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3 Steps to a New Home Loan

07 Jan

3 Steps to a New Home Loan

At Diversified Lending, we spend time with each customer to help educate you on the steps to becoming a homeowner, or to purchasing your next home. We bring over a decade of experience to the table. Take advantage of our experience and knowledge to help find the best steps toward your future home.

Step One: Understand Your Financial Picture

Your financial picture as a borrower consists of three main factors: your credit score, your current obligations, and your income.

Credit Score

The three main credit bureaus, Trans Union, Experian, and Equifax, each report different FICO credit scores, up to 850. Lenders use the middle score of the three. If you have a 540, 597, and 582, the lender would determine your score to be a 582.

Income

Lenders want to understand your income picture to ensure that you are going to be able to support the burden of your loan. They look at the amount you make, but also other factors like length of time at your job, how much of your income is variable, and what you currently have in the bank.

Debt Obligations

Lenders want to ensure that they aren’t going to burden you with more debt than you can manage, so they look at your current debt obligations to determine how much additional debt they are willing to add. Typically, lenders will not increase your Debt-to-Income (DTI) ratio to more than 43%. This means that your total debt obligations, with the new loan included, cannot exceed 43% of your current income.

Step Two: Save for a Downpayment

Regardless of the loan option you choose, a larger downpayment will come with fewer financial penalties. As a rule of thumb, you should plan for a downpayment of at least 20% of the total purchase price for your new home.

How does the downpayment affect your specific loan? Here are some general guidelines:

0% VA loans can obtain no-money-down financing, but the funding fee may be higher.
3% This is the lowest downpayment amount typically available through FHA loans
5% Most conventional loans require at least 5% down.
10% FHA loans with at least 10% down will be eligible to refinance to remove PMI.
20% Most loan types don’t require PMI with a down payment of 20% or more.

Step Three: Understand Loan Features

During the finance process, you will have a series of decisions to make. You must decide your preferred loan type, loan features and options, and what you can pay during closing. We guide you each step of the way.

Loan Terms

Mortgages can be either fixed, where the APR doesn’t change over the life of the loan, or Adjustable Rate Mortgage (ARM) loans, where the interest rate adjusts according to market changes. The duration of your loan may be different, whether 15 or 30 year.

Loan Buy Down

You can buy down a loan, using additional money at close to obtain points. You pay additional fees to get a lower interest rate. You will have to pay more money up front, but this buy down will allow you to save in the long run by paying less in interest. This can be a good idea or not, depending on how long you plan to stay in your home. If you aren’t planning to stay in the house very long, 5 years or less, this is not a very good idea. You won’t be able to recoup the costs that you spent to get the lower rate. If you have questions

Rate Lock

Rate locks guarantee that your interest rate doesn’t change for a set period of time, while you are in the process of getting your home loan. Rates can be locked for either you as a borrower (using your SSN) or for a specific property (using the address).  The right approach depends on whether you have multiple home offers out or not. There are different lock types, some of which can even accommodate rate decreases. We handle rate locking on your behalf so that you secure the best possible APR.

We Can Guide You to a New Home Loan

We work with lenders and buyers every single day. Lean on our expertise to guide you through the process. We are here to advise you on the right questions to ask, the right options for your scenario, and the timelines to keep your home purchase process running smoothly. Apply today to get started with your no-obligation consultation.

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