“Knowledge is power.” This is true in any industry and is especially true when you are making a large personal decision or purchase. By understanding all your options, knowing which questions to ask and equipping yourself with all the necessary information to make an informed decision could not only save you a significant amount of money, but also can help ease the anxiety that can come with making a big investment.
In this case, we’re focusing on a home mortgage, which is one of the biggest investments you’ll make in your life. Instead of diving in head first, you can (and should) take advantage of the many resources available to you. In addition to the abundant amount of content and information online, there are also community organizations and services that offer assistance and educational opportunities. Click here for a list of housing counseling agencies approved by the U.S. Department of Housing and Urban Development. You can find workshops on many different stages, situations or topics throughout the home-buying and consideration process. You can also take advantage of real estate professionals or loan officers to provide insights into the industry and how you can prepare. They will typically offer free consultations and are available for any questions you may have. You can either do a Google Search for a local real estate agent, or ask family and friends if they know of anyone they’ve worked with in the past.
To keep your home search focused and on track, you should first address your financial state. Unless you have a very big stack of cash sitting around, you will likely need to apply for a mortgage to make a home purchase. A mortgage is an agreement by which a financial institution lends money (along with an interest charge) in exchange for taking title of the debtor’s property, in this case, a home. Similar to loans you take out for education or a car, a mortgage follows a similar life cycle and process. Let’s take a closer look, along with some common questions along the way:
- Pre-Qualification and Application: the first step includes sitting down with a lender to discuss the loan process and your specific financial situation. The discussion will typically go through your goals, along with your financial situation and ability to repay the loan. You will usually be tasked with filling out a loan application either in person or online. The outcome will tell you how much home you can afford so you can begin exploring realistic home options.
What information will they need? Lenders will look for your debt-to-income ratio which will factor in your current income and debts (includes recurring bills or payments from credit cards, student loans, car payments, medical bills, etc). They will also factor in your length of employment, credit score and history, as well as savings amount.
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- Underwriting Analysis: next is the underwriting process, which includes a thorough analysis of your financial risk from issuing the loan. Underwriters will conduct an analysis to verify all of the information from the loan application is accurate. Their role is to uncover any false or misleading information in the loan application, so the lender can have a complete and accurate representation of your situation.
How do they do it and how long does it take? Underwriters will review all the paperwork associated with the loan (which is a BIG stack of papers, including supporting documents such as tax returns, W-2s, bank statements). They will verify facts such as employment history, income and credit scores. In some cases, there may be additional documents they will need to request from you. The timeframe can range depending on the specific loan application, but typically averages between five to eight business days, although can take up to a few weeks in some cases.
- Approval Process: once the underwriting process is complete and all information in the application has been verified, you move into the approval process. This step will outline the terms for repayment of the loan, the term or life of the loan repayment schedule and any other details to move forward.
What about pre-approval? Pre-approval and pre-qualification are often used interchangeably, but there is a difference to be aware of. Pre-qualification is typically more of an estimate of how much house you can afford vs. pre-approval which is based on facts (and requires documentation), which is usually a more accurate representation. Make sure to ask your lender exactly how they define it in their process and confirm with your real estate agent which one has more credibility in your local market (typically a pre-approval).
- Disbursement: once approved, the lender disburses, or pays, the funds to the borrower. How the funds are distributed will vary depending on the specific loan.
Are there grace periods on these loans? Sometimes the borrower has a specified grace period between the date funds are disbursed and the start of the repayment schedule. Discuss the exact loan terms with your mortgage company to ensure you are crystal clear on the repayment schedule.
- Repayment: now you are responsible for paying back the balance of the loan, plus interest, according to the payment schedule and terms outlined in the loan agreement. Once the entire balance in paid off, the life of the loan ends.
What if I can pay off my loan early? This is called prepaying your mortgage. By paying it off early, it may cut down on the amount of interest you incur over the life of the loan. Be sure to check with your lender on any prepayment penalties or if it is allowed for your loan.
As you prepare to start the process, here are a few tips to be aware of to prevent yourself from fraud or potential illegitimate sources:
- Something that’s “too good to be true:” unfortunately if this thought crosses your mind about an offer or a claim, it likely isn’t legitimate. Make sure to get an offer in writing and seek a second opinion from a professional you trust.
- Hidden feeds: always check if your mortgage includes a penalty if you pay it off early, or any other fees you should be aware of. Although the thought may not cross your mind at this point in time, it may be a factor in the future.
Purchasing a home is a very exciting milestone. After reading this article, you are already taking the first steps to doing your due diligence to put yourself in the best position possible to make an informed decision. Leverage your resources and talk to an ISU Credit Union representative to ensure you land your perfect home, both now and for years to come.