Steps Involved In Applying for a Loan
Applying for a loan can be a stressful procedure, especially if it is your first time. Whether you are applying for a student loan, car loan, home loan or a business loan, it is important to follow all necessary steps and ensure the terms and conditions are thoroughly scrutinized and thought through. Don't rush in and get locked in on an unfavorable deal.
There are eight primary steps to applying for a loan, including:
1. Determining the amount
The first step is to decide exactly how much you wish to borrow and the length of time to pay it back. Do not be enticed to borrow more than is necessary as you will be required to pay more in interest. There are a variety of loan calculators available to determine the amount you will receive and the monthly financing cost.
2. Acquiring your credit score
The next step is to determine your credit score through the three crediting agencies, Experian, Transunion or Equifax. Interest rates, annual percentage rates and loan approvals are all based on your credit rating. By reviewing your rating you will be aware of your position and what sort of rates to expect. Those with low credit ratings and FICO scores will have a higher interest rate which will increase the monthly payment.
3. Researching a lender
While your credit score is being calculated, you should research a variety of loan lenders. Ask for recommendations from friends, family and co-workers, and review the Better Business Bureau for any discrepancies. Make sure to ask many questions when meeting with the lender and ensure they answer them sufficiently.
4. Comparing loans and terms
While researching the lender, it's important to also review the available loans with a specific combination of features, interest rates and services. More specifically, analyze the APR, closing costs, loan terms and monthly payments with interest. Additionally, review the fine print and ask about balloon payments, penalties and fees, interest rates as a result of default and credit insurance. Also, do not place much faith in “unbelievable rates," for almost all of them they will increase drastically after the first few months.
5. Applying for the loan
Once you find the right loan, lender, terms and payments, collect the necessary documents to complete your application. The paperwork will require information about your employment history, job tenure, income, assets, liabilities and other loans. You will typically be required to provide proof of income and assets. Additionally, the lender may ask for bank account statements, tax returns, and proof of other earnings, apartment rental agreements, proof of insurance and many other types of documentation. Have these documents prepared to save time when you find the appropriate loan.
6. Reviewing a good faith estimate
Once the loan application has been completed and submitted, you will receive a Good Faith Estimate which is a preliminary estimate of fees associated to closing the loan. This document is the basis for the final figures received by the Escrow Company prior to closing. The Good Faith Estimate information is only provided for mortgage loans.
The next step after applying is to simply wait. Some lenders can approve loans in a matter of minutes. On the other hand, most mortgage loans take several weeks to process. During this time an appraisal and your credit report are being ordered, specific documentation is being obtained and the paperwork is reviewed for final approval. Depending on the loan type, this is the time to lock in your interest rate.
8. Closing on the loan
The final step is closing on the loan once it has been approved. During this time, the lender transfers the loan amount via cashier’s check, draft or electronic funds transfer to the seller in exchange for the property title.
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