What does a house mean to you? Family? A place of peace and tranquility? Indeed, these are great values. You probably want to have those high values, but sometimes it can be hard to buy a house if you lack financial strength. This is where the best home loans enter the picture.
Relax, You’re in a Good Position
Are you hesitating? You may be afraid that you cannot afford to pay today’s mortgage fees. You may not have a 20 percent down payment for your dream home, not to mention the full purchase price. As soon as you envision a picture of your new home, you may get away scared with a nightmare. You will have to pay homeowner’s insurance as well.
There’s no need to worry. Fortunately, you can find a wide array of options for any need. Even though you overcame all your fears and finally looked at the market, you might backtrack because the mortgage market is overflowing. There are so many lenders, banks, credit unions, and even private mortgage lenders. Thus, you may still be hesitating because you don’t know how to choose the best home loan for you.
You need a hand, and you are in the right place. In this article, you can find a lot of beneficial information about how to get started. You may want to know what “mortgage” exactly means and what other fundamental terms you must consider. Let’s start by taking a more in-depth look at a home loan.
What is a Mortgage?
A mortgage is a loan intended to support you in buying your new home, renovating your current house, or investing in real estate. This loan agreement involves two main subjects: a lender and a borrower.
Already in the etymology of the word, the concept of “reciprocity” is clear. It derives from the fact that what has been loaned must be returned. Therefore, the loan consists of the exchange of money between the lender and the borrower. The latter is committed to returning it to the lender over a certain period (in general, the duration varies from five to 30 years).
In other words, you are obliged to return the amount of the loan, plus interest, to the lender by making payments every month. If you are not able to pay back the loan, the lender can decide to retrieve the asset that was bought under the terms of the mortgage agreement.
13 Essential Tips for Getting the Best Home Loans
There are different factors to consider if you want to search for the best home loan types. As a first step, you should prepare a list containing your strengths and weaknesses in terms of mortgage conditions. Gather your credit history and score, debt-to-income ratio, and employment history. These items will give you a clear picture of what you can afford and what may be out of your budget. After that, you can choose your dream home or a different type of asset. Think about how long you plan to stay in your new home and how much of a down payment you are willing and able to make. These are all some of the essential determinants. However, one of the most important items on the list is to know if you meet the lender’s requirements.
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1. Check your credit score.
Ready for a mortgage?
Even though it’s not obligatory, it is highly recommended that you look over your credit score before you take out a loan with a mortgage lender. Your credit score can produce a considerable variance in terms of how much interest you will have to pay to your lender. It is better to have a clear picture of what a mortgage loan would mean in your case and how it would affect your financial situation. Your credit score will also determine what mortgage lenders you can approach.
The first step is to find out your FICO score, which is a credit score generated by the Fair Isaac Corporation. Your future lender will review your score and your credit reports to evaluate your credit risk. Many determinants are taken into consideration while calculating your FICO score. Some of them are what kind of credit you had, your payment history, liability, credit history, and new credit records.
Some loan arrangements want you to ensure you will keep a minimum credit score. Here’s a concrete example. In case of a standard mortgage, you will need a minimum FICO credit score of 620, while you can get a low-down-payment FHA mortgage even with a score of 580. More precisely, if you have a 590 score, you would probably be better off seeking FHA loans.
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2. Set a figure about how much you can afford to borrow.
The core question is how much money you can ask lenders to lend you for investing in a property. Lenders usually apply two debt-to-income ratios to settle it: front-end and back-end ratios. They consider your monthly income and expenses, taxes, and insurance. Your monthly payments should be a maximum of 28 percent of your pre-tax income. They will review your mortgage payment and other debts. The amount should not exceed 36 percent of your income. The lender will use the ratio that allows for the more inexpensive fees.
That’s why before you fill out your application for a mortgage loan, you should set your monthly budget and make sure that you can afford to repay the debt with interest.
3. Keep your documentation ready.
You can gain a notable advantage if you prepare all your documentation before you search for a home loan. The process will go much more smoothly if you can present all the required files at once.
To get even more concrete, we will explain which documents you will need at your disposal.
Your future lender surely will ask you to present documents about your financial situation like your last two months of bank statements in conjunction with checking, savings, retirement records, and brokerage accounts. You will be asked to prove your income and employment status. You must show your federal tax returns from the last two years, your W-2s, 1099s, and pay stubs issued in the previous month. Additionally, you must present documents verifying your identity, including your Social Security card and driver’s license if available.
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4. Provide additional documentation.
In some cases, your lender might ask you for further documentation. For instance, if you are a homeowner and about to sell your property, you will have to show your contract. If you don’t intend to sell it, you might have to provide a monthly mortgage statement. If you are selling because of divorce or separation, you will be asked to present the agreement. If you are renting a house, you may have to provide your landlord’s contact information. If you have additional income or any other property that you collect income from, you should present proof.
If you are a business owner, you should present your corporate tax returns and year-to-date profit/loss statements. They will ask about your credit report if you have late payments or other negative records.
If you are a veteran and want a VA loan, you must present the relevant documentation to prove the above.
5. Ask for a pre-approval to make sure you can do it.
What is a mortgage pre-approval?
It is not necessary to decide ahead of time which house you want to buy to get a mortgage pre-approval. However, if you’re going to look more determined and convince your seller that you can buy their house, this document can be helpful.
This document practically tells you how much of a loan you can take out, and consequently, it shows whether or not you can purchase your dream home. As soon as you decide on a lender, you can go to the loan officer and request a mortgage pre-approval process. All you need to do is supply your relevant information, fill out the application, and pay an administration fee.
Your potential lender checks your credit and debt and asks for your documents about your financial situation, including income, properties, job records, taxes, and monthly payments. The lender also validates the data you provide. After that, they will supply a document that contains a pre-approval with your potential maximum loan amount. This paper is usually valid for the following 90 days. If it expires, you must begin the same process from the very beginning.
6. Higher or lower down payment? Which one is better?
The down payment is the money you will give to your seller to secure the deal. How much is this amount? According to the standard practices of the mortgage loan business, you will have a 20 percent down payment. Of course, in some cases, you can negotiate that amount with the seller.
The rest of the money you will pay using the loan you get from your mortgage lender. The lender sees your down payment as evidence about your ability to pay the loan back. Your down payment has tremendous power. It will influence your total price on the house because lenders will consider it in calculating your interest rate. For example, if you make a higher down payment, your interest rate will be lower, and vice versa.
Don’t get upset if you can’t provide a significant amount. There are several options in conventional loans; you can choose to fund your desired asset. Some options like VA loans and USDA mortgages don’t require down payment at all. Their point of view is that if you provide a lower down payment, you probably will be able to cut your monthly expenses. You can use the cash you save each month to cover your mortgage and thus get a new home with less money spent upfront. It’s very convenient for first-time buyers.
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7. Closing costs are not your burden in all cases.
Don’t think that you can get the keys immediately after paying all the initial fees. You are not far off, but there is a final price you have to pay. It’s called closing costs. These fees are connected with the closing of the loan process and the arrangement of a real estate transaction. Like all the other costs, these fees also can vary, but usually, you can expect an amount of 2 percent to 3 percent of your mortgage.
The good news is that you can agree differently from general practices with your seller. If your seller accepts the terms, they will pay the closing costs, not you. However, it doesn’t necessarily mean you will pay less in total.
Let’s take a specific example. If your dream home costs $300,000, the closing cost will be approximately $9,000. If you pay this cost, you can add it to your offer. Thus, you will offer $309,000 in reality (your loan will be for this amount). On the other hand, you could ask your seller to pay the closing costs instead, and you would only borrow $300,000.
8. Have a second thought about an FHA loan if your credit history isn’t great.
What happens if your FICO score is under the minimum range and you are probably not able to qualify for conventional loans? There’s no need to give up. You have another option. The FHA mortgage can work for borrowers who can’t produce qualifications that match the criteria of traditional lenders. However, there is a crucial thing to consider before turning to this solution. These mortgages are more expensive than traditional ones, so make sure you have sufficient resources to pay off the cost of the loan.
9. What about mortgage insurance?
Here comes a nightmare: insurance. Don’t run off! You don’t necessarily need it, although we usually would recommend carrying some.
Mortgage insurance plays a valuable role in the stability of the banking system. It assists financial organizations in the granting of mortgages that cover a large part of the real estate value.
When do you have to pay for this insurance? It depends on your down payment. If you put less than 20 percent down, you presumably will be required to buy private mortgage insurance (PMI). The rates can differ based on some critical factors:
- The duration of your loan
- Your credit
- The amount of your down payment
- Other factors
10. Keep an eagle eye on low rate home loans.
Many first-time buyers make a colossal mistake. They accept the first offer immediately and don’t look around to see what else the market can offer. Others don’t give enough importance to the fine print. It means that the insignificant difference between mortgage rates can make a massive difference in the end. A lower price can save you thousands of dollars that you can use when your loan period ends.
Look around everywhere. Another common mistake some borrowers make is searching only among the big providers, and they don’t care about smaller home loan issuers. You may be surprised that it’s possible to get a great deal with a local bank too sometimes.
11. Flirt with a 15-year mortgage.
There are many options among mortgage programs as far as the term length is concerned. You can consider 30 years, or you can decide to take out a 15-year home loan instead.
What are the advantages and disadvantages? To make a long story short, if you choose a 15-year mortgage, you will save a considerable amount on interest rates, but your monthly mortgage payment will be higher.
12. Is a fixed or adjustable rate suitable for you?
In the mortgage industry, there are many options if you consider applying for a loan. For example, you can even decide if you prefer a fixed-rate loan or an adjustable-rate mortgage.
The most common combination among homebuyers is a fixed-rate mortgage with a duration of 30 years. But some buyers choose adjustable rates, which can also be a reasonable solution in many cases due to their initial lower interest rates. For example, for a 5/1 ARM mortgage, you would pay much less during the first five years than you would in the case of its fixed-rate counterpart. You can consider it a valid alternative if you aim to stay in your new house only for a short time.
13. Are interest-only mortgages the right solution?
You can take profit from another appealing option called interest-only mortgages. As you may imagine from the name, it means that you would pay only the interest on the mortgage instead of the principal payment amount. You can find them with adjustable and fixed rates as well. The loan shifts to entirely amortized as soon as your interest-only period is finished, and after that, you will have to pay a higher monthly rate. You will be expected to pay increased fees as you make this period longer. This option can be a good one if you aim to refinance your loan in a couple of years after your interest-only period is over.
It is also suitable for you if you prefer to live in a house you have been longing for instead of a house that it’s just good enough. Believe it or not, the majority of first-time homebuyers apply for a new equity loan after some years of staying in their new house. The reason is that the house doesn’t meet all their current needs. Did they make the wrong choice? In any case, buying a home sometimes requires quite a long period of reasoning and evaluation. Don’t buy a house only because you need one. Buy the house because you like it!
The 5 Top Mortgage Lenders of 2019
Quicken Loans
“Start Simply. Mortgage Better. Get the expertise, without the complexity.”
If you are searching for home loan options, you have probably encountered Quicken Loans since it is among the most well-known mortgage lenders.
Best At
They promote their services emphasizing simplicity, and in fact, their customers seem to be satisfied. They are among the best lenders, according to customer satisfaction.
Offerings
The most important reason they are considered a leading lender is that they provide various types of home loans and mortgage rates. You can apply for conventional loans, jumbo loans, ARM, VA, and FHA loans and refinance with fixed-rate and adjustable-rate mortgages. They have a significant advantage! They ask you for a minimum FICO credit score of 580 (for FHA loans). You can also find other loans with different credit score requirements. They provide various maximum debt-to-income ratios as well. What is interesting is that you can customize your loan terms if you reap the benefits of the “YOURgage” feature.
A Plus
Simplicity is the key. If you are annoyed about going to a lender’s office or calling them on the phone, you don’t need to push a button anymore with Quicken. The company has an excellent tool for you: an online mortgage application tracker. You can ask for help from their agents too. If you prefer solving problems online, you can use Rocket Mortgage, which is an online-only portal. It is designed for customers who would prefer to go through their mortgage application online.
Weaknesses
They don’t offer banking services, and they don’t have financial products or any options for investments.
Ratings
Quicken has high scores everywhere! They proudly show off with five out of five marks in the JD Power satisfaction rating. Quicken Loans received an A+ from the Better Business Bureau for customer service and scored a five in the 2018 U.S. Primary Mortgage Origination Satisfaction Study.
Bank of America
“Get the upper hand while house hunting.”
This firm’s story is interesting. Bank of America was initially an Italian bank; in fact, the bank’s original name was Bank of Italy. Although it was formed in San Francisco, Italian Amadeo Peter Giannini founded it. His mission was to support immigrants in getting financial help when they were not considered qualified elsewhere. Now the bank has 67 million customers worldwide.
That’s enough history. Let’s delve into the firm’s business.
Best At
They are well-known thanks to their 100 percent loan-to-value options and their low interest rates.
Offerings
Bank of America provides quite an extensive range of mortgage types such as conventional loans, VA and FHA loans, refinancing, home equity loans, HELOC, and Affordable Loan Solution mortgages. The offered loan amounts are high, ranging up to $5 million. The maximum loan-to-value ratio is 100 percent, and the maximum debt-to-income rate is 55 percent. They require a better minimum FICO score than, for instance, Quicken, as it is 620. You can find a broad spectrum of the potential and a very competitive total closing costs at the bank. Being a big bank, their financial centers are everywhere in the U.S., but still, their presence is limited in the Midwest.
A Plus
Bank of America is well ahead of its competitors with digital technology. The bank has developed a mobile banking app that has even won an award.
The firm offers alternative credit data in some cases. For example, it takes into account rent and utility statements as well.
You can find discount options if you are already their customer.
Weaknesses
The bank doesn’t provide many customization options, being a nationwide company, and seemingly, they care less about their customers. They receive a high quantity of complaints from their clients due to some problems with customer service.
The firm also has some fraud issues in the past that made its reputation questionable.
Ratings
Interestingly, Bank of America has done well when it comes to official customer satisfaction ratings. The bank earned a score of four out of five from JD Power, which is a pretty high rating compared to its competitors. Better Business Bureau rated it an A+.
Guild Mortgage
“Own what matters.”
This company is also a leading lender in the U.S. It also operates as a correspondent mortgage lender collaborating with other banks.
Best At
Guild Mortgage makes it possible for you to own the most critical properties in life, like a new house, thanks to the ample series of loans it offers.
Offerings
The firm also provides all the traditionally supplied home loan types and even more. You can find government home loans, conventional loans, conforming loans, renovation loans, VA and FHA loans, refinancing, jumbo loans, ARM, home equity, reverse mortgages, and USDA loans with fixed and adjustable rates. The firm even offers 1 percent down loans. Like many of their competitors, Guild requests a higher minimum FICO credit score of 620. The maximum debt-to-income ratio is 45 percent.
Guild Mortgage runs branches all over the United States, except in New Jersey and New York.
A Plus
Have you heard about the 3-2-1 Home program? It’s a fantastic opportunity for first-time homebuyers.
You will see it as soon as we decipher their “secret” 3-2-1 code! The number three stands for a 3 percent down payment. Yes, you read that correctly! It means you pay only 3 percent instead of the usual 20 percent down. If you really want to spend more, you can add a gift to this 3 percent. Let’s jump to number two. It’s a $2,000 Home Depot gift card at your disposal as soon as the deal is done. Figure one is another pleasant surprise. You will receive $1,500 in grant money that you can use for your closing costs.
Another plus is the information Guild Mortgage provides. If you are a new homebuyer and need some information about how to start, the firm will be perfect for you. It has a lot of online educational resources about what you will need to apply for a loan and other useful knowledge.
Weaknesses
The firm’s website does not include updated information about its interest rates. It implies that in practice, you must speak with an assistant to figure it out.
Ratings
Guild is not bad, but also not unique. The Better Business Bureau rated the company an A+, and they captured a four out of five in the JD Power customer satisfaction survey.
New American Funding
“Your mortgage, your terms.”
New American Funding started small but now has arrived at the level of a big credit union and big regional banks.
Best At
Don’t be disappointed if you don’t have an excellent credit score and a substantial financial background. You may think you will never qualify for a housing loan. Before you give up, take a look at New American Funding’s offers. They may fund you despite the facts above, even if you are self-employed too.
New American Funding prefers human help over machines. This means the firm takes care of every single application, which is reviewed by humans instead of just computers. Where computer algorithms don’t enable you to pass the first look, New American might help you as it processes requests manually. For example, if you have some significant savings and a good income, New American may finance your home.
Offerings
The company puts several options on the market in terms of home loans. They have very flexible terms.
You can find all the types you may have seen elsewhere: conventional, jumbo loans, ARM, VA, and FHA loans, USDA, purchase, refinancing, and home equity loans with fixed and adjustable-rate mortgages. They offer even interest-only loans! Their minimum FICO credit score is 620, but you may get approval even with a score of 580, which is a very competitive number. New American is not the only lender with a 3 percent minimum down payment out there, but its personal approach is a plus.
Check the lender out if they have a branch in your location. It is present in all states except New York and Hawaii.
A Plus
You can find a lot of useful information on the company’s website to help you choose the most suitable mortgage. For example, it informs you about its rates in the section about today’s mortgage rates. You can estimate your future fees using the mortgage payment calculator.
They also speak Spanish.
Weaknesses
If you are already a homeowner and searching for home equity loans, you should look at other firms. New American is not good at home equity loans.
Another disadvantage is its high loan processing fees, but everything depends on a comparison. A deal with them may be convenient even in this case.
Ratings
New American’s ratings are a mystery. It’s difficult to find any official ratings as they don’t publicize anything. We do know that their Better Business Bureau rating is A+.
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LoanDepot
“Simple. Secure. Smart.”
Best At
If you search for cheap and easy-to-get home equity, consider that you have found one of the best options with LoanDepot. It’s a pretty safe choice if you are considering renovating your current home. Consider it if you are about to purchase another property or cover your credit card debts.
Offerings
LoanDepot offers a full set of home loan options such as conventional, VA and FHA, refinancing, purchase, additional home equity, and personal loans. If you choose the jumbo loan, you can borrow up to $2 million, which is good compared to competitors. You can apply for ARM with a duration of three to seven years. Fixed and adjustable rates can’t be missed in the repertoire either, of course. The company sets its minimum FICO score requirement at 620, which is not the best on the market. However, you can get a house with a minimum of 3.5 percent down.
You will have an excellent experience with LoanDepot’s customer service due to its professional approach.
A Plus
The firm promises to guide you throughout the loan choice process in a reliable way without focusing on its business interests. LoanDepot will assist you in this crazy journey through its online interface, which submits an on-demand application process.
Weaknesses
LoanDepot indeed has a lot to offer in terms of mortgage programs. However, its rates and fees are way too pricey. The company charges more than its competitors for some products.
LoanDepot is not doing well in administration processes either. It is slow, and it can cause you some bitter moments when it comes to waiting for a response.
Ratings
This firm’s ratings are better than the average. In the 2018 JD Power customer satisfaction study, the company managed four out of five. It received 8.7 out of 10 stars on Trustpilot as of August 2019 and an A- rating from the Better Business Bureau.
Learn More About Best Mortgage Lenders for First-Time Buyers in July 2020
Let’s Hear From You
Have you already found your dream house? If so, which mortgage lender will you turn to? Why? Feel free to share in the comments section below.
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