Prearranging your financing is very important in determining what your home buying budget will be. As you begin speaking with various lenders they should provide you with a “loan estimate” form which spells out the actual costs of the various fees involved in them providing the loan for you as well as their stated interest rate for your loan type. These fees can vary significantly from lender to lender so you will want to pay strict attention to them.
A lender should be willing to take time to discuss with you your current financial situation, the funds you have available for closing and which loan type best suits your needs.
If you have any questions about financing, your agent should be able to refer you to trusted lenders that she has worked with before.
Hint – Choose your lender based on their reputation, availability and trustworthiness and not just the interest rate. Once you have selected the lender you will be working with, you will want to begin the loan application process as soon as possible so the lender can provide you with a pre-approval letter. Having a preapproval letter helps your agent negotiate with the seller for the very best price and terms as it shows the seller that you are a serious buyer who is well qualified to close. Buyers who choose to write a contract without being preapproved for financing generally find themselves at a competitive disadvantage.
Preapproval is different than prequalification.
When you have preapproval from your lender, that means that you have actually applied for the loan, provided the required documentation for vetting and have been approved by the lender. Prequalification, on the other hand, means that you qualify for a loan based on the undocumented information you have provided, but you have not yet submitted your documents or been approved and the lender has not made any guarantees to you.
Your lender will provide you with a more definitive list, but here are some of the items you should be prepared to provide:
- Proof of employment (W2’s for the last 2 years)
- Proof of previous employment
- Copies of bank, savings and investment account statements
- Information regarding additional income sources which may include things like Social Security benefits, rental income, child support, etc.
- Permission to request your credit report
- Auto loans
- Credit card debt
- Other assets and liabilities
- Tax returns
The pre-approval letter will generally be contingent on a few things: usually a full appraisal, inspections, and title search.
Money Matters: Other things you need to know
The higher your credit score, the lower your interest rate will be on your loan.
- You will need to be prepared to pay closing costs which are approximately 3% of the price of the home. In some cases it can be negotiated for the seller to pay all or a portion of your closing costs, but you need to be prepared to pay the full amount yourself.
- The “mortgage payment” provided by the lender may not include taxes and insurance. You will want to make sure you verify those amounts.
- Every home has property taxes associated with it. At the very least you will pay a county property tax, and in some cases you may be required to pay a city property tax as well.
- If you are buying a condominium or a house with a homeowners association you will also have monthly/yearly association fees.
- Depending on your financial circumstances you may receive tax benefits as a result of buying a home. Check with your accountant or tax advisor.
As you most likely already know, all homes that are not fully paid off require homeowner’s insurance (though it only makes sense for every homeowner to cover their potential risk of loss through the purchase of homeowners insurance). Collectively, “homeowner’s insurance” provides hazard insurance, liability coverage and contents coverage for the owner. You will need to contact your current insurance company or insurance broker to set up the insurance policy. Do not wait until the last minute as the insurance underwriting process can take longer than many buyers realize. In order to determine their potential risk the insurance company must consider your past claims history as well as any unique issues related to the new home; for example, it’s location, if it has a specific type of roof, etc. and this determination takes time. You do not want to delay your closing, or pay a higher rate, by not acting on this in a timely fashion.