January 31, 2022 in Mortgages
How to get a mortgage
Erik J. Martin @Bankrate
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Eager to purchase the home of your dreams and start building equity for the future in this thriving housing market? For many, shopping for a home is the fun part, but obtaining a mortgage is another story. Whether you know a little about the mortgage process or have no idea how to get a home loan, dont fret. This guide to getting a mortgage breaks down every step of the process so youll know what to expect.
How to get a mortgage, step by step
Step 1: Strengthen your credit
A strong credit score demonstrates to mortgage lenders that you can responsibly manage your debt. So, youre likely to get approved for a mortgage with a competitive interest rate if you have good or excellent credit. If your credit score is on the lower side, you could still get a loan, but youll likely pay more in interest.
Having a strong credit history and credit score is important because it means you can qualify for favorable rates and terms when applying for a loan, says Rod Griffin, senior director of Public Education and Advocacy for Experian, one of the three major credit reporting agencies.
To improve your credit before applying for your mortgage, Griffin recommends these tips:
Follow these steps to help boost your score and nab a lower interest rate on a home loan.
Step 2: Know what you can afford
Its fun to fantasize about a dream home with every imaginable bell and whistle, but its much more practical to only purchase what you can reasonably afford.
Most analysts believe you should not spend more than 30 percent of your gross monthly income on home-related costs, says Katsiaryna Bardos, associate professor of finance at Fairfield University in Fairfield, Connecticut. This includes home maintenance and utilities.
Bardos says one way to determine how much you can afford is to calculate your debt-to-income ratio (DTI). This is calculated by summing up all of your monthly debt payments and dividing that figureby your gross monthly income.
Fannie Mae and Freddie Mac loans accept a maximum DTI ratio of 45 percent. If your ratio is higher than that, you might want to wait to buy a house until you reduce your debt, Bardos suggests.
Even with the 45 percent threshold, the lower your DTI ratio, the more room youll have in your budget for expenses not related to your home. Thats why many financial advisors recommend keeping the ratio closer to 36 percent, if feasible.
Andrea Woroch, a Bakersfield, California-based finance expert, says its essential to take into account all your monthly expenses including food, healthcare and medical costs, childcare, transportation, vacation and entertainment expenses and other savings goals.
The last thing you want to do is get locked into a mortgage payment that limits your lifestyle flexibility and keeps you from accomplishing your goals, Woroch says.
You can determine what you can afford by using Bankrates calculator, which factors in your income, monthly obligations, estimated down payment and other details of your mortgage, including the interest rate and homeowners insurance and property taxes.
Step 3: Build your savings
Your first savings goal should be your down payment.
Saving for a down payment is crucial so that you can put the most money down preferably 20 percent to reduce your mortgage loan, qualify for a better interest rate and avoid having to pay private mortgage insurance, Woroch explains.
Its equally important to build up your reserves. One general rule of thumb is to have the equivalent of roughly six months worth of mortgage payments in a savings account, even after you fork over the down payment. This can help safeguard you if you lose your job, for example, or something else unexpected happens.
Also, dont forget closing costs, which are the fees youll pay to finalize the mortgage. They typically run between 2 percent to 5 percent of the loans principal. They dont include escrow payments, either, which are a separate expense. Generally, youll also need around 3 percent of the homes price for annual maintenance and repair costs.
Overall, aim to save as much as possible until you reach your desired down payment and reserve savings objectives.
Start small if necessary but remain committed. Try to prioritize your savings before spending on any discretionary items, Bardos recommends. Open a separate account for down payment savings that you dont use for any other expenses. This will help you stick to your savings goals.
Step 4: Choose the right mortgage
Once your credit score and savings are in an adequate place, start searching for the right kind of mortgage for your situation. Youll also want to have an idea of how mortgages work before moving forward.
The main types of mortgages include:
A first-time homebuyer, for instance, might consider an FHA loan, which requires a minimum credit score of 500 with a 10 percent down payment or a minimum score of 580 with as little as 3.5 percent down. A conventional loan could be a better fit for a homebuyer with a higher credit score and more down payment savings.
Mortgages can have a fixed or adjustable rate, meaning the interest rate stays the same for the duration of the loan term or changes over time, respectively. Most home loans have 15- or 30-year terms, although there are 10-year, 20-year, 25-year and even 40-year mortgages available. Adjustable-rate loans might come with a lower monthly payment initially, but can become more expensive over time if rates rise. If you cant afford that risk, the fixed-rate is the way to go.
Sign up for a Bankrate account to determine the right time to strike on your mortgage with our daily rate trends.
Step 5: Find a mortgage lender
Once youve decided on the type of mortgage, its time to find a mortgage lender. Its important to shop around for multiple offers to make sure youre getting the best possible deal, not just the lowest interest rate. Be mindful of the lender fees when evaluating your options.
To find the right lender, speak with friends, family members and your agent and ask for referrals, advises Guy Silas, branch manager for the Rockville, Maryland office of Embrace Home Loans. Also, look on rating sites, perform internet research and invest the time to truly read consumer reviews on lenders.
[Your] decision should be based on more than simply price and interest rate, says Silas. You will rely heavily on your lender for accurate preapproval information, assistance with your agent in contract negotiations and trusted advice.
Remember that interest rates, fees and terms can vary substantially from lender to lender.
Thats why its important to shop around carefully and ask questions, Woroch says.
For many borrowers, applying for a mortgage is overwhelming. If youre not sure exactly what to look for, you might want help. A mortgage broker can help you navigate all the different loan options available to you and possibly help you get more favorable terms than youd be able to secure by applying on your own.
Step 6: Get preapproved for a loan
Its a good idea to get preapproved for a mortgage once youve found a suitable lender. With a preapproval, the lender will review your finances to determine if youre eligible for funding and an amount theyre willing to lend you.
Getting preapproved before shopping for a home is best because it means you can place an offer as soon as you find the right home, Griffin says. Many sellers wont entertain offers from someone who hasnt already secured a preapproval. Getting preapproved is also important because youll know exactly how much money youre approved to borrow.
Be mindful that mortgage preapproval is different from prequalification. A mortgage preapproval involves much more documentation; prequalification is less formal and is essentially a way for a lender to tell you that youd be a good applicant. Still, it doesnt guarantee any particular loan terms.
Step 7: Begin house hunting
With preapproval in hand, you can begin seriously searching for a property that meets your needs. Take the time to search for and choose a home that you can envision yourself living in.
When you find a home that has the perfect blend of affordability and livability, be ready to pounce quickly. In a competitive market where available homes go fast and bidding wars are common, youll need to be aggressive.
Its essential to know what youre looking for and what is feasible in your price range, Bardos notes. Spend time examining the housing inventory, and be prepared to move quickly once the house that meets your criteria goes on the market.
Utilize social media and ask your agent for leads on homes going on the market before they are listed on the MLS, Bardos also recommends.
Step 8: Submit your loan application
If youve found a home youre interested in purchasing, youre ready to complete a mortgage application. These days, most applications can be done online, but it can sometimes be more efficient to apply with a loan officer in person or over the phone. You might be better able to establish a relationship with the loan officer in person, too, which can work to your advantage if you have questions in the process or issues come up.
The lender will require you to submit several documents and information with your application (which you should keep multiple copies of), including:
The lender will also pull your credit report to verify your creditworthiness.
Step 9: Wait out the underwriting process
Even though youve been preapproved for a loan, that doesnt mean youll ultimately get financing from the lender. The final decision will come from the lenders underwriting department, which evaluates the risk of each prospective borrower, and determines the loan amount, how much the loan will cost and more.
After all your financial information is gathered, this information is submitted to an underwriter a person or committee that makes credit determinations, explains Bruce Ailion, an Atlanta-based real estate attorney and Realtor. That determination will either be yes, no or a request for more information from you.
There are a few steps involved in the underwriting process:
Step 10: Close on your new home
Once youve been officially approved for a mortgage, youre nearing the finish line. All thats needed at that point is to complete the closing.
The closing process differs a bit from state to state, Ailion says. Mainly it involves confirming the seller has ownership and is authorized to transfer title, determining if there are other claims against the property that must be paid off, collecting the money from the buyer, and distributing it to the seller after deducting and paying other charges and fees.
Common closing costs include:
You will review and sign lots of documentation at the closing, including details on how funds are disbursed. The closing or settlement agent will also enter the transaction into the public record.
They say you shouldnt put the cart before the horse. The same is true in the home-buying process. Youll need to complete several steps to finance a home, so the more you learn about whats required, the better informed your decision-making will be.
If youre denied a mortgage, theres no barrier against trying again in the future.
If you are unable to qualify for a loan with favorable terms, it may make more sense to simply wait until you can make the necessary changes to improve your credit history before trying again, Griffin suggests. A bit of patience and planning can save a lot of money and help you get the home you want.