Buying your first home is quite an exciting milestone in life, but it comes with its own stressors. One of the main points of tension in homebuying is going through the mortgage loan process. This is something most home buyers will have to go through, unless they pay with cash which, according to the National Association of Realtors, is only 13% of total home buyers. Therefore, rather than trying to avoid the mortgage process, you should focus on learning what you can before getting your first home loan.
It can be especially stressful if you become overwhelmed by everything you need to know or if you aren’t sure how home loans work. In this post, we’ll be sharing the information you’ll want to know going into financing your home, including the different types of mortgage loans and what the process will look like.
Mortgage loans 101
A mortgage is a type of loan you can use to finance a home where the home you purchase serves as the collateral to your loan. Since most people don’t have enough cash at their disposal to pay for a home, getting a mortgage loan is the common way to go. These loans work the same way as other kinds of loans: you pay a certain amount upfront (down payment), then borrow the rest of the cost of the house, make monthly payments (that include a percentage of interest) until it’s paid off. The most common mortgage term is 30 years, but a 15-year term is also an option. Check out our previous post to learn which mortgage term is best.
Here’s an example of what a monthly payment could look like depending on the mortgage amount and interest rate. Say your mortgage amount is $300,000 and you want to pay it off over the course of 30 years. If you choose the common fixed-rate mortgage your interest rate will be locked in. Say you lock in your interest rate at 5%. This means that your monthly payment will be $1,610.46.
Getting the best mortgage rate possible will be important for your finances. You’ll need to figure out the maximum mortgage you can get without breaking the bank and then look around for the best rate. When in doubt, it’s always a good idea to talk to a professional. Our mortgage team is available to talk you through the process and answer any questions you have. Another great resource is our list of mortgage calculators that can help you determine your maximum mortgage, your monthly payment schedule, and more.
Types of mortgage loans
Did you know there are multiple types of mortgage loans? In fact, Hickory Point Bank has seven types available to suit your personal mortgage lending needs. It’s important to know what each type offers, because one of the less common types may end up being more suitable for you depending on your needs. Below we’ll give you the scoop on each of our offerings.
Fixed rate mortgage
The most common type of mortgage loan is a fixed rate mortgage. You’ll have the same interest rate throughout the loan term, which will give you a consistent payment to make each month. No surprises to catch you off guard. This kind of loan can be especially good in a rising interest rate environment, to ensure that your payments don’t increase past what you can afford.
A good option for: Homebuyers who have reliable income, a good credit score, and who want consistent payments
FHA financing
The Federal Housing Administration offers this type of loan that is administered through a bank, which allows the use of gift or grant funds to help with the down payment and closing costs. It also may have more flexible credit guidelines for low-income households and first time home buyers.
A good option for: First-time homebuyers who don’t have as much money to put toward the down payment
Guaranteed Rural Housing Loan Program
The Guaranteed Rural Housing Loan Program gives special financing options to homes located in certain eligible rural areas. Additionally, to be eligible, your household income must not exceed 115% of your area’s median income.
A good option for: Homebuyers in one of the eligible communities who meet the income requirement (find out if your area is eligible here)
VA loan
The Veterans Administration provides eligible U.S. Veterans with special financing options and low closing costs.
A good option for: Eligible U.S. veterans looking to purchase a home
Lot and land loan
These loans provide financing for the purchase of land that the buyer can then build a home on.
A good option for: Those who want to build a home but need to purchase the land first
Construction loan
Construction loans provide short term financing for the construction of a new home. While the home is being constructed, you’ll make interest-only payments. Then when the home is completed, the loan can be refinanced to a fixed-rate mortgage until it’s fully paid off.
A good option for: Those who want to build a home on land they already own
Portfolio lending options
A portfolio loan is an in-house solution for homebuyers who are interested in options outside of the conventional loan. The lender keeps the debt in-house, so the borrowers don’t have to meet the usual qualifying standards.
A good option for: Homebuyers who are in situations outside of typical qualifying standards
The home loan process explained
Another stressor of financing a home for the first time is not knowing what the process will be like. That’s why we make sure to outline the ten-step process to all our customers, so they know exactly what to expect. Being aware of each step leaves less room for uncertainty and stress.
Hickory Point Bank’s home loan process
- Meet with your mortgage lender or apply online for pre-qualification
- We provide loan disclosures
- A loan disclosure is a form with details about your selected mortgage loan
- You provide all required documentation
- Hickory Point Bank orders a home appraisal
- A home appraisal is a professional opinion of the home’s value
- We submit documents to underwriting
- Underwriting verifies your income, assets, debt, and other details
- Underwriter reviews the loan and issues final credit decision
- You set up hazard insurance
- Hazard insurance protects you against damage caused by natural events like fire or storms
- Documents are sent to the title company for signing
- You sign documents at title company and pay remaining costs (if any)
- Loan is recorded and keys are exchanged. You’re home at last!
The home financing process isn’t always the easiest to navigate by yourself. That’s why we’re here to help in any way we can. For more information, visit Hickory Point Bank’s Mortgage Center or stop by one of our branches to speak with one of our loan officers. We are dedicated to providing the best service in Central Illinois, and we would love to help you finance your dream home!
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