Getting a loan
12 Factors that impact your Interest Rate
- Credit Score - The higher your credit score, the lower the rate.
- Credit History - The less credit history you have, the less knowledge a lender has of your repayment ability, possibly making you slightly more risky. The better the payment history, the better the rate.
- Employment Type and Income - Self-employed, hourly employed, bonus-based pay – these all affect the risk factors of whether you’ll be able to pay back the loan.
- Loan Size - How much money are you asking for? Often if you are requesting an amount under a certain level (i.e.$100,000), there may be a slight increase in rate.
- Loan-to-Value (LTV) - What percentage is your loan amount to the value of the property? Typically, the lower the percent, the lower the rate.
- Loan Type - Fixed, variable, adjustable, balloon – these all have varying rates because of the variation of risks. Depending on the situation, your initial interest rate may be lower with an adjustable rate than with a fixed rate but you run the risk of the rate increasing significantly later on.
- Length of Term The shorter the term on your loan, the quicker you’ll be paying down the debt; possibly resulting in a better rate. It’s important to note that your payments will most likely be higher, so you’ll want to make sure you can afford it.
- Payment Frequency - If you elect for a payment plan that allows for an infrequent or semiannual payment rather than a monthly one, you can expect a higher rate.
- Property Type - A residential house will have a lower interest rate than a commercial farm on 50 acres because of the increased risk that comes with a farm loan. Purchasing a farm or land is different because there aren’t as many properties for value comparison, buyers or people that can afford to.
- Co-borrowers - Will there be other people on the loan, and if so, what does their credit look like? All parties involved in the loan will be used in determining the rate.
- Debt Ratio - How much money is made monthly versus the cost of monthly bills. The typical ratio that lenders looks at is 42%.
- Documentation Available - Are you able to produce all documentation (bank statements, taxes, retirement accounts, etc.) to show your assets? This will help ease the risk factors for a lender and help lower the rate.
Example of a Rate Sheet - https://onlineapps.fremontbank.com/Affiliates/Documents/Rates/Wholesale%20Rate%20Sheet.pdf
Think you want a loan?
Annually you should review your credit score, no matter who you are. People make mistakes, companies make mistakes, and not having a correct credit report can cost you money.
www.annualcreditreport.com is the site run by the 3 largest credit reporting agencies, that provide you a FREE full check on an annual basis of your credit report.
This is step 1 of applying for a loan. Any discrepancies should be addressed with the reporting party. Reach out to your bank, your store, utility or whoever has report either a missed payment, derogatory report or any default that are not correct.
If you're thinking about buying a home in the next 12 months, you need to protect your credit score:
- Avoid Taking out other loans (impacts your debt to income ration)
- Increasing Credit Card Debt - impacts your credit utilization ratio)
- Missing Payments (Bills, Car or credit card) Payment history is 35% of your score
- Build the deposit, Cash in reserve can improve your application as it lowers the lenders risk . Put off purchases until after you've secured your loan.
- Changing jobs, or taking a leave of absence. The ideal scenario is to maintain the status quo, as far as your employment goes. Sometimes we have no control over such things. But if you do have a say in the matter, postpone your career changes until after you received financing.
What You Should Do Before Applying for a Mortgage
We've talked about what to avoid. So what should you actually do before applying for a mortgage loan? The opposite of everything listed above, of course. Here's a checklist of smart choices:
- Put off all other forms of financing (auto, personal loans, etc.) until after you've closed on the home. If you over-extend yourself with other forms of debt, you could have trouble getting approved for mortgage financing.
- Limit your credit card usage. Keep those cards in your pocket for now. Resist the urge. Use them only as a last resort, and sparingly. Keep your balances down.
- Make darn sure you pay all of your bills on time, especially the ones that show up on your credit report. A single missed payment could blow your chances of getting a mortgage loan, if it gets reported to the reporting agencies.
- Save as much money as possible, as early as possible. The more the better. You'll need it for your down payment (maybe), your closing costs, and possibly additional cash reserves. And that's just to qualify for the loan. You'll also need money to cover moving expenses, furnishings, etc.
- Keep things steady on the employment front. Keep your current job and avoid switching, until after you've been approved. The exception to this rule is when a job change results in a significantly higher income, which could improve your chances of getting a loan. Aside from that, the status quo is best.
Get Ready to Apply
Mortgage application information
- Details about the type of mortgage you're applying for
- Information about the home you plan to purchase
- Basic identification information about each borrower
- Employment information for the past two years
- Monthly income and household expenses
- A list of your assets (what you own) and liabilities (what you owe)
- Details about the home transaction
- A declaration of any legal issues that may impact your financial situation
- Your signature, which confirms the information you provided is true and accurate
- Optional information for government monitoring purposes
- Purchase contract signed by all parties
- Government-issued identification
- Two years' worth of W-2 forms
- 30 days' worth of pay stubs
- Two to three years' worth of income tax returns
- IRS Form 4506-T (signed and dated)
- If self-employed: income tax returns, current profit and loss statement, and list of all business debts
Assets and debts
- Two to three months' worth of statements for all accounts listed on the application (such as bank accounts, investment accounts, credit card accounts and student loans)
- Documentation for any large deposits on asset or bank statements
- Judicial decree or court order for each obligation due to legal action
- Credit explanation letter for late payments, collections, judgments or other derogatory items
- Bankruptcy/discharge papers for any bankruptcies in credit history
- Thin credit file: payment history for utilities, cellphone, cable TV, car insurance and other expenses
Applying for a loan
Decide Whether You Need a Mortgage Broker
There are benefits to working with a mortgage broker. A broker can save you time by doing a large portion of the work when it comes to finding lenders. Nevertheless, there are some drawbacks you should be aware of when working with a mortgage broker.
Brokers earn their profits by arranging the deal between the lender and the new homeowner. The wrong broker could set you up with a lender that offers them the highest profit, but not necessarily the best mortgage for you. Should you decide to go with a broker, it’s important to take the time to do a little research. Ask for references and learn from other homeowners what their experience working with the broker was like. Brokers who are hesitant to provide references from past clients should be a huge red flag.
Decide What Kind of Lender You Want
Do you prefer a small lender or a large lender? If you are someone who prefers more personal customer service and a lender who knows your name, you would likely want to go with a smaller lender. If you care more about getting the right interest rate, a larger lender may be your best option. Researching the differences between larger lenders and smaller ones will help you decide which fit is best for you.
Ask Around for Mortgage Companies
A broker is not the only way to find mortgage lenders. Ask your friends, family members or coworkers who have purchased a home within the last few years about their lenders. Getting referrals from those close to you can help you cut through the sea of prospects to find someone you know you can trust.
Talk to Me - A Real Estate Agent
A good agent will not limit recommendations to his or her in-house lenders, and smart loan officers take especially good care of customers recommended by real estate agents. Use this to your advantage, and make sure the lender you speak with knows you came to them through a recommendation from your agent.
Research the Lender’s Reputation
No matter how you hear about a lender- whether from a family member or a website- it is imperative to do a background check. If you can get names of past clients, make sure you speak with them. Check online reviews and don’t hesitate to bring up any questions you have with a potential lender.
Closing the Loan
From the time you submit you're application for a loan, you want to ensure that nothing changes. Here are some examples of things that might cause you an issue with closing your loan.
1. Applying for a credit - Any application for credit will change you're credit score or raise questions from you're lender. Wait till after you close.
2. Do not provide your SSN to anybody in between the time that you apply for a loan, and the closing. Its likely they will be pulling a credit inquiry, and you need to be sure this won't impact your score.
3. Changing Careers - Changing employers or even more impactful, becoming self employed can have a big impact on your credit application
4. Be ready to answer questions that may arise on your documentation from the underwriter.
5. Final checks will be done on all Loans. including employment verification, soft credit check.