Contributed by cPort Credit Union
When a potential homeowner is ready to buy a home, visiting a financial institution is a good first step. A loan officer can help the client figure out how much money a client can afford to spend, and eventually can help the client to borrow the money needed to buy a home. A mortgage is a contract with a financial institution of a promise to pay back the loan, with the house or property used as collateral.
Before applying for a mortgage, a client needs to get preapproved. At this step, having a specific house in mind is not necessary. This process evaluates a potential borrower’s credit and employment history to be sure they are qualified to borrow enough money to purchase a house. The preapproval will let the borrower know the maximum amount they can afford to spend. Once approved, the borrower receives a preapproval letter to use when working with a realtor. A realtor can guide home buyers through the process of searching for a house, negotiating a price, and making an offer to buy.
Next, the prospective home owner needs to apply for a loan in the amount they hope to borrow. The credit union or bank evaluates the client’s credit and employment history, and determines the maximum loan they believe the client can afford. They will ask how much money is available for a down payment. Down payments can range from 0% to 20% of the value of the house. The larger the down payment, the lower the monthly payments will be, and the less interest the borrower will pay over the life of the loan.
The loan officer will evaluate the client’s employment history. A good rule of thumb is showing two years of consistent employment at the same company or in the same line of work. This reflects reliable and ongoing employment, with hopes for ongoing employment throughout the duration of the mortgage – usually two or three decades.
The client’s credit history will also be reviewed. A client’s credit history does not have to be perfect, however it is important to have a few years of credit history with multiple types of credit (car loan, credit card) that report on-time payments. A mortgage loan may be the biggest loan a borrower ever obtains, and the lender needs to feel confident they’ll be repaid that large sum. Looking at how well a client has repaid loans and credit cards in the past will give them a sense of how the client will meet the mortgage payments in the future.
When the client has found a house, and obtained a mortgage, they can sign a contract on a home!