If you plan to buy or refinance your home this spring, I applaud you for taking advantage of historically low rates.
Sure, getting the financing may not be as quick or as easy as it once was during the housing boom because lenders and banks who lost billions from borrowers inability to repay loans they could never really afford aren't willing to repeat their mistakes. But, if you CAN afford the loan, there has never been a better time to get a rate that may just get you the home you've always wanted or an even better rate on your existing home.
Today, an informed borrower is an empowered borrower. Knowing what you will need to provide to start the process and to complete the process or even having familiarity with the process are key to your success. There are many lender out there who are ready and waiting to take your application and process you, but not all take the skill and care needed to make sure you 1- get the best rate, 2- are utilizing the best loan program for your needs, 3- anticipate potential detours or all out road blocks to prevent you from getting your loan.
Knowing what to seek and steer clear of is half the battle. Here are 12 Tips for Getting the Best Loan for YOU:
- Know what you want to accomplish. Not all loans are created equally, but if you don't know what you want, it's much harder to get the correct one for your needs. Know your short-term goals. Then, know your long-term goals. Someone who plans to spend only 2 years in their home will probably benefit from something very different than what someone who plans to spend the next 30+ years in their home. The same goes for the borrower who just got married and wants to start a family, vs. the borrower whose kids just all went off to college and will be thinking about retiring in the next 10-15 years.
- Have the documents you will need to provide to get started. Every lender has a minimum list of documentation they will need in order to take your application for a home loan. It doesn't matter how much or how little money you make- if you plan to finance a home, this is what lenders need to document your ability to repay a loan. If you're a small business owner, as I am, be prepared to pull together more paper than you would really like to imagine, especially if you take a much smaller payroll than you do in gross business income. The lender will want to know why you claim to make so much money, but show so little of it on paper. More may be required to go through the complete underwriting process, but be prepared with your:
- 2 most recent years of tax returns (personal & business, if applicable)
- 2 years of most recent W-2s or 1099s, if self-employed
- 60 days of most recent bank statements- if you have lots of accounts and don't want to document every little detail, you might ask the loan officer to give you an amount of funds that you need to show liquid (readily available).
- 2 most recent pay stubs
- You may be asked to provide statements of 401Ks, IRAs and/other securities
- You may be asked to document other sources of income if they are substantial (disability, social security, alimony, child support, etc.)
- Know what info you really need to provide to give the loan officer a clear picture of your financial situation.Being able to dump off a bunch of paperwork to yoru loan officer is just the tip of the iceberg. They have your credit report, which also shows your employment history and any/all loans you have outstanding can open a can of worms. Being upfront with him/her can save you a lot of hassle. I've seen all of these instances be game changers in the financing process. Be prepared to share info like:
- I've been at this job for less than 1-2 years
- I'm considering changing jobs
- I just bought a big-ticket item (car, motorcycle, engagement ring, vacation home)
- My compensation plan just changed and is substantially more or less
- Bonuses or stock options/grants make up a significant portion of my income
- Start with recommendations for loan officersas opposed to walking into your nearest bank branch or hopping online. You might ask why not walk into your local bank branch, since that's where your banking relationship already is. The reason is simple- though you may know your banker, he or she may not be the one to start you and finish your loan. You may be transferred to a processor or a closer somewhere else who you have no relationship with, or trust in. This is especially an issue if you are purchasing and have limited time to complete a sale. A recommendation from a Realtor, your attorney, an accountant or CPA or a trusted friend or family member who have had a good experience are often a better way to go.
- Consider finding a lender who can process your entire loan locally. When you relinquish your loan to an out of state lender, they may not be familiar with local customs. For instance, a pre-qual from a bank might cut it in CA, but here in AZ, if you don't have an AAR pre-qual letter, your purchase offer may not even be considered by a potential seller. Also, a NY or NJ lender may be waiting for contract details to come from an attorney as is required in those states, but in AZ, we rarely use real estate attorneys to handle purchases. Also, the closing process varies from state to state. In many states, a loan is considered "closed" when all parties sign the loan & final deed. That's not the case in AZ- here, the loan is not considered closed until the county recorder records the file. If you have a deadline by which to close and these details haven't been ironed out, they may have devastating consequences for a buyer.
- Be wary of loan officers who slow to give you details, but quick to ask you to sign on the dotted line. If you don't know what their process is or what to expect, how can you be sure that you are getting the best loan for you? Sadly, too many borrowers trusted their loan officers to take good care of them during the housing boom and were left holding mortgages they didn't understand and eventually couldn't pay. As a borrower, you have to look out for yourself to some extent and understand what your obligations are when you sign for a mortgage. If the terms doesn't work for you, don't do the mortgage.
- Ask your loan officer to give you an assessment of your ability to get the loan. Just because you find a lender and turn in all your paperwork doesn't mean you are guaranteed to get the loan! Loan officers are able to analyze your info by running an automated desktop underwriting (DU) report or even having an underwriter evaluate the file long before you start the process to give you an idea of whether you stand a chance or might want to hold off to establish better credit or be prepared to provide additional documentation. Wouldn't you rather know before you find the home of your dreams whether or not you can actually buy it?!
- Know what you will be required to pay at closing before you commit yourself to the loan. Many lenders have standard processing fees that may range from $900 to many thousands of dollars for doing the loan. If you're buying a home, there is more than just your down payment to consider. There are fees and costs for things like: origination (not mandatory), discounts to the rate (not mandatory), title insurance (depending on the title company you use), mortgage insurance premiums (if putting down less than 20% of the loan), flood certification, tax service, courier, shipping, appraisals, etc. Asking for a "Good Faith Estimate" (if your loan is locked) or an estimate of fees if you are just starting the process, will tell you if this loan is really doable or not. One percent of the loan amount used to be typical, but the more the complex or risky the loan, the higher the likelihood of your fees being higher.
- Know the difference between your "Interest Rate" & "APR". Your interest rate is the amount of of interest that you will pay for your loan. Your APR or "annual percentage rate" factors all those fees I just mentioned into the life of the loan but broken down as a yearly percentage. Your interest rate may be 4%, but your APR may be 4.375% or higher. The bigger the difference between the 2 numbers, the more you're paying in fees and other costs for the loan. You can also use your APR to make "apples-to-apples" comparisons of the same loan program from different lenders, but be sure that are looking at the same loans or this won't work. I.e. don't compare a 30-year fixed conventional loan with a 15-year loan- they're just different and your comparison won't be comparable at all.
- Shop your rate! This is one of the most neglected items that borrowers fail to do when getting a home loan. While a recommendation is a heck of a thing, ignoring another really good lender whose rate is substantially lower is just a mistake. I will be the first to say that that a relationship is a great place to start, but do yourself a favor and look at how much more you will pay over the life of a loan that is a 1/4% higher. Do be wary of the rock bottom rate out there too- it could be a teaser or be tied to all kinds of conditions that could make it a terrible option, but it's up to you to do your due diligence.
- When you lock your interest rate, ask for a written confirmation that it's done. I just had a client struggle to get her loan officer to lock her rate, only to assure her it was locked and she found out 2 days later that it really wasn't. The end result? A higher interest rate to the tune of 1/4%. On an expensive loan, a boo boo like that could mean added cost to a monthly payment. Trust me, don't assume that everything is good- make sure it is.
- Ask for regular updates in the process. Again, "I'm on top of it" really doesn't cut it. Anyone can "yes sir" or "yes ma'am" you to death- getting it all done is a whole different story. In my experience good lenders will update borrowers (and agents, if applicable) regularly with status updates. They may even send weekly reports with a checklist of what is done and what needs to be done. You will usually know where you are and if you don't, you can figure it out quickly.
Hope this info helps. I'm not a bank or a loan officer, but considering I veered away from a career in investment banking (I'm the daughter of a 40+yr IB veteran) I'm pretty savvy with financing. You'll have to confirm all details with your lender, but I can help you sift through the mountain of requirements and sniff out a bad deal pretty easily. If you need help, I'm a call/text or click away!