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Loan Counseling: What It Is And Why Homebuyers Can’t Ignore It

We get it— buying a home can be scary. While homeownership is an exciting milestone, it doesn’t come without hard work and a bit of research. 

That’s why we’re going to walk you through everything you need to know about seeking counsel for taking out a mortgage loan. And we’ll explore what you should do before getting a loan so you can be ahead of the game.

Ready? Let’s dive in.

What’s loan counseling?

Also known as entrance loan counseling, this type of financial advising is intended to guide current and prospective homeowners. A counselor who specializes in mortgage loans helps you set a realistic path toward homeownership by educating you on your financial situation and the total cost of owning a home.

Benefits of loan counseling

The primary advantage of receiving this type of counseling is that you’ll walk away knowing exactly how much money you can afford to borrow. This means that you can narrow down your search for a home and greatly minimize the risk of foreclosure when you buy one. 

Likewise, receiving counsel can also provide you with valuable information on current mortgage loan programs that you may not be able to purchase your dream home without.

What you’ll learn from a loan counseling session

Expanding on the note of mortgage loan programs, your counselor can instruct you on FHA programs that have helped first-time homebuyers in your area with a down payment or closing cost assistance. 

Additionally, a counselor will help you identify your barriers to homeownership— like poor credit, debt, or low income— and teach you ways to overcome them. Once you and your counselor have assessed your financial barriers and needs, you’ll learn the best way to achieve your goals of homeownership. 

While the path to homeownership is different for everyone, your counselor will teach you the steps that every prospective homebuyer must take before filling out a mortgage loan application.

What to do before applying for a mortgage

In addition to seeking counseling, other critical steps make the process of getting a mortgage loan much easier. We’ll take a look at each one so you’re fully prepared when you sit down with a lender.

get a home loan

Know what your needs are

The first step on your way to homeownership is identifying what your needs and preferences are so you can choose the right loan for you. Do you need a conventional mortgage loan? A personal loan? A jumbo loan? Listing your needs will help you prioritize which ones you want to finance with a loan.

You’ll also need to assess the loan terms carefully during loan counseling so you can confidently decide which option works best for your situation. Would a 15-year mortgage work well for you? Or, perhaps you want a 30-year mortgage for more affordable monthly payments? And what about the type of loan? Do you want an adjustable-rate mortgage to enable some flexibility and lower rates at the beginning of your term? Or would a fixed mortgage better suit your needs?

Once you’ve clarified your needs, you must check your credit score to see if you’re in a good borrowing position.

Credit score

A good credit score is a critical prerequisite to obtaining a mortgage. So, if you’re thinking of buying a home and find yourself wondering, “how hard is it to get a home loan?” the answer can heavily depend on your credit history. The better your credit score is, the better your chances of getting a loan with favorable terms are.

Why is a strong credit score so important?

The unprecedented housing crisis of 2008 coupled with the rise of the subprime mortgage market has made a strong credit score more important than ever for securing financial backing. A good credit score will boost your lender’s confidence in you because it shows that you pay credit obligations on time. Because your score is an important indicator affecting your candidacy for a loan, it’ll likely be the first thing your lender checks during the application process.

A good rule of thumb is to check your credit score a few months before you apply for a loan. This way, you’ll have time to report any mistakes and work on improving your score. 

Gather the necessary papers

In a loan counseling session, you’ll learn that applying for a mortgage and a hefty amount of paperwork go hand-in-hand. So, to speed up the application process, make sure you’ve collected all the financial documents that you’ll need to present to your lender. 

Since your take-home pay directly affects your ability to pay off a mortgage, your lender will need to see proof of your total income. This typically includes your recent pay stubs, the last couple of months of bank account statements, and the past two years of tax filings.

Figure out how much you can borrow

There’s a lot to know before getting a home loan, but the arguably most important thing is determining how much money you can actually borrow. So, how do you figure this out? You get a pre-qualification, a pre-approval, or both!

Pre-qualification vs. Pre-approval

A pre-qualification and a pre-approval both give you an estimate of how much you can afford to borrow. The estimate you’ll get from a pre-qualification will be based on your income, credit, bank account information, and employment. It’s a pretty rough estimate that comes before getting a pre-approval home loan.

When you receive loan counseling, you’ll learn all about the pre-approval process because it’s an important step on the road to homeownership. During this process, your lender will take a close look at your situation by verifying your financial information and credit history. Then, they’ll tell you how much you’ll likely be able to borrow and give an estimate of your interest rate. 

Understand all of the costs

A complete loan counseling session will cover all of the costs associated with mortgages, including before you take out the loan and during the life of the loan. Here’s a rundown of fees you may need to pay before your loan term starts and during your loan term.

Fees to pay before a loan officially kicks off:

  • Application fees
  • Title search fees
  • Insurance fees
  • Closing costs
  • Appraisal fees
  • Commissions to a real estate agent or broker
  • Other processing or prepayment fees

Fees to pay during the life of your loan:

  • Property taxes
  • Mortgage interest
  • Late fees for missed payments
  • Homeowner insurance
  • Mortgage insurance
  • Home repair costs
  • Homeowner association or condo fees
  • Utilities like electricity, internet, and gas

Considering all of the above costs will help you manage your finances and understand if the loan you’re seeking is within your budget. 

Make sure you don’t break the bank

Taking out a loan isn’t a wise choice if you’re not going to be able to pay it back. This is why assessing your ability to repay a loan is a critical topic covered in loan counseling. Not only will you need to take your total income into account, but you’ll also need to know the exact amount of your monthly debt obligations. Thus, you might think you’re in good shape if your income is $6,000 a month; but if you pay $4,000 a month toward debts, paying back a mortgage will be pretty stressful.

This is why a great tip to get a home loan is to write down all of your sources and amounts of income and all of your sources and amounts of debt before you pull the trigger on taking out a loan.

Be a detective

The last step before taking out your home loan is doing a thorough scan of the rates and terms in your area. When you do your due diligence and shop around for various loans, you ensure that you get the best deal for your financial scenario.

At the end of the day… 

Getting a loan for a house doesn’t have to be an overwhelming endeavor. With proper loan counseling, you can secure a mortgage loan with confidence that it’s the best option for your situation. Because at the end of the day, home buying isn’t just about purchasing a home— it’s about making sure you can stay in it; and in turn, setting yourself up for long-term success as a homeowner.

Wondering how you can score your dream home? Talk to one of our mortgage loan experts today to receive loan counseling. We’ll listen to your needs and provide honest and practical guidance to help you get the best home loan for your situation.

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