10 Steps to Take When Applying for a Home Loan

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You are so excited! Finally, you're going to buy a home--your own space that you can do with what you want. No landlord saying you damaged a wall, or sticking his/her hand out for rent. Of course, deciding what house to buy was probably the easiest part of the equation. Now you need to pay for it and that opens a whole other can of worms. Since most people aren't independently wealthy, you will need a home loan. Now comes the tricky part.

First off, the price you pay for the house is not going to be the amount you finance. That amount may be lower or higher, depending upon the taxes and fees that you're subject to. You'll likely need a down payment. Then the type of home loan you want, the interest rate, the term of the loan, the... Scared yet? Probably, but stay calm. Using the steps below may help you make sense of the process and alert you to some of the pitfalls just waiting to trip you.

Are you purchasing an already built home or building a new one?

This is an important distinction. When building a home, you will need to get a construction loan that can then usually be turned into a standard home loan.

The construction loan gives payments at certain points--such as when the basement is in and the well is dug--rather than giving a lump sum. In general, before money is released, the bank will verify that the work has been done and done to whatever standards are in effect at the time.

Decide whether you're using a mortgage company or a bank.

There are pros and cons to both avenues. Generally a mortgage company "brokers" your loan out to a set of investors or a bank, getting paid when the mortgage closes. The mortgage company can be exceedingly helpful by buffering you from many of the hassles that you may face dealing directly with a bank. Also, the mortgage company will look for the best deal for you, since they are more likely to get your business in that manner.

However, a mortgage company is only going to get paid when you actually use that company. There may be some hard sell tactics brought to bear, or unethical businesses may gloss over matters that will cause you problems later on.

A bank's mortgage officer is going to get his or her paycheck, in general, whether you finance with that bank or not. The bank may be able to offer more competitive rates because they are not paying a broker's fee. Of course, the same problems that you could face with a mortgage company can occur with an unscrupulous bank officer.

In the end, this decision is one of preference. As you'll see, the keyword here and throughout this article is... research. Check around, ask friends, call any business watch groups in the area. Meet with the people with whom you'll work. Find a good fit for you, both in terms of people and finances.

Fixed or Variable?

You need to decide whether to go with a fixed rate or a variable rate. This has to do with the interest rate and how much you will pay--monthly and through the life of the loan.

Fixed rate: A fixed interest rate stays the same over the length of the loan. So if you sign with an 8% interest rate, you will keep that rate--and therefore the same monthly payment--for the 20 or 30 years you will pay on the mortgage. A fixed rate will generally start out higher than a variable rate.

Variable rate: Variable interest rates fluctuate with the market. They usually start out lower than fixed interest rates, potentially allowing you to afford more house for your money. The problem is that the interest on your mortgage can go up, increasing your monthly payment. Loans may also have language that will allow the lender to increase your interest rate no matter what, after a certain term, often three years after the inception of the loan.

Know your credit report.

Is your credit report going to reflect a life that's been spent frugally, paying off bills on time and without late payments? Or will it reflect a life spent figuring out which bill to pay now so that you don't lose your electric service, while hoping you can go a little longer before losing your water service?

Having poor credit doesn't mean that you can't get your home loan. It does mean you'll likely pay a higher interest rate for your loan than the lucky so-and-so with the pristine report. If you go in knowing what your credit report is going to say, you may be able to explain some of the late payments (you were on a trip at the time, had lost your job, etc). None of the reasons may make a difference in the long run, but at least you will be able to explain what was going on to cause the blot on your report.

Know the fees.

Nothing is free in this world, even getting a new home loan. Banks and mortgage companies not only make a nice profit on your paid interest, they also try to cash in with added fees, such as:

Loan Approval Fee: A one-time fee you pay to cover the cost of the steps the loan company must take to approve your new home loan. Expect to pay $500 or more to cover this fee.

Loan Administration Fees: An ongoing fee that covers the monthly charges associated with your new home loan. Though $10 a month doesn't seem like a lot of money, it adds up. Some banks will waive loan administration fees if you have your mortgage payment electronically deducted from your account, so check into this option for more savings.

Early Payment Fee: Some lending institutions will charge you a fee if you pay off your loan early or make additional payments to your new home loan. This is because the lending company loses out on the interest you would have paid if you stuck with the loan for the set amount of time. You'll want to choose a new home loan with either a low or waived early payment fee so you can make additional payments as needed. Paying off your loan early should be rewarded, not penalized.

Consider the maximum loan amount of property value.

When you apply for a new home loan you'll notice that some loans only offer a mortgage for a percentage of the home's secured value. For example, one loan will allow you to borrow money for 95% of the value, meaning if it's a $100,000 home you will be able to get a mortgage for $95,000. That means you'll need to come up with a deposit for the home out of your pocket.

If you shop around for a new home loan you will be able to find different loan percentages. There are loans that allow you to mortgage for 100% or even more than the full value of your home. Keep in mind, the interest rate will likely be higher when you put less money down on the house.

Apply for a First Home Owner Grant (FHOG).

Some mortgage companies and banks, such as the National Australian Bank (www.national.com.au) will apply for a FHOG for you when you apply for a new home loan with their company. The FHOG was established June 2000 by the government to help offset the burden of the Goods and Services Tax (GST). This one-time grant is offered to citizens or permanent residents of Australia that are purchasing their first home within Australia.

The great thing about a FHOG is that it's not based on your income or the value of the property--it's based solely on how much you pay to buy or build your first home. That means anyone can apply, as long as you or your spouse haven't owned a home either singly or with another person.

The various states and territories have qualifications as to what type of home is eligible for the grant. It's important to make sure your home is eligible before signing a contract, as you're no longer eligible for a FHOG if you sign. To find out if your future home makes the grade, go to www.firsthome.gov.au.

If you are awarded the grant, you could receive up to $7,000, depending on the cost to purchase or build the home. The amount is paid when you settle--for new constructions, the amount of the grant is paid when the first progress payment is made to the builder.

Be careful purchasing things for your new home.

Many new home owners find themselves in trouble shortly after they start the process for obtaining a mortgage. They envision this large space that they need to fill and go out and buy a new living room set or a new washer and dryer. Unfortunately, most of these buyers are going to use credit and guess what happens then? It shows up on your credit report. The bank sees it and can (though it may not) decide that you're now too much in debt to be able to afford the mortgage. Suddenly you have lovely new furniture with no place to put it.

While this may be an extreme scenario, do keep in mind that--until after the closing--whatever you do is fair game for the bank to consider when granting a mortgage.

Read the fine print.

This should seem redundant, since you've already been warned several times to do your research but all too often people sign documents that they haven't taken the time to fully read or understand. Unfortunately, saying "I didn't see that" doesn't work when you've put your initials next to the phrase in question during the closing.


Remember that you are buying a home to enjoy. While it may be an investment or a "sure bet" to make money, this is where you are going to live. If you've done all your research, double checked your figures, asked for clarification on details and read everything you've been asked to sign, you should have a relatively easy road getting through your mortgage application.

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