Working with a Lender
Even if you think your home purchase is far in the future, it’s a good idea to meet with a lender now to explore the loan options available to you and to learn what you can do to become more financially prepared. You might be surprised to find you are ready sooner than you think!
Your lender will determine the amount of loan for which you qualify. This information is important to have before you start looking at homes with a real estate agent. It will save you and your real estate agent a great deal of time since you will be able to focus on the proper price range for your home search.
Choosing a lender is more than just calling around to find who has the best interest rates. Interest rates will change from the time you choose your lender to the time you close on your home — so choose your lender based on your level of trust and comfort with them. Feel free to interview several before making a final choice.
Remember, selecting a lender who is part of the Coastal Housing Partnership network can reduce your closing costs when buying a home!
Your lender will determine how much home you can afford based on:
- The amount of your down payment
- The amount of loan for which you qualify
A loan pre-approval demonstrates loan amount you can afford. A pre-approval is often required to work with a real estate agent and will give you leverage when making an offer on a home. Loan pre-approval is provided free of charge to potential home buyers. The only charge you may incur is a fee to run your credit report.
In securing your pre-approval, the lender focuses on your ability and willingness to repay the loan. The lender will concentrate on your income, assets, credit and debt. Click to further understand income, assets, credit and debt.
Income – In addition to your gross monthly income, the lender will look at your employment history, stability of income, secondary income such as bonuses, commissions, dividends.
Assets – Determined by your cash on hand and other liquid assets; adequate cash for the down payment and closing costs.
Credit History – Your history of debt management and repayment and total outstanding debt.
Once you determine the amount of your down payment and the amount of loan for which you are approved, you will have a good idea of your price range and can more effectively begin looking for a home.
Your lender will explain what loan options are available to you, but here’s some valuable information to have some context for that conversation:
What Determines the Cost of My Loan?
The cost of the loan is made up of the interest rate, points, fees, and sometimes, mortgage insurance. Make sure you ask for all four of these components when you are comparing loan quotes. Points and fees are paid up front or before the loan closes. A point is one percent of the loan amount. If you are paying points, you should expect to pay a lower interest rate. Since points are pre-paid interest, you should expect to pay a higher interest rate if you are not paying points. The decision to pay points is up to you, as the borrower. Fees include application fees, processing fees, appraisal fees, credit report fees, underwriting fees, etc.
Some loans will require a pre-payment penalty if the borrower refinances the mortgage or sells the home – generally within a two-year period. The penalty is typically six months of mortgage interest. Always ask your lender if there is a pre-payment penalty.
Understand the type of loan.
Understand the type of loan (fixed rate or adjustable rate) that fits your family’s needs and suits your risk tolerance. Click to learn more about types of loans!
Fixed-rate mortgage – the interest rate and the monthly payment on a fixed-rate loan remain constant for the life of the loan – the most common term being 30 years, although shorter or longer term loans are also available.
Adjustable-rate mortgage (ARM) – The ARM generally has a lower starting interest rate than a fixed rate mortgage. The interest rate and therefore, the monthly payment, adjust periodically over the life of the loan. Payments on an adjustable rate loan can fluctuate up or down according to financial market conditions. Since this loan payment could potentially increase beyond what you can afford, it’s important to understand:
- How frequently your interest rate will adjust
- How an adjusted interest rate will affect your monthly payments
- The maximum monthly payment during the entire life of the loan
Fixed rate feature to an adjustable-rate loan – This is an adjustable loan that starts out as a fixed rate loan for a period of 3, 5, 7, or 10 years. The longer this period is, the higher the cost of the loan. After the fixed rate period, the loan typically becomes an adjustable rate loan. Make sure you ask your lender all the questions about how frequently and by how much this loan can adjust after the initial fixed period.
Interest Only Loan – Interest only loan is a loan that allows you to pay only the interest costs for a period of time. You are not required to pay any amount toward your loan principal during this initial period. Once the interest-only period ends, in addition to making payments toward interest, your monthly payment goes up to include paying off the loan amount. Since you are now paying the loan off (or making principal payments) over a shorter period of time, the principal portion of your payment will be significantly larger.
Mortgage insurance allows a buyer to obtain a loan with less than a 20% down payment. Homebuyers pay monthly mortgage premiums so that the lender is protected in the event that the homebuyer defaults on the loan. Ask the lender the amount and terms of the mortgage insurance and for what period you are obligated to pay it. If you still want to learn more, check out this site.
Down Payment Requirements
Did you always think you needed a 20% down payment to purchase a home? Think again!
There are a number of low down payment options available. If you don’t have a 20% down payment, one of the first questions you want to ask the lenders you are interviewing is do they have a number of low down payment programs for you. This is another good reason you want to meet with a lender early on in the process. Having information about your loan and down payment options is essential in determining your readiness.