Step 6 to Purchasing a Home

Once you have a ratified contract on a home, you must start working on obtaining your loan. Actually, you should have laid some of the groundwork for this in step #2. There will be dates on the contract that will restrict your time frame for obtaining the loan. Try to obtain your loan directly from a bank. Using mortgage brokers can lead to all sorts of problems and extra fees and should be avoided if possible. There are many types of loans. The most popular is a 30 year fixed amortized convential loan. Your monthly payment will include interest to the bank for the loan and some principal payment that lowers the amount of principal that remains to be paid. At the beginning of the loan, an extremely large percentage of your payment is interest while only a very small portion goes to paying down the principal. This will change every month. Over time, you will finally reach a point where your principal portion is larger than your interest portion. Another type of loan is one with an adjustable interest rate, also known as an ARM. Initially, the interest rate is lower than a convential loan, but after a predetermined time(3-5 years), the rate fluctuates within certain guidelines. Since the rate can go up and change your monthly payment, this can be quite risky. However, it can be the right thing if you know that you're going to sell your home before the rate changes. Even risker is the interest only loan that does not include any amount to reduce the principal payment. This is only of interest for those willing to bet that the value of their home is going to significantly increase while they own the home.

Generally, banks like for you to make a down payment of at least 20% of the purchase price. However, with homes at $200k and above, this would mean a $40k down payment. Since most people don't have that kind of money to put down, we are seeing loans for as much as 100% of the purchase price. In the case where you have less than 20% to put down, the bank will penalize you by forcing you to pay an extra monthly fee added to your payment that is called Private Mortgage Insurance(PMI). This makes them feel a little better about the fact that they are loaning you such a high percentage of the purchase price. This extra fee will go away once you have made enough payments to reduce the amount of principal left on the loan to 80%. If you make your payments on time, you can possibly apply to have the PMI removed before that point. Some banks have programs that reduce or waive PMI if you meet certain restrictions or if the property qualifies. One of these is called the Community Committment Program.

Who the bank gets the money from can be important. They may be a local bank and have the ability to make the loan themselves, but more likely, the money will actually come from higher lending institutions such as Freddie Mac, Fannie Mae, or FHA. FHA has become a very popular type of loan in the last year. In the past, it has been reserved for those with less than stellar credit and had lots of restrictions and fees. However, FHA has relaxed many of the restrictions and you can usually get a lower interest rate.

Now, here's the hard part. All lender fees are very negotiable. If you don't make them compete with each other, they will charge you far too much. It's unfortunate, but that's the way it is. They will reduce their fees and possibly their rates if you have them compete with each other. Here's how you're going to do that. Go to one and get prequalified and then they will give you an estimate of the costs and the monthly payments. Once you have that Good Faith Estimate, you take that to 2 other lenders and you ask them what they can do for you. They will beat the numbers given to you by your first lender, even if your first lender is your best friend. You then take the new good faith estimates back to the first lender and the first lender will reduce their price to beat these new estimates. You can do this about 2 or 3 times until they won't budge anymore. Then you select the best deal that works for you, keeping in mind who you are most comfortable with. Everyone hates this part of the process, but it will save you money.

Finally, once you have a ratified contract, don't finance any major purchases such as furniture or cars during the approval process. This could have a negative effect on your qualification for a loan.