If you’re new to buying a house, then you need to know how to get a mortgage loan. We explain the process of getting a mortgage for your new home in 13 easy steps. —-
If you’re thinking about buying your first home, you probably have a vision of what your dream home looks like, where it will be, and what features it will have.
But when it comes to one of the key aspects of buying that home — how to get a mortgage loan — you may draw a blank. No one daydreams about filling out mortgage applications, and the process is complicated because you have to keep track of so many details and make so many choices.
We’ve prepared this simple guide to lead you through the process, step-by-step. We include advice from an agent who has worked with hundreds of new buyers, descriptions of different loans, and information about the many kinds of paperwork you’ll deal with. With this information in hand, you’ll be prepared to get a mortgage loan and start your journey to homeownership.
Step 1: Prepare your finances
You may think homeownership is all about lifestyle choices, but at its heart, buying a home is a financial move.
Before you can get a mortgage, you have to have your finances in line. Be prepared in these three financial areas.
Lenders look at your credit history to determine whether to give you a mortgage. They want to know you pay your bills on time and don’t have more debts than you can repay on your income. Your credit score — which is based on information compiled by the country’s major credit bureaus, Equifax, Experian, and TransUnion — reflects how well you manage debts.
Credit scores can range from about 300 to 850 (each bureau calculates scores slightly differently). The higher your credit score, the more likely you are to qualify for a loan. You’ll also get rewarded for a good credit score by receiving a lower interest rate on your mortgage.
Maureen Kile, a real estate agent from Tulsa, Oklahoma, who has worked with 75% more single-family homes than the average agent in her market, notes that lenders will always check a buyer’s credit score; the higher the score, the better the loan terms.
However, some government-backed loans will accept borrowers with credit scores as low as 500 if they’re able to make a more sizable down payment.
You can raise your credit score by:
Paying down outstanding debts
Setting up automatic payments so you pay your bills on time
Asking the credit bureau to remove inaccurate information from your file
The last may require you to get a letter from the creditor certifying you’ve paid the debt and then send it to the credit bureau, Kile said.
While having good credit helps you get a mortgage, your debt-to-income (DTI) ratio will help determine the size of the loan you qualify for. To determine your DTI, the lender will add up all the monthly debt payments you have to make — student loans, car loans, credit card minimum payments — and divide the total by your gross monthly income.
Lenders generally want your DTI to be 45% or lower, including the amount you’ll have to pay for your new mortgage. Having a lot of existing debt lowers the size of the mortgage you can get.
If you have outstanding loans, pay them off entirely, or make additional payments to reduce the balance before you start looking for a home. That will lower your DTI so you can afford a bigger mortgage.
Increasing your income also helps your DTI, so if you’re expecting a raise, wait until it shows up in your paycheck to apply for a mortgage.
You also need to have money saved before you apply for a mortgage.
The most important thing to save for is a down payment. The size of your down payment will affect what kind of loan you qualify for and the rate you pay. You’ll also need money for other costs that come with buying a home, from paying for a home inspection to covering the various fees you’ll be charged at closing.
How much money do you need to save? While you’ll get the best interest rate with a 20% down payment, you can still buy a home with a much smaller down payment.
The median price of a home sold in the U.S. was $272,500 in 2020, according to the National Association of Realtors 2020 Profile of Homebuyers & Sellers. The median down payment for first-time buyers was 7%, NAR says. To make a 7% down payment on a median-priced house, you’d need $19,975.
Average closing costs in 2020 were $6,087, including prepaid taxes, according to ClosingCorp data. These costs vary widely by state, and you may be able to roll the closing costs into the loan — although that means paying interest on the closing cost amount for the life of the mortgage.
Step 2: Learn about loans
Once you start looking at loans, you’ll find several types of mortgages that fill different needs.
Types of loans
Conventional loans are privately backed and generally require good credit, with a minimum credit score of at least 620.
Down payment requirements vary. If you’re qualified, you may be able to put down just 3% to 5%, but if you can put down 20%, you don’t have to pay for private mortgage insurance.
FHA loans are backed by the Department of Housing and Urban Development and accept credit scores as low as 500. They also accept down payments as low as 3.5% with a score above 580. However, you’ll have to pay for mortgage insurance for at least 11 years, depending on your down payment size — most FHA loans require mortgage insurance for the entire life of the loan.
This government-backed mortgage requires a credit score of 640 or higher but may not require a down payment. USDA loans are only available in specific areas, usually rural regions, and there is an income cap that varies by location.
Designed for veterans, active-duty military, and qualifying spouses, VA-backed loans often require no down payment.
The Veteran Administration doesn’t make these loans; instead, it guarantees a portion of the loan so a private lender will give you a better deal.
A jumbo mortgage is a loan that’s too big to meet conforming loan limits, so it’s riskier for lenders. In 2021, loans over $548,250 are considered jumbo in most areas, although in high cost-areas like Hawaii and parts of California, the jumbo loan limit is up to $822,375.
You might have to submit more paperwork to verify your income, but the process is similar to a conventional loan.
Lenders use the word “term” to refer to the amount of time you have to pay back the mortgage. Typically, you can choose between 15-year and 30-year terms. The monthly payments are lower with a 30-year loan because you’re paying the amount back over a longer period.
However, the longer it takes to pay off the mortgage, the more you will pay in interest.
FRM or ARM?
You can also choose between a fixed interest rate mortgage (FRM) or an adjustable-rate mortgage (ARM).
With an FRM, the interest rate stays the same for the life of the loan. If it starts at 3.25%, it stays there for the entire 30 years. The principal and interest portion of your mortgage payment will never change (although the amount you pay into escrow for taxes and insurance can change).
The rates on an ARM will periodically change. Usually, the loan offers a low introductory rate, which adjusts after five, seven or ten years. Since no one knows what mortgage rates will be in 10 years, you risk paying a much higher rate in the future. But these loans might be a sensible choice if you plan to move before the introductory rate expires.
Step 3: Compare lenders
Shop around for a lender and compare prices beyond interest rates. Kile suggests getting a Loan Estimate from several lenders, evaluating the closing fees, and asking your preferred lender to match the lowest offer you got.
She also recommends finding a local lender in the area where you’re purchasing a home. She finds local lenders also provide better customer service than big banks.
Step 4: Get preapproved
Before you go house-hunting, get preapproved for a loan. During the preapproval process, the lender will look at your financial paperwork and issue a letter that says you’re preapproved for a mortgage up to a certain amount.
Preapproval is vital, especially in a hot real estate market. Sellers will demand to see the preapproval letter before accepting an offer.
“If you have to wait for your preapproval letter, three other people can beat you to a successful offer,” Kile says.
She considers preapproval so critical that she requires all her clients to undergo the process before showing them more than one house.
Step 5: Find your dream home
Finally, after all the saving and number crunching, it’s time for the fun part — looking at what houses are available and finding the perfect match for your family.
Before you start house-hunting, find a real estate agent to guide you through the process. An experienced agent can show you homes that match your criteria, help you determine a fair offer for the house, and guide you through the process once your offer is accepted.
Step 6: Apply for a mortgage
While you’ve been preapproved for a mortgage, you must have an accepted offer on a property to formally apply for a mortgage. As soon as you have the contract and the property address, contact your lender and start the application process.
The lender will ask for a variety of financial documents. To speed up the mortgage approval process, gather the paperwork before you start house-hunting:
Tax returns for the past two years
W2 forms for the past two years
1099 forms, if you are an independent contractor
Pay stubs from the previous 30 days
Profit-and-loss statement if you are self-employed
Proof of any other income you’re counting on to buy the house, including child support or alimony, rental income if you own other property, Social Security or other retirement payments, and VA benefits
Paperwork showing the source of your down payment, whether that’s a money market statement, or letters from family members who are giving you money as a gift (be sure this is acceptable with the loan you plan to take out)
Two months of statements from your checking and savings accounts
Recent statements for your retirement accounts, such as 401(k)s or IRAs
Recent credit card bills
The lender will also pull your credit report and may ask for additional paperwork if necessary.
Step 7: Review the loan estimate
After you complete your application for a mortgage, the lender will issue a Loan Estimate, which will provide you with the estimated costs and fees you’ll have to pay in association with the loan. The Loan Estimate includes:
Loan terms: The estimate outlines the amount of the mortgage, the interest rate you’ll pay, and the monthly principal and interest.
Payment schedule: The payment schedule includes estimates for other costs that will be added to your monthly payment, including homeowners insurance and any private mortgage insurance.
Closing costs: These are the fees you’ll have to pay at closing and include charges for the appraisal and recording fees required by your city or county.
Your lender may offer you the chance to lock your interest rate on your mortgage. Interest rates can change at any time. If they go up while you’re waiting for your loan to be approved, you could face higher monthly payments. To reduce this risk, lenders offer to lock in your rate for a specified time, usually one or two months.
Because interest rates can be unpredictable, it’s a good idea to lock in your rate as soon as you’re within the 30- or 60-day window before closing.
Step 8: Be ready to help your lender
Once you provide all that paperwork to the lender, it goes to the underwriter. It’s the underwriter’s job to evaluate everything in the file and decide whether your loan application meets the lender’s eligibility requirements.
Underwriting has many steps, such as reviewing your finances, making sure the house appraises, and confirming you get homeowner’s insurance.
If any paperwork is missing or something in your application doesn’t check out, the process can get delayed.
To prevent delays, respond as quickly as possible when the underwriter requests additional documents or information. Keep all the paperwork organized so you can quickly find whatever the underwriter might need.
Step 9: Do your due diligence
While the underwriter is combing through your file, you need to order an inspection, get homeowner’s insurance, and take other steps to be sure you’re protecting your interests.
Get a home inspection
You’ll hire a home inspector to evaluate the condition of the house you have under contract. Do this as soon as possible after the seller accepts your offer because the agreement probably limits how much time you have.
The home inspector will look for significant issues that need repair or that could affect the value of the house — things like water damage, structural issues, or problems with the plumbing. The inspector will provide a written report. You and your agent can negotiate with the seller to have the repairs made before you close.
A home inspection costs around $350, but it’s well worth the price if the inspector saves you from having to repair a cracked foundation or replace the HVAC system.
A title search is a process to confirm the current owner has a clear title to the property and is thus eligible to sell it. A specialist will comb through documents related to the property to make sure there are no issues with the title. They’ll also make sure there are no deed restrictions or liens on the house.
A home may have a lien because a previous owner failed to pay a contractor for work on the house or didn’t pay their property taxes. The lien must be paid before the house is sold.
The title search fee is included in the closing costs, and you’ll be required to purchase title insurance to protect the lender. However, you also have the option to buy your own title insurance, which will protect you if anyone claims they have title to the house after you purchase it. It’s a one-time fee, usually between 0.5% and 1% of what you pay for the property.
You may be able to save money by shopping around for title insurance, according to the Consumer Financial Protection Bureau (CFPB).
Hire an attorney
Whether you need an attorney may depend on how closings are structured in your area. If one is required, your agent may suggest one.
If attorneys aren’t routinely involved in closings in your area, there may be situations where you want to hire one. In complicated transactions, such as buying a short sale or purchasing a home from an estate where several people own a share, an attorney might be a good investment.
Line up homeowners insurance
The lender will require you to have homeowner’s insurance, but it’s a wise investment even if you are paying in cash. Homeowners insurance covers damage to your property from certain risks, such as fire. Your policy also covers personal property, such as furniture, and provides liability coverage if someone is injured while visiting you.
The cost of insurance can vary, depending on factors such as your coverage limits and deductibles. You may be able to save money by buying your homeowner policy through the same insurance company that insures your car, so shop around for a policy.
Step 10: Clear the appraisal
As a buyer, you may not have to do anything for the appraisal. The appraisal is a valuation of the property you have under contract, conducted by an independent appraiser. The appraiser will visit the house to get details about it, then determine its fair-market value by comparing it to other homes in the area that have recently sold.
If the property appraises for the contract price or higher, everything is fine. If the appraisal comes in lower, the lender can’t lend you all the money you’re expecting because they can’t make a mortgage for more than the appraised value, which includes your down payment.
If the appraisal is low, you can negotiate with the seller. The seller can reduce the price, you can put more money down, or both buyer and seller can compromise a little. If you and the seller can’t reach a solution, you can usually invoke the appraisal contingency in your contract and walk from the deal without forfeiting your deposit.
Step 11: Prepare to close
Your mortgage is sailing through underwriting, and you’re getting close to the end. Take care of the details now.
Schedule your closing appointment
Your lender may provide a choice of times. Plan on spending about an hour at the closing.
Get your closing funds together
A few days before the closing, the lender or closing attorney will let you know exactly how much money you’ll need to bring.
If you’re taking money out of a mutual fund or other accounts, move it into your checking account now. You may need to convert it to a certified check before the closing.
Review your Closing Disclosure
You’ll get your Final Closing Disclosure from your lender at least three days before closing, so take a few minutes to make sure the details are correct. Now is the time to question any problems you see on the form, the CFPB recommends.
Step 12: Sign lots of paper
Closings may vary based on your situation and location, but there are a few things you can depend on.
You may have to get a cashier’s check or certified check for the amount due, or the bank may ask you to wire the money. Be sure to confirm the wiring transfer instructions.
You will have to sign a number of closing documents, including the promissory note, deed of trust, title documents, deeds, and affidavits. The closing officer should explain each one before you sign it. If you have questions, ask before signing!
The lender will fund the loan. The loan is officially complete, and the sellers get their money.
The title company records the deed with the county, which could happen on the day of closing or the next day.
Step 13: Enjoy your new home!
After all the saving, planning, and paperwork, you own your dream home. Congrats! Put your mortgage paperwork in a safe place, set up automatic payments for your mortgage, and enjoy your new home.
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