{"id":2155,"date":"2017-07-17T16:45:34","date_gmt":"2017-07-17T23:45:34","guid":{"rendered":"https:\/\/www.realtyexecutives.com\/blog\/?p=2155"},"modified":"2017-08-08T15:19:18","modified_gmt":"2017-08-08T22:19:18","slug":"how-to-apply-for-a-home-loan","status":"publish","type":"post","link":"https:\/\/www.realtyexecutives.com\/blog\/how-to-apply-for-a-home-loan","title":{"rendered":"The first-time homebuyer&#8217;s guide to applying for a home loan"},"content":{"rendered":"<p><a href=\"https:\/\/www.realtyexecutives.com\/blog\/wp-content\/uploads\/2017\/07\/2-applying-for-a-home-loan.jpg\"><img decoding=\"async\" loading=\"lazy\" class=\"aligncenter wp-image-2150\" src=\"https:\/\/www.realtyexecutives.com\/blog\/wp-content\/uploads\/2017\/07\/2-applying-for-a-home-loan.jpg\" alt=\"applying for a home loan\" width=\"800\" height=\"533\" \/><\/a><\/p>\n<p><span style=\"font-weight: 400;\">Purchasing your first home can be one of the most exciting and overwhelmingly stressful experiences of your life. Yet, armed with the appropriate knowledge and information, you can define your budget, get pre-approved for your home loan, <\/span><a href=\"https:\/\/www.realtyexecutives.com\/blog\/housing-options-quiz\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">shop for the perfect house<\/span><\/a><span style=\"font-weight: 400;\"> and close the transaction with confidence.<\/span><\/p>\n<p><!--more--><\/p>\n<h3>1. Assess the amount of money that you can afford to pay each month for your mortgage<\/h3>\n<p><span style=\"font-weight: 400;\">At the beginning of your homebuying journey it is vital to calculate your finances to <\/span><a href=\"https:\/\/www.realtyexecutives.com\/blog\/how-much-house-can-i-afford\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">determine how much house you can reasonably afford<\/span><\/a><span style=\"font-weight: 400;\"> on your income. <\/span><\/p>\n<p><b>Pro Tip: In addition to factoring in the mortgage payments also be sure to include all housing costs for each month.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Your monthly housing budget should consist of mortgage payments, homeowner\u2019s insurance, private mortgage insurance (PMI) and property taxes. When calculating the amount of your income that can go toward monthly mortgage payments keep in mind the more money you spend on the monthly payments, the less money you have accessible to spend on anything else. Things in your life could change drastically for example having children, purchasing a new vehicle, paying for college, losing a job or going out of business. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">As a general rule of thumb:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Keep your mortgage payments below 25 percent of your pretax monthly income.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Your mortgage payments should be equivalent to one week\u2019s pay check.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It is vital to crunch your own numbers before shopping for a mortgage. Lenders may pre-approve your loan amount at 30 to 35 percent of your pretax income, enticing you to take on more home debt than you can actually afford. Never presume that just because the bank endorses it, you can bear the cost of it.<\/span><\/p>\n<h3>2. Verify that your finances are in order to move forward with the mortgage process<\/h3>\n<p><span style=\"font-weight: 400;\">To guarantee that now is the best time to purchase your first home the bank will require that you have a good credit score, money to cover closing costs and verifiable income.<\/span><\/p>\n<p><strong>Assess your credit\u00a0<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">It should be no surprise that good credit is needed to secure a home loan. If you\u2019re based in America, get all three of your credit reports free of charge from <\/span><a href=\"https:\/\/www.annualcreditreport.com\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">AnnualCreditReport.com<\/span><\/a><span style=\"font-weight: 400;\"> to verify that there are no errors on them. If you\u2019re based in Canada, check the two national credit bureaus, <\/span><a href=\"http:\/\/www.consumer.equifax.ca\/home\/en_ca\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Equifax Canada<\/span><\/a><span style=\"font-weight: 400;\"> and <\/span><a href=\"https:\/\/www.transunion.ca\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">TransUnion Canada<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you need to enhance your score quickly consider doing the following:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Pay down any outstanding credit card balances<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Stop using credit cards two months prior to applying for a home loan<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Avoid applying for a new credit card or car loan until after you have closed on your new home<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">To significantly improve your credit score, keep in mind that it may take up to six months so get started as soon as possible<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Set money aside to cover the down payment, closing costs and other expenses<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In addition to ensuring that your credit is in good standing it is also important to make sure that you have the cash required to make buying your first home a reality. In general a conventional loan will require a down payment amount of 5 to 20 percent of the sale price of the home. Government issued loans such as an FHA loan or VA mortgage loan can require as little as 3.5 percent down.<\/span><\/p>\n<p><b><i>Example<\/i><\/b><\/p>\n<p><i><span style=\"font-weight: 400;\">If the purchase price of the home is $250,000, and you are required to pay a 10 percent down payment, you will need 25,000 cash to move forward with your purchase.<\/span><\/i><\/p>\n<p><span style=\"font-weight: 400;\">To avoid paying additional private mortgage insurance (PMI) most lenders will require a 20 percent down payment, instantly doubling the cash amount used in the previous example to $50,000. PMI protects the bank in the event that you default on your loan and your home\u2019s value significantly decreases.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Closing costs can raise the upfront costs substantially and many first time homebuyers are not aware of this added expense. Closing costs can be up to 3 percent of the total loan amount. Which means on a $250,000 mortgage an additional $7,500 in closing costs is added \u2014 on top of your down payment.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Closing costs fluctuate from state to state or province to province, but they often are based on the following expenses:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Application fee charged by the lender (amount varies from lender to lender)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Appraisals<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Attorneys<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Government taxes collected based on a percentage of the mortgage loan amount<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Real estate transfer tax<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Title insurance<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Total of percentage \u2018points\u2019 of the mortgage loan amount charged by the lender<\/span><\/li>\n<\/ul>\n<p><b>Key facts about lender points<\/b><\/p>\n<p><span style=\"font-weight: 400;\">One kind of point that a lender can charge is called an <\/span>origination fee<span style=\"font-weight: 400;\"> or money charged to the lender for originating or placing the loan. There are also <\/span>discount points<span style=\"font-weight: 400;\">, or compensation paid to the lender to decrease interest rates permanently. <\/span><\/p>\n<p><b>Pro Tip: There are two ways to significantly reduce or even eliminate closing costs:<\/b><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li><strong>Arrange for the seller to pay the closing costs.<\/strong><\/li>\n<\/ul>\n<ul>\n<li><strong>Consult with your lender about premium pricing (with this method you agree to pay a higher interest on your home loan in exchange for the lender covering the closing costs).<\/strong><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p>Additional expenses to be aware of:<\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Prepaid expenses or payments made in advance of the money being due. Most commonly this will consist of mortgage interest that will accrue between the closing date and month-end, real estate taxes and homeowners insurance paid into an escrow account. This expense can be equivalent to 2 percent of the total loan amount or more.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Utility expenses (i.e., heating, sewer, trash removal and water)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Homeowners\u2019 Associations (HOA) Fees<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Lenders cash reserve requirement (after all expenses are paid for the home the lender requires that you have a specified amount of cash left over, usually at least two months of mortgage payments, to avoid the risk of defaulting on the loan early. The funds are not directly deposited with the lender however they must be available in a verifiable source (i.e., a checking or savings account or a money market fund).<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Home Inspection<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Estimated amount of cash needed to purchase a $250,000 with a 10% down payment:<\/span><\/p>\n<h2 id=\"tablepress-9-name\" class=\"tablepress-table-name tablepress-table-name-id-9\">Cash needed upfront to purchase $250,000 home<\/h2>\n\n<table id=\"tablepress-9\" class=\"tablepress tablepress-id-9\" aria-labelledby=\"tablepress-9-name\">\n<tbody class=\"row-hover\">\n<tr class=\"row-1 odd\">\n\t<td class=\"column-1\">Down payment<\/td><td class=\"column-2\">10% of $250,000<\/td><td class=\"column-3\">$25,000<\/td>\n<\/tr>\n<tr class=\"row-2 even\">\n\t<td class=\"column-1\">Closing costs<\/td><td class=\"column-2\">3% of  $225,000<\/td><td class=\"column-3\">$6,750<\/td>\n<\/tr>\n<tr class=\"row-3 odd\">\n\t<td class=\"column-1\">Prepaid expenses<\/td><td class=\"column-2\">2% of  $225,000<\/td><td class=\"column-3\">$4,500<\/td>\n<\/tr>\n<tr class=\"row-4 even\">\n\t<td class=\"column-1\">Utility expenses<\/td><td class=\"column-2\">Approximate estimate<\/td><td class=\"column-3\">$600<\/td>\n<\/tr>\n<tr class=\"row-5 odd\">\n\t<td class=\"column-1\">Required cash reserves<\/td><td class=\"column-2\">$1,000 mortgage payment x 2<\/td><td class=\"column-3\">$2,000<\/td>\n<\/tr>\n<tr class=\"row-6 even\">\n\t<td class=\"column-1\">Total cash required<\/td><td class=\"column-2\"><\/td><td class=\"column-3\">$38,850<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<!-- #tablepress-9 from cache -->\n<p><span style=\"font-weight: 400;\">Using the example above the numbers can add up quickly when buying a home. This is why it is very important to add up all of your upfront costs when planning your home buying budget. Doing so will provide you with a realistic snapshot of how prepared you are to move forward with the home buying process.<\/span><\/p>\n<h3>3. Compile important documentation<\/h3>\n<p><span style=\"font-weight: 400;\">After preparing a realistic assessment of your housing budget, it is important to gather <\/span><a href=\"https:\/\/www.realtyexecutives.com\/blog\/what-personal-information-do-you-need-to-reveal-when-buying-a-home\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">documentation<\/span><\/a><span style=\"font-weight: 400;\"> that will aid in verifying your finances to accompany your mortgage application. You will need the following items:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Bank statements<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Copy of your credit report<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Copies of your last two tax returns<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Paystubs<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Proof of freelance or self employment income (if applicable)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Proof of Identification (driver\u2019s license, passport or state issued ID)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Social Security Number or Social Insurance Number<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">W-2 Forms (wage and tax statements from your employer)<\/span><\/li>\n<\/ul>\n<h3>4. Shop for your home loan<\/h3>\n<p><span style=\"font-weight: 400;\">Do not wait until the last minute to shop for your mortgage, you could essentially lose your dream home if another applicant already has their financing in place. Getting a mortgage pre-approval is a free and non-binding process that can make the home buying process smoother in the following ways:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Knowing exactly how much you are approved to spend <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Positions you as the buyer with the advantage if the home has multiple offers, thus giving you negotiating power.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Positions you as a serious qualified first-time home buyer<\/span><\/li>\n<\/ul>\n<p><strong>Get familiar with mortgage rates<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">There are <\/span>fixed mortgage rates<span style=\"font-weight: 400;\"> and <\/span>adjustable mortgage rates.<b> <\/b><span style=\"font-weight: 400;\">With a fixed mortgage rate the interest stays the same as long as the borrower is paying down the loan. With a fixed rate mortgage the interest is not dictated by the market. With an adjustable mortgage rate (ARM) the interest fluctuates, going up or down based on the interest rate of the market.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Home loans can be paid over a period of 5 to 30 years, with 30 years at a fixed rate being the norm. <\/span><\/p>\n<p><strong>Mortgage fees<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">But wait there\u2019s more! Mortgage lenders charge additional fees that are not associated with the \u00a0interest rate. For example you may be assessed fees for:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Credit check<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Document preparation<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Home appraisal fees<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Some lenders may provide you the option to pay mortgage points at closing that can lower your interest rate. Points are basically prepaid interest that could save the borrower money over the duration of the home loan. One mortgage point is equivalent to 1 percent of the overall mortgage value. Using our previous example of $250,000 mortgage, 1 mortgage point is equivalent to $2,500.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is best to pay mortgage points in the following circumstances:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You can afford to pay out the added cash expense<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You expect to hold the mortgage for a long period of time<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You have less than stellar or poor credit and the lender requires it<\/span><\/li>\n<\/ul>\n<p><strong>Where to shop for mortgage rates<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">A good starting point is your bank because you already do business with them, but do not stop there. You can shop online and compare rates with leading industry mortgage lenders or partner with a local mortgage broker that can place your application amongst multiple lenders within his or her network. Your <\/span><a href=\"https:\/\/www.realtyexecutives.com\/blog\/choosing-a-real-estate-professional\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">licensed real estate professional<\/span><\/a><span style=\"font-weight: 400;\"> should be able to provide local mortgage broker referrals if you need assistance.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Purchasing your first home can be a very fun and exhilarating experience.It is also an experience that can be confusing and frustrating if you are not adequately prepared. Before you go house hunting do your homework, get your finances in order and shop around for the best mortgage rates to be adequately prepared for the overall process.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This post was written for Realty Executives by Ashley Neal. <\/span><span style=\"font-weight: 400;\">Ashley is a freelance content strategist focused on writing about, real estate, interior design, health, fitness and luxury for almost a decade. Ashley\u2019s work has appeared in a number of digital and print publications including <\/span><a href=\"http:\/\/us.blastingnews.com\/editorial-staff\/ashley-neal\/\" target=\"_blank\" rel=\"noopener\"><i><span style=\"font-weight: 400;\">Blasting News<\/span><\/i><\/a><i><span style=\"font-weight: 400;\">, CBS Local Atlanta, Atlanta Business Chronicle<\/span><\/i><span style=\"font-weight: 400;\"> and <\/span><i><span style=\"font-weight: 400;\">Huffington Post<\/span><\/i><span style=\"font-weight: 400;\">. She has also contributed to and\/or been mentioned on a number of well respected media platforms including;<\/span><i><span style=\"font-weight: 400;\"> Forbes, Small Biz Trendz<\/span><\/i><span style=\"font-weight: 400;\"> and <\/span><i><span style=\"font-weight: 400;\">Biz Sugar<\/span><\/i><span style=\"font-weight: 400;\">. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Purchasing your first home can be one of the most exciting and overwhelmingly stressful experiences of your life. Yet, armed with the appropriate knowledge and information, you can define your budget, get pre-approved for your home loan, shop for the perfect house and close the transaction with confidence.<\/p>\n","protected":false},"author":10,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0},"categories":[25,1],"tags":[307,515],"yst_prominent_words":[],"_links":{"self":[{"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/posts\/2155"}],"collection":[{"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/comments?post=2155"}],"version-history":[{"count":7,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/posts\/2155\/revisions"}],"predecessor-version":[{"id":2214,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/posts\/2155\/revisions\/2214"}],"wp:attachment":[{"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/media?parent=2155"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/categories?post=2155"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/tags?post=2155"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.realtyexecutives.com\/blog\/wp-json\/wp\/v2\/yst_prominent_words?post=2155"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}