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The Process Once a party is ready to buy, the borrowing process begins. In practice many of the decisions made that affect an application happen before any information is actually written down by the buyer. This pre-research is critical since it helps the buyer understand and plan for what he or she can actually get financing for. First, the buyer needs to fully examine his or her own financial situation prior to borrowing. This means examining how much is earned on a monthly basis versus how much actually has to be spent on bills, debt, and liabilities (don't forget car loans or college student loans). If the ratio of income to debt monthly is more than 28 percent for just the proposed house mortgage or 36 percent for all debt, including the mortgage, then the chance of borrowing a home loan is pretty slim, at least with a government-backed mortgage. The buyer should first focus on paying down some debts to improve the ratio. Second, the buyer needs to count up all his or her assets that can be converted to a down- payment. This doesn't mean that every cent will be spent, but it is a figure needed for the application process. The decision on how much down-payment is paid comes later. First, the buyer needs to count up all the funds he or she has in savings, CDs, bonds, investments, and cash. Assets that can't be easily converted to cash don't count. If this figure is nil or next to nothing, the buyer needs to save up some more funds before considering borrowing. Residential loan lenders don't like to lend to borrowers for 100 percent of the home cost. And first time buyers are required to put in a down payment of at least 5 percent. Don't forget the purchase deposit as well. Many sellers of new homes require a cash deposit of a few thousand dollars when a buyer signs an agreement on intent to buy. This deposit goes towards the purchase, but is lost if the buyer is not successful at getting a home loan in the end. This deposit typically has to be cash up front and out of pocket. Third, the buyer needs to run a credit score report. The $30 or $40 spent getting this report is worth a lot of trouble later if it turns out the buyer has a bad score. Knowing ahead of time can steer the buyer away from loan programs that would just be a waste of time and a denial due to less-than-stellar credit. Alternatively, knowing one has a very good score gives the buyer leverage to demand a better interest rate from the lender on the loan. Interest rates are approved within a range, so borrowers don't have to accept the first rate offered in the application process. With the pre-research figures in hand, the buyer now has to collect all the necessary paperwork to complete an application. This includes recent payroll stubs, a recent credit report to reference, proof of identification (usually a government-issued identification), social security numbers, the intent to buy agreement with the seller (it includes all the specific plot and property information to reference in the loan application), and information on all standing liabilities and loans that still exist. Now begins the application process with all the pieces accounted for.
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The Loan Process