Financing for a Home Loan: 8 Things to Know

Before you begin seriously shopping for homes for sale in Miami, it’s wise to speak with a lender about what you can afford to spend on a home. If you haven’t purchased a home before, you may have questions about what happens during these conversations and may not know what information you’ll need to have ready to expedite the process. This article will walk you through the entire process of getting preapproved for a loan, and you’ll also learn what needs to happen after you agree to purchase a home to finalize your purchase.

Usually, a lender will need to know your current credit score and debt-to-income ratio. They could also ask to see pay stubs or recent tax returns as a form of proof of income. They use this information to determine what sort of loan you might qualify for and to assess how much risk you might present if they offer you a loan.

Perhaps you’re familiar with the national interest rate. This has been a hot topic over recent years. During 2020 and 2021, when the COVID-19 pandemic was at its height, interest rates dropped to staggeringly low levels. Since then, the interest rate has risen again and is now higher than it was pre-pandemic. While this rate certainly impacts the rate your lender will offer you, it’s essential to recognize that some lenders offer higher interest rates than others. For this reason, you should give yourself plenty of time to shop around and speak with multiple lenders. This will give you an idea of who can offer you the best rate.

Once your lender gets a good feel for your overall financial condition, they may offer you preapproval for a loan at a certain amount. This doesn’t guarantee that you’ll eventually receive the loan (there is an underwriting process that we’ll touch more on later), but it’s a good indication of your overall financial condition. Some realtors will only work with buyers who have been preapproved for a loan, and many sellers will want to see a preapproval letter before they agree to a deal to sell you their home. 

Only in rare cases. More often than not, you’ll need to have some cash on hand to bring to closing as a down payment. With traditional loans, your down payment is 20% of the cost of the home. However, additional options are available, especially if you’re a first-time home buyer. Many individuals qualify for an FHA loan. These loans only require a 3.5% down payment when you purchase a home, assuming other conditions (like a minimum credit score of 580) are met. Additional options exist for veterans, first responders, public servants, and anyone who purchases property in some rural regions. You will also be responsible for some of the closing costs when the transaction is completed, which range from 2% to 5% of the total cost of the home.

Once a home goes under contract, an appraiser will come to the home to evaluate what the home is worth. They will consider the home’s condition, location, and recent sales in the area. Ultimately, they will estimate the fair market price for the home. If the home's appraised value doesn’t meet the agreed-upon price in the contract, some lenders won’t provide funding. This presents an increased risk for them if you cannot make your mortgage payments, and they must foreclose the home. The lender needs to have the assurance that they could recoup their losses if they have to sell the home later on down the road. If the home doesn’t appraise, you can renegotiate the price with the seller, or you can increase your down payment so that the lender isn’t loaning as much cash.

The underwriting process happens once you agree to a deal to purchase a home. Your lender will do more significant research on your financial history to determine if you have any outstanding debts or liens. The goal is to ensure that you are a good candidate for a loan and that they aren’t taking on any unnecessary risk by lending you money to purchase a home. More often than not, approval isn’t an issue. However, some borrowers will be approved with conditions, or an application could be suspended if the underwriter cannot verify your income or employment status.

When you buy a home, you’ll work with a title company to legally transfer ownership of the home. The title company checks to see if there are any additional claims of ownership of the property and ensures that the seller has the legal right to sell the home. Before closing, the title company will work with your lender to secure the funds for the home. The title company is a neutral third party in the transaction, so they are also working with the seller to ensure that the seller pays off their mortgage and receives any remaining profits.

The Ben Moss Group are elite Miami real estate agents who help individuals buy or sell Miami homes. Ben’s priority is to tailor his service to each individual he works with, and he regularly helps Miami Sports and Entertainment professionals along with families and hedge fund managers. With a wide range of experience and a strong knowledge of the local market, Ben is well-equipped to stand by your side throughout the entire process of buying or selling your Miami home.