A simple guide to home loans
The home loan process can be stressful and difficult to navigate; with the number of acronyms and new terms that are used, it can feel like loan officers speak their own language. However, understanding the basics of the loan process can help make the process as easy and pain-free as possible. The following guide highlights the basics of the home loan process, terminology, and what to expect when applying for a mortgage.
How do I start the mortgage process?
So you’re ready to buy your first home… now what? Before you find a real estate agent or start going to open houses, the first step in the homebuying process is to obtain a letter of pre-approval from a lender. You will need to fill out a full mortgage application which will require documentation including a credit check, employment verification, and other financial information. Before committing to a lender, don’t be afraid to shop around for the best interest rates; if all of the credit checks are done within a two-week window, it will not adversely affect your credit score.
How much can I borrow?
After submitting the mortgage application, your lender will pre-approve you for a specific mortgage amount. This is calculated by calculating the cost of a monthly mortgage payment as a percentage of your monthly income; in general, lenders like this amount to be 28% or less. They also look at other factors, such as your debt-to-income ratio when deciding on a pre-approval amount.
How much do I need for a down payment?
The industry standard for down payments is 20% of the purchase price of the home. However, it is possible – and increasingly common – to obtain a mortgage with a much smaller down payment. Some conventional loans will let you put as little as 3% down, while FHA loans can be obtained with as little as 3.5% down; with these loans, down payments less than 20% still require PMI, or private mortgage insurance. Other loans, such as VA or USDA loans, can be obtained with no down payment whatsoever.
How do I choose a loan?
There are a number of different types of loans; the mortgage that is right for you comes down to a number of factors such as income, credit history, location of a home, and more.
- Conventional: the “standard” mortgage that conforms to Fannie Mae and Freddie Mac lending standards.
- Jumbo: a mortgage that exceeds that Fannie Mae or Freddie Mac lending limits but is not insured by the federal government.
- FHA: Federal Housing Authority loans that are insured by the federal government and often have more lax credit standards.
- VA: loans guaranteed by the US Department of Veterans Affairs and available to those who have qualifying military service.
- USDA: loans insured by the US Department of Agriculture and designed to encourage rural homebuying.
How much do I need at closing?
Closing costs is the blanket term for the taxes and fees that are paid when the mortgage is finalized. These often include the loan origination fee, title insurance, deed recording fee, appraisal costs, additional inspections, and more. Closing costs are typically 2%-5% of the loan amount and are not included in the loan amount – you will need cash on closing day to cover closing costs.