can stake their claims. Since a second mortgage carries a higher level of risk, these loans generally carry a higher interest rate than a first mortgage. When you are evaluating second mortgage options, you need to decide whether it is better to get a second mortgage or refinance your existing mortgage with a larger loan. To make this decision, look at the interest rate on your current mortgage. If it’s very low, it probably makes sense to get a second mortgage. If you think you could refinance a larger mortgage at or around the same interest rate, you might be better off using a refinance loan.

Home Equity Loan

A home equity loan used to take equity out of your home without refinancing your original loan. These loans are generally faster and easier to obtain than a traditional mortgage loan. They are also attractive because you can get them to finance things like auto purchases or other miscellaneous purchases and they are generally tax deductible. Home equity loans come in a variety of types, can be fixed or variable rate, and can range from 5 to 30 years.

Home Equity Line of Credit (HELOC)

This loan is similar to a credit card loan except that it is secured by a lien on your home and is tax deductible. These loans allow you to withdraw money only when you need it and typically stay open for around 15 to 25 years. The terms of a home equity line of credit include a fixed rate, a variable rate, an interest rate on the unused portion, variable rates based on the percentage used, principal only repayments and many loan terms. different, usually between 10 and 25 years old.

Fixed rate loan

A loan for which you pay a fixed rate of interest over the life of the loan. These loans usually have a higher interest rate than a variable rate loan, but they are also protected against upward fluctuations in interest rates.

Variable Rate Loan

Also known as a Variable Rate Loan (ARM), this type of loan has an interest rate that varies over the term of the loan. The interest rate is usually linked to a benchmark interest rate such as the prime interest rate or the LIBOR rate, and it can be adjusted on a daily, weekly, quarterly or even annual basis.

Debt Consolidation Loan

A loan that replaces all of your credit card debt, auto loans, boat loans, personal loans, and any other loans you have with one loan. These loans are usually secured against the equity in your home and are beneficial because they can lower your monthly payments and significantly lower your interest rate.

Bad Credit Loan

A loan for someone with bad credit. These loans generally carry a higher interest rate than a typical loan and are generally made for a lower percentage of the equity in your home. These loans are also called subprime loans.

Understand your credit.

Almost as important as your income and the amount of equity you need to invest in your home (or already in your home if you want to take equity out), your credit report will dictate how much money you can borrow and how much money you can borrow. what interest rate. Your credit is often summarized as a digital representation of your estimated creditworthiness using a credit score. Your credit score is then used by banks and lenders to determine whether or not you are creditworthy, and if you are, how much and at what interest rate they will lend you money.

Your credit score is based on your credit reports and is determined by averaging the information in your credit report against millions of other people’s credit reports. The main factors that determine your credit rating are: your past payment behavior (less late payments, the better), your current debt load (the lower the better), the length of time you have used the credit ( the longer the better) and whether or not you are looking for credit (the less recent credit applications the better). A credit score can range from 375 to 900, 900 being the best. And while not everyone agrees, a credit score of 650 or higher is considered excellent by most lenders.

It is important that you understand your credit before applying for a loan. If your credit is great (a score above 650) you should expect to get very competitive interest rates and lenders may even offer you loans that are higher than what you ask for. On the other hand, if you have bad credit, don’t worry, there are many lenders who will give you a loan. However, these loans will often come with higher interest rates and / or lower loan amounts. Understanding your credit is important so that you can accurately define your loan expectations.

Home Loan Guide

Determine how much to borrow.

Depending on your credit, income, current debt, and other factors, you may be able to borrow different amounts of money than those applying for the same loan. Before applying for a loan, you need to have an idea of ​​how much you can actually borrow and how much you want to borrow. Here are some guidelines:

How much can you borrow?

Try to be realistic about it. If you have good credit and you think the loan repayments would be well within your means, you should probably be able to borrow that much money. However, if you have bad credit, don’t expect to be able to borrow as much money as you need. The amount of money you can borrow varies widely from lender to lender. If you are seriously considering applying for a loan, your best bet is to go to a company whose lenders compete for your business. This way, you can get multiple ratings of your creditworthiness in one easy step. Plus, since different lenders are looking for different types of investments, your loan could be worth twice as much to one lender as another. It is really difficult to determine how much you can actually borrow until you apply for a loan. However, don’t be discouraged until you’ve thoroughly explored your options.

A good example of this is this: A friend of mine wanted to get a first home loan. He applied to his local bank and was told they would loan him $ 70,000. Discouraged, my friend almost gave up buying a home until he used an online service that included various lenders competing for his business. When he did, he found he was able to borrow over $ 100,000. Why, because often mortgage companies are more lenient than banks, and more so, some mortgage companies really need a specific type of loan (for example, a single family loan in a certain geographic area) to balance their portfolio.

How much do you want to borrow?

You need to know how much you want to borrow before you apply for a loan, especially if it’s a home equity loan, home equity line of credit, or second mortgage. This is an important topic because often times, if you have excellent credit, the lender will often offer you a lot more money than you expected. Don’t let this catch you off guard. If this happens, only take a loan for the amount you really need. By accepting larger loans, you are much more likely to spend the extra money on frivolous items and you may also have to pay interest on unused lines of credit or money you would not have borrowed. other.

Know what to look for in your loan.

This mortgage advice really serves to protect you against taking on a bad loan. Many home loans have covenants that often hide significant expenses or create penalties that could have been avoided. Here are some things to look for in your loan, or questions to ask, before accepting a loan:

Does the loan sound too good to be true?

If so, it probably is. Check all the loan clauses carefully before accepting the loan. Look carefully for hidden costs and learn about commitments you don’t understand.

Prepayment Penalty – Make sure the loan you are applying for has NO prepayment PENALTY. Prepayment penalties have become less and less common, but sometimes a lender will try to add a commitment that adds a fee for any prepayment of principal or prepayment of the loan. These loan covenants protect the lender against the risk that interest rates will drop and you will prepay the loan. In some cases, a prepayment penalty is acceptable, but only in cases where

1) you are certain that you will not prepay the loan, even if interest rates fall,
2) if the prepayment penalty is low and
3) if the loan the interest rate is lower due to the stipulation. If you take out a loan with a prepayment penalty, you will often be subject to significant fees if you decide to refinance the loan or prepay the loan. Sometimes prepayment penalties only apply for the first 5-10 years of a loan.

The important point here is that you understand the alliance and allow yourself as much flexibility as possible.

Loan Fees

Loan fees can be overwhelming at times. Try to avoid a lot of loan fees. Loan costs are usually shown as a percentage of the mortgage. Note that these fees are negotiable. If a lender offers you a loan with a 2% loan fee. Tell them you’ll agree if they reduce the fee to 0.5%. They won’t always be able to lower the fees, but if they don’t, make sure the higher fees are worth it. Higher loan fees may be worth it if they also offer lower interest rates or some other attractive loan incentive.

Mortgage Points

Mortgage points, also known as loan points, are fees you pay that effectively lower your mortgage interest rate. For example, one lender may offer you an 8% loan with 0 points and another lender may offer you a 7% loan with 2 points. To translate what this means, it means that you can either get an 8% loan or get a 7% loan, but in order to do that you have to pay, in advance, in cash, 2% of the total value. of the loan you are borrowing. The rule of thumb about mortgage points is that if you keep the loan for more than 7 years, it’s worth paying the points to lower your mortgage interest rate. If there is a good chance that you will repay or refinance the loan within 7 years, then you are probably better off taking the 8% loan with zero points.

Appraisal Fees

An appraisal fee is almost always charged when obtaining a first mortgage. However, if you are getting a second mortgage, home equity loan, home equity line of credit (HELOC), home improvement loan, or consolidation loan, you may not need an appraisal. . Appraisal fees range from $ 150 to $ 800, depending on where you live and the type of home you own. In addition, a loan that does not require expertise is often faster and less expensive than a loan that requires new expertise.

Inspection fees

Inspection fees are generally only required for first mortgages. And then, usually only for older homes or for areas susceptible to earthquakes, floods, termites, etc. If you are asking for something other than a first mortgage, you should try to negotiate these fees with your loan.

Compare Everything

After you apply for a loan, be sure to compare each loan offer you receive. Some may offer low interest rates and high loan fees. Others may offer higher interest rates but other more favorable loan terms. It’s up to you to evaluate these different options and decide which loan offer is best for you.

Gather your loan information.

Before you apply for your loan, make sure you have all the information you need to apply for the loan. Common items you will need to provide before and after the initial request include:

During the first request:

  • Social Security number
  • Name and social security number of any co-applicants
  • Property address
  • Phone number
  • Home address
  • Previous residential address (for credit report)
  • Estimated value of the property
  • Annual revenue

After applying for a loan:

  • Proof of employment and income (a recent pay stub)
  • W-2 forms from last year
  • Last 2 years of tax returns
  • A copy of your last mortgage statement
  • A recent bank statement
  • A copy of the home purchase contract (if applicable)
  • If you received a cash gift, you need a copy of the check and the donor’s name
  • If you own other real estate, you may need lease information, property tax, and insurance documents.
  • If you are receiving alimony or child support, you may need proof of income (canceled checks or bank statements)
  • If you have gone bankrupt in the past seven years, you will need a copy of the agreement and an explanation of the circumstances
  • If you are currently paying rent, you may need to provide your landlord’s name and address
  • If you are collecting Social Security you will need a copy of the award letter and a copy of a recent benefit check

Apply for your loan.

The next step is to apply for your loan. There are different ways to apply for a loan. I’ll discuss the three main ways and the pros and cons of each:

Apply to a Bank – This option works for some people, especially people in smaller towns who are more comfortable applying for a mortgage face to face. The problem with banks is that they are very rigid and usually only look for specific types of loans that fit their portfolio, and that your loan may or may not fall into. If you strictly adhere to their loan requirements, there’s a good chance their mortgage rate isn’t competitive. In fact, you won’t know it until you compare their mortgage rate to that of another lender.

Apply through a mortgage broker

A mortgage broker is a good loan option because they can contact several lenders to find a lender who will offer you the loan features you want, and often at the most favorable rates. The downside of working with a mortgage broker is that mortgage brokers are often relentless. Since they have your phone number, they will keep calling you and not take a no for an answer. In some cases, they will sell you a loan product that you don’t need.

Apply online

Applying online, in my opinion, is the best way to apply for a loan. Applying for a loan online allows hundreds or even thousands of lenders to view your application and get back to you within hours (and sometimes even minutes). Plus, every lender realizes they’re bidding against other lenders, so they’re much more likely to offer their best rates up front, without having to negotiate. And perhaps the most valuable aspect of applying for a loan online is that the lenders competing for your business DO NOT have your phone number or other personal information needed to contact you personally.

Online services are only allowed to contact you if you accept their offer. Here’s why and how it works: When you submit your application online (which is usually free), the company you use to submit the application does not give your personal information to any of the lenders because, if they did , the lender may contact you personally and waive the auction process that the online application uses for their benefit and that of you, the borrower. Because the website you are applying for a loan on is beneficial if you get a loan, it is in their best interest to protect you and find you the best loan possible.

Other things to consider

Besides the above three ways to apply for a loan, you should also make sure that you apply for your loan from the appropriate lender. For example, if you have bad credit, you should apply for a loan from someone who specializes in bad credit loans. If you are looking for a debt consolidation loan, you should apply for a loan from someone who specializes in this type of loan.

Complete the loan process.

Once you’ve decided where you stand with all of the previous topics, it’s actually pretty easy to make up your mind. Simply follow the steps provided by your lender. They should give you a timeline of events, with the ultimate goal being the closing of your loan. They should give you a detailed list of everything they will need from you and everything they need before they finance your loan.

If during the process you have a lot of issues or disagreements with your chosen lender, don’t be afraid to change lenders, or at least let your potential lender know that there are many more. mortgage companies waiting to take your loan application.

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