Home Loans

What is a home loan?

A home loan, or a mortgage, enables you to purchase a home without having to foot all the cash out of your pocket when purchasing. You will, however, need to make a down payment, which is typically between 5-20% of the home’s appraised value (some types of loans require zero down), along with closing costs and some other fees. The lender then finances the rest of the purchase. You will repay the loan, along with interest, over the course of (generally) 15 to 30 years.

Are all home loans alike?

Before you get started, you’ll need to choose a mortgage type. A conventional loan will necessitate a 5-20% down payment on the home.  There is also an FHA loan, which only requires a down payment of 3.5%, but necessitates mortgage insurance. If you’re a military veteran, consider obtaining a VA loan, which lets you buy a home with zero down payment.

Once you have chosen the kind of loan which is best for your scenario, you may be given a choice of repayment arrangements for that loan.  Here are the common types of mortgages:

  1. 30-year fixed-rate mortgage. The interest rate on this 30-year mortgage will remain fixed no matter the changes to the national rate.
  2. 15-year fixed-rate mortgage. This mortgage will also have a fixed interest rate, but the term lasts just 15 years. The monthly payments will be higher, but the overall interest paid over the course of the loan will be significantly lower.

What do I need to know before applying for a home loan?

A home is likely to be the largest purchase you will ever make. To qualify for one, you will need to prove that you are living a financially responsible life and that you can afford the monthly payments.

The primary way lenders gauge your financial responsibility is through your credit score. This number is like a grade that tells lenders how you have handled your past credit card accounts and other debts. It will include the length of time you have had your credit cards and loans open, the timeliness with which you’ve made your payments, the trajectory of your debt and the amount of available credit you might use. Most lenders will only grant a home loan to borrowers with a credit score of 650 or higher. You can check your score for free on Credit Karma. You might also consider ordering a free credit report from all three major credit bureaus once a year at AnnualCreditReport.com.

During the time leading to your mortgage applications, make sure to pay all your bills on time, don’t open new credit cards and work on paying down overall debt. A higher credit score will help you get approved quicker and it will ensure a lower interest rate on your loan.

Another crucial factor in determining your eligibility for a mortgage is your debt-to-income ratio, or your DTI. Lenders want to know how big your collective outstanding debt will be in relation to your income if you receive the home loan. When should I apply for a home loan?

While you won’t need the loan until you are ready to close on a house, it’s a good idea to start the process before you begin house-hunting. Your lender will let you know whether you can expect to be approved for a loan and will provide you with an estimate of how much house you can afford so you don’t face disappointment later.

When initially applying for a home loan, ask for a letter of pre-approval. This letter confirms you are pre-approved for a home loan up to a specific amount. Having this letter in hand shows real estate agents and sellers that you are serious about buying.

Here is a list of documents you may need to get started applying for your home loan.

  • Name of current employer, phone and street address
  • Length of time at current employer
  • Official position/title
  • Salary including overtime, bonuses or commissions
  • Two years’ worth of W-2s
  • Profit & loss statement if self-employed
  • Pensions and Social Security check stubs
  • Proof of child support payments
  • Copies of alimony checks
  • Statements for all checking and savings accounts
  • Investments (stocks, bonds, retirement accounts)
  • Proof of any gifted funds from relatives
  • Car loan information
  • Explanation of any blemishes on your financial record; including bankruptcies, collections, foreclosures and delinquencies.

If you’re ready to apply for a home loan, stop by ASCU today or go to https://ascu.org/loans-and-credit-cards/home-loans/ We are committed to your financial success!

 

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