The loan process can be a bit confusing. To help you understand how acquiring a home loan works, I am meeting with Sheryl Nolan today to demystify the lending process.
For more detailed information on loan approval, read what I learned about qualifying below. This is the first episode in a four-part series that will walk you through each stage of home buying. My goal is to make lending easy. Now, let’s learn whether prequalified or preapproved is better and why you need to know before you start your home search.
Preapproved versus Prequalified
The first step in acquiring a loan is understanding the distinction between prequalified and preapproved. When you get prequalified, you are providing a lender information like income and assets through an online loan application or over the phone. Based on this information, the lender can let you know what you qualify for.
Preapproved entails providing a lender more detailed information. Sharing paystubs, W-2s and other tax forms with a lender allows them to verify that you qualify for the loan you are interested in. Preapproval hold more weight in the buying process because it verifies a loan officer has seen financial information and approved the loan.
Buyers should get preapproved before beginning the home search. Sheryl goes so far as to call the listing agents for her clients to let them know all of the documents have been reviewed and affirms that you are a solid buyer. This phone call can me tremendously effective if you are competing against other buyers.
Important Terms You may have heard of the debt to income ratio. This just means that your income is compared to your debt. Debt includes things like school loans, credit card debt, and car loans. This ratio is important in the home buying process because different loan programs have different numbers they have to go by to get you approved.
Another term you may not be familiar with is front end ratio. The front end ratio is just your new housing debt. On the other hand, back end ratio includes new housing debt plus all of your other debts.
Credit score is also important. To come up with this number, the loan officer pulls your score from the three different unions: Experian, TransUnion, and Equifax. The middle score is what they look to as your credit score. This score will help determine what your interest rate will be.
Be sure to get preapproved before you begin your home search. Completing this step at the beginning allows you to go into your home search knowing exactly how much house you can afford.
Tune in to our next episode of Demystifying Lending to continue learning about the home loan process.
In part two of Demystifying Lending, we are going to be talking about loan disclosure, prepaids and interests rates.
Sheryl Nolan, a financial loan expert, gets a lot of question on interest rates. They fluctuate often and can be difficult to understand. Let’s break it down.
Loan Disclosure and Estimate
Disclosing the loan includes a loan application, a loan estimate, and a legal disclosure.
After you are under contract, the next step is to get the loan disclosed. This lays out the parameters of the loan financially. After this step is complete, we send an electronic copy which has to be signed within three days. If this signature is not obtained within the three-day window, the loan disclosure has to be mailed and signed which can delay the process.
In the loan disclosure, you will find estimates on your interest rate. Be aware this is just an estimate because of items that can arise during inspection. If the rate is not locked in, the numbers can fluctuate as well. Sheryl recommends locking in an interest rate within 30 days to save you money.
The estimate provides a rough idea of what it will take to close the loan and how much you need to bring to the closing table. Home insurance also factors into the loan price. The numbers in the loan disclosure are also an estimate for this reason.
Sheryl often times suggests to her clients, that if they are comfortable with the payment and the interest rate, to lock it in immediately. You can also buy the rate down. For instance, if the seller contributes to closing costs, you can apply that amount to lower your rate.
Buying the rate down means if you put in a certain amount of money that provides you with a 4.5 percent interest rate, you can look into the amount you would need to get that rate down to 4.25 with your lender. This can end up saving you money over time.
Prepaids: Interest, Homeowner’s Insurance, Escrow
Pre-pays are another contributing factor. Depending on the day that you close, your interest rate will change. If you close on the first day of the month, there will be only one day of interest. On the other hand, if you close on the fifteenth day of the month, you will have 15 days of interest to account for.
Another prepaid cost is homeowner’s insurance. You always have to pay for a year of homeowner’s insurance upfront. This sum will cover you for the first year of ownership.
Escrow basically sets up a savings account. Each month, a little bit of your mortgage payment gets set aside so that the next year when your property taxes and insurance are due, you can pull from this fund. Each month you pay into your escrow to account for these large payments at the end of the year of home ownership.
Sheryl often gets asked by clients if their payments can vary even if they have a fixed rate. The answer is yes because insurance can change, deductibles vary, as do property taxes.
The more we learn the more there is to know! If you need additional explanation, give Sheryl Nolan a call. As you can tell, she is extremely knowledgeable.