Read this before buying a home and applying for a mortgage in the US.
A major feature of Chinese buying a house is “buying a house in cash”. Due to cultural and consumption habits, most Chinese home buyers will have relatively sufficient financial resources before buying a house and pay the full amount in cash. However, with the strengthening of everyone’s awareness of rational planning of investment and financial management, more and more buyers choose to take out loans to purchase real estate.
In the United States, one of the important factors that directly affects your home loan interest rate is your credit score. The lower the credit score, the higher the interest rate on the home loan, or even the failure to pass the loan application.
The common credit evaluation model in the United States is FICO, which mainly evaluates payment history, amount of arrears, credit history length, newly opened credit, and credit type. The minimum FICO score is 300 and the maximum is 850. Generally speaking, a score above 700 is considered a good credit score, a score below 600 is a poor credit score, and a credit score below 500 is usually rejected for loan applications.
Taking the common credit model FICO and a 30-year fixed mortgage rate of 216,000 as an example, the monthly payment difference between a FICO score of 760 and above and a 720 is $289, and the 30-year difference is more than $100,000.
Therefore, a good credit history is very beneficial for applying for a low-interest rate home loan and saving unnecessary expenses.
●Before applying for a home loan, keep a good credit history. Before applying for a mortgage, timely payment of bills, reducing arrears, and reducing the number of new credit cards can improve and enhance your credit score
● During the application process, pay attention to any factors that will affect the credit report, and maintain effective and good communication with the housing loan company. As little as $4 in debt, for example, can reduce your credit score by 100 points. If you’re planning to pay off your credit card, also check with the lender ahead of time, as any changes on your credit report can affect the application process.
●It is best not to increase new loans. Adding new debt will directly affect your debt-to-income ratio (Debt-to-Income Ratio). The debt-to-income ratio is also an important indicator for the loan company to examine during the application process. For example, taking out a loan for the purchase of furniture and appliances in a new home will increase your debt. These can be more convenient to apply after the loan is approved.
●When applying for a loan pre-approval letter, you should choose Soft Pull; only choose Hard Pull when you are sure to choose to apply for a loan, because Hard Pull will reduce your credit score.
●When filing tax returns, do not deliberately reduce your income in order to save tax. Some home buyers use other expenses to offset income and reduce taxable income (TaxableIncome) in order to reduce tax expenses when filing tax returns in the United States, because lending banks or institutions assess your income ability based on taxable income.
Loan Pre-Approval Letter:
Housing loan pre-approval letter (Pre-approval) is a loan bank or lending institution will give the purchaseable property value and loan amount based on the applicant’s income, credit history, debt and work conditions, etc. The validity period of the pre-approval letter is generally 60 days – 90 days.
Types of Home Loans:
There are two main types of home loans in the United States: fixed rate and adjustable rate (floating rate).
Fixed-rate Mortgage (FRM) refers to a home loan in which the borrower pays the interest at the agreed interest rate regardless of how the market interest rate changes during the loan period. The main advantage of this type of loan is that you are protected from future inflation; even if the market rate rises, your interest rate will remain the same. Of course, conversely, if the market rate drops, your rate won’t change either. However, if interest rates drop too low, you can also opt for Refinance. That means fixed-rate mortgages are more beneficial to applicants when interest rates are historically low.
The loan period generally ranges from 10, 15, 20, and 30 years. The longer the period, the lower the monthly repayment, but the higher the total interest paid.
Adjustable-rate Mortgage (ARM) means that the interest rate is fixed for the first few years of the loan period, and then the interest rate changes with the market interest rate every year.
Steps to apply for a home loan:
Choose a lending bank or lending institution;
Submit loan application form;
Receive a loan fee estimate form;
Loan banks or institutions review applications, house valuations, and lock interest rates;
The loan is approved; check all terms, fee details and other documents again;
Home loan completed.
To apply for a home loan, these fees must be spent on:
Bank approval consists of two stages: individual solvency review and property right review. In the personal repayment ability review stage, when the bank receives the lender’s application, the bank will arrange a property value evaluation and check the lender’s credit history to evaluate its repayment ability. All processes are handled internally by the bank, but the fees incurred are listed, including bank approval fees, home appraisal fees, flood zone inquiry fees, credit report inquiry fees and tax service fees.
Bank application fee:
The bank’s application fee or approval fee is charged by each bank, and the price will vary, generally around $1300-1600. The bank application fee is independent of the loan amount.
Home Appraisal Fee:
The purchase price of a home cannot be taken as the actual value of the home. When the bank approves the loan, it will ask a professional institution to evaluate the property value. The evaluation fee is generally between $400~$600. Home appraisal fees are mainly related to the size and structure of the home, not the purchase price.
Credit report inquiry fee:
To assess a lender’s ability to repay, banks look at the lender’s credit score and history from the three major credit reporting agencies (Equifax, Experian and TransUnion). The credit scores provided by the three institutions are generally different, and the bank will use the middle value. The cost of checking a credit report is about $60.
Property related costs:
When the personal repayment ability review is completed and the requirements are met, the bank will notify the lender to choose the Title company to review the property rights. If the property title is confirmed to be legal, the bank will require the lender to purchase property certificate insurance. The price for that part is around $2200. Since both real estate license insurance and home insurance are related to the price of the house and are determined by market conditions, the difference may be relatively large.
Property title search:
Mainly check whether the real estate certificate is valid and legal, whether there is a debt connection, and whether it is suitable for transfer (clean title).
Borrower Title Insurance:
In order to avoid possible problems with the title deed, the bank will require the lender to purchase a one-year title deed insurance. Within one year of the completion of the transaction, if there is a problem with the property rights of the house, the real estate insurance company will compensate the bank for related losses. The cost of title deed insurance is related to the loan amount, for a loan of around $300,000, title deed insurance is about $1000.
In order to avoid losses caused by natural disasters such as fires, banks generally require lenders to purchase home insurance Hazard Insurance. Lenders must purchase home insurance for one year in advance before the loan is approved. Home insurance is similar to auto insurance in that lenders can choose their own home insurance company. Home insurance companies calculate coverage based on the Dwelling value of the home. Each home insurance company calculates the Dwelling value differently, and it is recommended that lenders consult more before purchasing.
Property transfer fees:
When the bank approval is complete and the lender’s loan is approved, the Title Company will begin processing the settlement/closing. Since the Title company is chosen by the buyer and the seller, different Title companies can be used, or the same one can be used.
Housing transfer processing fee:
Title Company coordinates banks, mortgage brokers, sellers, and buyers in matters related to the transfer of real estate deeds, including the payment of real estate transaction taxes, the filing of transfer records, and down payment payments.
Transfer record fee:
The Title Company submits the transfer records to the government county office for preservation, and the county office charges a record fee.
Housing Transaction Tax:
The housing transaction tax collected by the government is about 0.86%. Usually paid by the seller. New builds vary by builder.
Buyer’s Title Insurance:
The title insurance (Buyer’s Title Insurance also called Title insurance owner’s policy) purchased by the seller for the buyer guarantees the buyer’s rights. This insurance will indemnify the buyer for losses when there is a problem with the title of the home. Fees vary by room rate. The cost in the table is based on an estimate of 300,000 houses, and the buyer’s title insurance cost is about $1,000.
Bank advance charges and others:
In addition to paying the principal and interest of the bank loan each month, the lender also needs to pay a certain amount of property tax and home insurance.
When the house is transferred, the bank will establish an escrow account (Escrow Account), and the monthly property tax and home insurance will be put into this escrow account. The government and home insurance companies send tax bills and insurance bills directly to the bank each year, and the bank then pays them from this account.
In order to ensure that there is sufficient balance in the escrow account, the bank generally requires the lender to prepay two months’ property tax and home insurance during the transfer transaction. Sometimes it may be necessary to pay more in advance, for example, the house will be transferred in June and the property tax will be levied in July. In this case, the prepaid property tax may exceed 2 months. Either way, the bank will carefully calculate the balance in the escrow account each month to make sure there is enough money to pay for property taxes and home insurance.
More about real estate tips please keep an eyes on ibi1.