How New Home Loans Work

Before you embark upon buying a new home or getting a home loan, become a savvy borrower by familiarizing yourself with the process and what to expect. Here is a step-by-step guide to the home-buying process:

1. Check your credit report.
   The largest determinant of how competitive your home loan will be is your credit score. Lenders rely upon this heavily when making quotes. Review your credit report for errors and have any mistakes you find corrected. Also know your credit score. If you have less-than-perfect credit, Sheri may still be able to get you a home loan but remember that the interest rates might be higher.
    
2. Determine your price range.
   Experts advise that housing expenses comprise roughly 28% of your income. Be sure to include other debts you might have and try not to have more than 36% of your income going toward debt (including other loans and credit cards).
    
3. Get pre-approved for a mortgage.
   This makes you more attractive as a home buyer.
    
4. Find a real estate agent and decide on the home you want, if you haven’t already.
    
5. Make an offer.
   Keep in mind what gives you bargaining power as a buyer—pre-approval on a mortgage, flexibility on closing dates, and no sale contingencies are all examples.
    
6. Choose the right mortgage for you.
   The types of mortgages are explained below.
    
7. Have a 3rd party inspection and appraisal done on the home.
    
8. Close on your new home.

What Type of New Home Loan is Right for Me?

To select the type of home loan that is right for you, you’ll first need to understand what options are available. Each of the five basic types of mortgages is explained below.

• Fixed rate mortgage – your monthly payments and interest rate will remain the same for the duration of the loan. This is best if you plan to stay in your home for a while, think interest rates will increase, or want the consistency of fixed interest rates and regular payments.
   
• Adjustable rate mortgage (ARM) – interest rates will change periodically (usually at one, three, or five year intervals), and, as a result, your payments will fluctuate. This is best if you plan to spend less than three years in your home, are willing to risk fluctuations for the lowest rate possible initially, or think interest rates will go down.
   
• Hybrid mortgage – this is a combination of adjustable and fixed rate mortgages. You pay a fixed rate for a specified period of time, after which the loan converts to an adjustable rate mortgage. Consider this option if you would like the comfort of knowing your payments will remain the same for at least three years or plan to sell or refinance soon after the fixed rate period is over.
   
• Option ARM – a form of adjustable rate mortgages. Consider this if your income fluctuates for any reason or if you have the discipline to pay more than the minimum each month.
   
• Interest-only mortgages – this means you will pay interest only on your home loan for a certain period of time. This works well if you know your financial situation will improve in the future (for example, you plan on paying off a major debt soon).