Loan Process: Where should I start?
It is hard to know where to begin when starting the loan process! There are so many options that it can be very confusing to find the right type of loan. You must first ask yourself many questions. Some of these are:
- How much can I afford to pay each month?
- Do I plan on keeping this house for only a few years or for a long period of time?
- Is a small payment a higher priority than paying the loan down quickly?
- Am I able to make a down payment?
- Over how many years do I want to pay a mortgage?
- Am I trying to find a mortgage or refinance an existing mortgage?
The answer to these questions will help you know which loan will be best for you. There are a wide variety of loan options, so it will be useful to know some of the basic tendencies. In general:
- The larger the down payment, the better your options are for payment size, interest rate, and length of time to pay back the loan.
- A fixed-interest rate will tend to be higher than an adjustable rate.
- The longer the term of payback, the smaller the payment.
- The smaller your payment, the larger the amount that is going to interest.
- The more that you pay to interest, the slower that you are building equity.
It is also useful to understand the essential differences in types of loans. There are really only three basic types of loans:
- Fixed Interest Mortgages (FRM)
- Adjustable Rate Mortgages (ARM)
- a Hybrid ( some combination of the other two)
Loans are also classified as either government loans or conventional loans.
Conventional loans are further broken down into either conforming or non-conforming loans. To qualify as a conforming loan (or an A paper loan), it must fall under the guidelines established by Fannie Mae and Freddie Mac, corporations that have established industry standards and guidelines that govern credit requirements, down payment amounts and maximum loan amounts.
Borrowers that do not meet those requirements, due to flawed credit, can often still obtain what is known as a non-conforming loan (B, C, or D paper loans).
Once you have these general types down, you will still have to look at the individual features of specific loan types to determine which one will best meet your needs.
Your loan options can be limited by poor credit. A credit score is a system of points earned based on your credit history. This three-digit number (raging from 300 to 900) is influenced by such factors, among others, as:
- late payments
- debt to credit ratio
- total debt amount
- age of accounts (the older the better)
There are three major credit bureaus (Experian, Equifax and TansUnion) that produce comparable credit scores using some version of FICO, the industry standard developed originally by Fair Isaac and Company. Because this credit score is used by most lenders to determine your qualifications for a loan, you may want to see what you can do to increase your credit score before you apply for a mortgage.
So, the bottom line: Start with your credit score; end with the specific loan type that is most appropriate to your needs.