- Posted by Jordan Blakley
- loan process
Buying a new home can be an exciting experience, but it can also be one of the most challenging, especially if you are unfamiliar with the mortgage process and its many requirements. Much of this stress can be avoided, however, if you understand the steps involved with purchasing a home.
So, we've created a blog series called Explaining the Home Loan Process. Our objective is to help you, the homebuyer, successfully navigate the mortgage process easily and quickly, by explaining the loan process step-by-step. From the people involved to the costs and forms you'll be asked to complete – we'll cover it all because we believe the best way to prepare yourself is to educate yourself.
Let's begin exploring the first step of the mortgage application process-prepping.
Familiarize Yourself with the World of Real Estate
Before you even begin looking for a mortgage or assessing your financial health, buyers should familiarize themselves with common loans, rates, and terminology. We suggest starting with the basics, such as understanding:
- 15-year vs. 30-year loans
- Fixed vs. Adjustable Rate Mortgage
- APR and interest rates
- Fees and costs associated with a mortgage loan
In addition to the PennyMac website, the homebuying sections of the websites of the U.S. Department of Housing and Urban Development and Fannie Mae provide excellent overviews of the home buying process and real estate terminology.
What's Your Financial Health?
Once you have begun to familiarize yourself with the real estate realm, it's time to start prepping for the loan application process. It is imperative that you have a clear picture of your current financial standing before contacting your lender. This means knowing your credit score, checking your savings, and establishing a budget.
So, while it may be tempting to start looking for your dream home, make sure you take care of these three steps first.
Know Your Credit Score
Having a good credit history is critical to securing a great loan and interest rate. All lenders will require a credit report before they let you take out a new mortgage. As far in advance as possible, make sure to check all three credit scores before contacting any lender. This gives you the opportunity to do any credit repair work, including scrapping unused credit cards and paying off debts. And, most importantly, it may help you secure a lower interest rate or be eligible for a larger loan.
To learn more about how to improve your credit score and get the best rate possible, check out PennyMac's previous blog post, Top 10 Credit Score Mistakes When Applying for a Mortgage.
Know Your Savings
Buying a home is likely the single largest purchase you may ever make. Therefore, you should start putting away money as soon as possible. Remember, you'll have to put at least 20% down on your mortgage to avoid paying costly private mortgage insurance (PMI). On a $250,000 home, you'll have to put down $50,000 to avoid PMI.
But, the costs associated with purchasing a home don't stop there. You'll also have to pay settlement costs, such as costs for title services, appraisal, and credit report. And, all of these expenses can easily add up to more than $10,000.
For more information regarding the cost of homeownership, you can take a look at PennyMac's previous blog post, The Real Cost of Homeownership.
Establish a Budget
Creating a realistic budget is a must! This will help you assess what you can comfortably afford to pay each month. It's best to base your budget on your typical monthly spending habits. This allows you to create the most realistic budget possible. Some lenders may even refer you to a homeownership education counselor for assistance. This representative will work with you to evaluate your current financial health and flexibility.
Remember, different loans and terms will affect the size of your mortgage payment. So, know how much you can afford to spend each month BEFORE you begin picking mortgage terms.
Prepping – A Quick Overview
Starting the home loan application process can be confusing and intimidating. But, if you're prepared, you can save yourself a great deal of stress and anxiety. Be sure to:
- Begin familiarizing yourself with various loans, rates and terminology
- Know your credit score
- Know your savings
- Establish a budget
Completing these steps could make all the difference in helping you chose the best lender and loan possible.