Buying a home is the American dream. Finding the right loan and lender to process your home is not always as easy as finding the right place to hang your hat. Since you are going to be taking on a 30-year commitment, you want to make sure that you get the best bang for your buck. If you're ready to start negotiations on a home to put down roots, then here is an easy guide you can use.
Finding a Lender
Finding a lender seems like a simple task as you just get online or ask a friend for advice. However, different lenders have different requirements. For instance, the threshold to get an FHA loan approved is a credit score of 520. However, most lenders won’t even consider approving a loan unless the FICO is above 580. Why the difference? The underwriting company at each bank has specific guidelines that they use for their loans. Make sure you brush up on lending terms so that you can understand their jargon before going into negotiations. You must find the right company to work with that can use your credit and income to give you the best possible mortgage. You’ll likely receive offers that vary greatly, but don’t be surprised if some banks will match others to vie for your business. Don’t just fall into the trap of going with the first bank you find. Good deals come to those who do their homework.
Possibility to Refinance
It’s common for people to sign for a loan with the hopes of refinancing into a better mortgage later. Refinancing rates change as the interest rate goes up and down. You can lower your payment significantly by switching banks. You might be able to refinance with another lender. However, your credit score, income, and debt to ratio must be adequate for such a transaction to be approved. Your credit situation can change overnight, so you should never get a loan that you can only afford long term with refinancing. Nevertheless, it’s a great option if your credit is worthy.
Choosing the Best Loan for Your Credit
If your credit score is below 620, then you may want to hold off on a purchase. Many lenders will give you a mortgage that requires you to pay some of the principle and interest if you cannot meet the entire 20 percent down payment. Additionally, you may be talked into a loan that has an adjustable rate. While it seems like a good idea at the time, balloon mortgages increase your payment every few years according to the interest rate. Before you buy a house, make sure your credit, income and down payment are all in order. Not only does it make the process easier, but you will get a more affordable mortgage payment and an attractive loan.
When it comes to dealing with lenders, you can certainly negotiate your terms. However, they are more eager to negotiate with those who have an excellent FICO and significant down payment. Don't think you have to settle for the first loan you're offered. You are in the driver’s seat. If you do get a loan with lackluster terms, then you can always refinance later.
When you apply for a loan, your future lender wants to make sure that you aren’t too much of a risk on defaulting. In the past, lenders have used the Allowance for Loan and Lease Losses (ALLL) standard to evaluate the risk of your loan. However, the Financial Accounting Standards Board (FASB) has decided to switch to a new system, known as Current Expected Credit Losses (CECL). This means that, starting in 2020, loans will be evaluated differently. Here’s what you need to know about these changes.
Why The Change?
The financial crisis of 2007 was devastating for a number of reasons, but one of the biggest ones is that it demonstrated that the ALLL was not adequate for making timely adjustments. ALLL worked well for evaluating losses that would happen with some certainty, but it was not able to respond to changes that happened suddenly. The financial crisis demonstrated that the current evaluation was not able to adjust for fluctuations in the economy. As a result, The FASB decided to reevaluate how risk was calculated for loans. In 2016, they announced the new accounting standard, known as CECL, that would be implemented by 2020.
CECL is Based on GroupsUnder CECL, review for loans is mostly based on collective groups. CECL looks at your situation and puts on you in a category. Each institution will have to develop their own way of dividing these groups up, but they will be based on things such as credit score, type of loan, length of the loan, the interest rate, what year you are applying, and what your individual finances look like. Once you are placed in a category, your lender is able to determine how much risk this loan will carry. However, under CECL you can still be individually reviewed, but only when you fit a couple different requirements. Your lending institution will decide whether your loan will be individually reviewed based on your circumstances and other factors with your loan.
Understanding the Effects
In the banking industry, there has been some criticism about CECL accounts. Some lenders have a tough time adjusting to the policies since they have to implement procedures in order to pinpoint losses that could possibly happen down the road. This requires a lot more data and analysis than they have previously used. However, CECL will help lenders stay competitive and prevent a lot of the losses that many of these institutions saw during the 2007 financial crisis. To use CECL methods, bankers must always monitor the conditions in the economy, and this process heightens focus, awareness, and drive.
Most of the major changes will occur behind the scenes, and you may not see much impact on your loans as a consumer. When applying for a loan, you will still need to pay attention to your earning potential, personal debt, and credit score. While it may seem intimidating and confusing, don’t let these changes scare you when it comes to getting a new loan. Your lender will be able to guide you in the right direction.
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