Looking to buy a home but feeling overwhelmed by the mortgage process? Our 2023 step-by-step guide on how to get a mortgage in 8 steps is here to help.
Whether you're a first-time homebuyer or an experienced homeowner, our guide will break down everything you need to know, from preparing your finances to selecting a lender and navigating the application process. Get ready to take the first step toward your dream home - read on!
Take Out A Mortgage In 8 Steps
Step 1: Evaluate Your Financial Status
Before applying for a mortgage, it's essential to evaluate your financial situation. Start by checking your credit score and credit reports.
Many lenders will check your credit score to determine your qualification and interest rate. If after checking, your credit score requires improvement, consider repaying previous loans, suspend opening new accounts, and ask for a review on credit errors.
Next, determine how much you can afford to spend on a home by calculating your debt-to-income ratio (DTI). Your DTI compares your monthly debt payments to your gross monthly income. Lenders typically prefer a DTI of 43% or less.
You'll also need to save for a down payment, which is typically between 3% and 20% of the home's purchase price. Keep in mind that if your down payment is less than 20%, you'll likely need to pay for private mortgage insurance (PMI), which can add to your monthly mortgage payments.
Step 2: Select The Best Mortgage Type For Your Situation
There are several types of mortgages available, including:
- Conventional Loans: These are the most common types of mortgages you will find. They are loans not government-insured, instead private lenders like banks and credit unions create, insure and service them. They usually have stricter eligibility criteria and do not offer some of the benefits you will find with government-backed loans.
- FHA loans: These loans are insured by the Federal Housing Administration and have more lenient credit score minimums and down payment requirements.
- VA loans: These loans are available to active service members or veterans and are backed by the Department of Veterans Affairs. They often require no down payment.
- USDA loans: These zero-down-payment loans are for lower-income borrowers who live in rural areas.
- Jumbo loans: These loans are conventional loans for properties that exceed conforming loan limits.
Additionally, you'll need to choose between fixed or adjustable interest rates and consider the mortgage terms. Generally, 30-year loan terms are the most common in the market; however, there are also shorter loan terms like 15-year or 10-year mortgages. While 30-year terms enable lower monthly payments, the shorter terms can help reduce your total payable interest.
Step 3: Seek Out Available Mortgage Lenders
When it comes to finding a mortgage lender, it's essential to shop around and compare rates, terms, and fees from multiple lenders.
Consider traditional banks, online non-bank lenders, and credit unions. You may also want to look for specialty lenders that cater to specific borrowers, such as military personnel or first-time homebuyers.
When researching lenders, consider the following:
- How do you prefer to communicate with the lender.
- Whether the lender offers unique programs or down payment assistance.
- Whether any sample rates you're shown include points, which are fees paid upfront to lower your interest rate.
- The minimum qualifications for the loan, such as credit score and down payment requirements.
Step 4: Pre-qualify For A Home Loan
Before applying for a mortgage, it's a good idea to get preapproved by at least three lenders.
Preapproval gives you an estimate of the loan amount, interest rate, and monthly payment you can expect. It also shows sellers that you're a serious buyer and can help you compete in a competitive housing market.
When you apply for preapproval, you'll need to provide your lender with documentation, including:
- Bank statements from recent months.
- Credit History, preferably long-term debts like student or auto loans.
- Proof of identity- driver's license, Identity Card, and Social Security Number.
- Income Proof - W-2 forms and pay stubs from the previous two years and 30 days, respectively, federal tax returns, and proof of income from other sources.
- Proofs of recent deposits to your bank accounts.
- Documents showing down payment sources, including donations and gifts.
Step 5: Select A Mortgage Loan and Apply
After getting preapproved, you'll need to submit your application for a mortgage. The lender will review your financial information, credit score, and other qualifications to determine if you're eligible for a mortgage.
The lender will also order an appraisal to determine the home's value and schedule a home inspection to check for any defects.
When you submit your application, you'll receive an initial loan estimate that outlines the loan's cost, associated fees, and interest rate. Review the estimate carefully, and compare it to other lenders to ensure you're getting the best deal.
Step 6: Proceed To The Underwriting Stage
The underwriting process can be nerve-wracking during a mortgage application because that's when the lender determines your eligibility. You will be evaluated for qualification by the lender based on your credit history, job history, debt-to-income ratio, and other factors.
During this evaluation period, you should avoid taking actions that can cause friction, like switching jobs, borrowing loans elsewhere, or altering your finances. They can harm your credit score and put your qualification at stake.
Step 7: Make Preparations For Closing
After underwriting, you'll receive final loan disclosures and closing documents. Review these documents carefully, and compare them to your initial loan estimate to ensure there are no unexpected costs or changes.
Before closing, you'll need to purchase homeowner's insurance and title insurance to protect yourself in case of problems with the title or property. You'll also need to have funds for your closing costs, which typically range from 2% to 5% of the home's purchase price.
Finally, at closing, you'll sign the loan documents and make any necessary payments. Your mortgage lender, real estate agent, and other parties involved in the home-buying process will be present at closing.
Step 8 Close on the Home
After closing, the loan is yours, and you're officially a homeowner! Keep in mind that you'll need to make regular mortgage payments on time to maintain your homeownership status. If you ever have trouble making payments, reach out to your lender to discuss options for avoiding foreclosure.
What Are Mortgage Lenders Looking For?
Income and Job History
When you apply for a mortgage, the lender will ask you to provide proof of income, such as pay stubs, tax returns, and bank statements. They want to make sure that you have a steady source of income and that you'll be able to make your monthly mortgage payments.
Typically, lenders prefer borrowers who have been employed in the same job for at least two years. If you're self-employed, you'll need to provide additional documentation, such as tax returns and financial statements, to demonstrate your income.
Your credit score is one of the most crucial factors that determine whether you get a mortgage or not. It is a number between 300 and 850, representing your creditworthiness. To calculate it, your payment history, credit utilization, credit history length, and debt mix are considered.
Your credit score generally depicts how likely you would pay back your loan on time. So, the higher your credit score, the higher your chance for loan approval and a low-interest rate.
A typical conventional mortgage lender requires at least a 620 credit score to consider your application. However, other types of mortgages, especially government-backed may have lower credit score requirements.
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is also a means for lenders to measure your creditworthiness. It shows how much of your income goes into debt settlement. Lenders usually check your DTI to determine whether you can manage your debts effectively while taking care of your usual expenses.
A typical lender would require to have a 43% DTI or lower.
You can calculate your DTI by adding up your recurring debt and dividing it by your gross monthly income. Your recurring debts include auto loans, credit card payments, child support, and auto loan, while your gross income includes your income from all sources before tax.
When applying for a mortgage, lenders may also consider your assets. Assets include savings accounts, investments, and other valuable property that you own.
Having substantial assets can help you qualify for a mortgage and may even result in a lower interest rate. For example, if you have a large down payment or substantial savings, lenders may view you as less risky and offer you a lower interest rate.
The type of property you're looking to buy can also affect your eligibility for a mortgage. For example, lenders may be more willing to approve a loan for a single-family home than a multi-unit property.
Additionally, if the property you're buying is in a flood zone or has other issues, the lender may require additional insurance or documentation.
What Are The Documents Required To Take Out A Mortgage?
When applying for a mortgage, it is important to have all the necessary documentation ready to speed up the process. Here is a list of documents that are typically required by lenders.
Proof of income
A typical mortgage lender will request income proof to verify your claims. This may include the following:
- Recent W-2 forms and Paystubs.
- Federal tax returns not older than 2 years.
- Legal alimony or child support documents and any other proof of additional income.
- Profit or loss statement or 1099 forms for self-employed applicants.
- Legal documents verify that you'll be receiving payments from sources like child support, divorce decrees, and others.
When processing your mortgage, lenders will request permission to do a hard credit pull to evaluate your creditworthiness. They typically check your report for negative factors, like bankruptcies, deliquescence, foreclosure, and other factors that pose risks.
In case your report has any errors, it would be best if you explained them and provided proof, like court letters, credit dispute letters, credit card statements, or loan documents to back them up.
Proof of assets and liabilities
Your lender will also ask for documentation that confirms your assets and liabilities. This may include:
- Up to 60 days' worth of account statements that show the assets in your checking and savings accounts.
- The most recent statement from your retirement or investment account.
- Documents for the sale of any assets that you have gotten rid of prior to applying like asset purchase agreement, bill of sale, or transfer of titles certificate.
- Proof and verification of any gift funds that have been deposited into your account within the last two months.
- Your lender may also ask for supplemental information on any debts you owe, such as student loans or auto loans.
It is important to cooperate with your lender and provide any requested information as soon as possible to help the mortgage loan process go smoothly.
You will need to provide information about the property you are purchasing, including the purchase price and any appraisal reports. The lender will want to verify that the property is worth the amount of the loan and that there are no major issues that could impact its value or your ability to make mortgage payments.
After the lender gets the property information, they will carry out a valuation on it. This valuation is done so that the lender can verify whether such a property is a viable security for your loan amount.
You will need to provide a government-issued ID, such as a driver's license or passport, to verify your identity.
Proof of homeowner's insurance
You will need to provide proof of homeowner's insurance to protect the lender's investment in the property.
What is The Minimum Credit Score To Qualify For A Mortgage?
The minimum credit score required to get a mortgage varies by lender and type of mortgage.
Generally, a credit score of 620 or higher is required to qualify for a conventional mortgage. However, some lenders may require a higher score.
FHA loans, which are backed by the Federal Housing Administration, may be available to borrowers with lower credit scores, typically around 580 or higher.
How to improve your credit before applying for your mortgage?
To improve your credit score before applying for a mortgage, you can take the following steps:
- Check your credit report and correct any errors.
- Pay down credit card balances and other debts.
- Avoid applying for new credit.
- Make all payments on time.
- Consider working with a credit counselor or financial advisor for guidance.
How long does it take to get a mortgage?
The timeline for getting a mortgage can vary depending on a number of factors, including the lender's processes, the complexity of your financial situation, and the type of mortgage you are applying for. Generally, the process can take anywhere from 30 to 45 days or longer.
What types of mortgage lenders are there?
Mortgages can be issued by different agencies, from traditional banks to online financial institutions. They are:
- Community Banks and Credit Unions: Regular traditional community banks usually offer mortgages to their customers. They are usually more lenient and flexible than national Banks. Credit Unions offer mortgages as well, but most require you to be a member before considering your application.
- National Banks: These banks have a much larger scope than community banks. They usually offer loans to borrowers across the country. Their qualification is usually stricter than community banks and other non-bank lenders.
- Mortgage Brokers: These are middlemen between lenders and borrowers. They usually work with multiple clients to find suitable mortgages for their clients. Mortgage brokers collect commissions usually between 1 to 2% on the loan amounts they find for clients. Some more brokers that offer loans include LendingTree, Urban, OppLoans, etc.
- Online lenders: These lenders operate similarly to other types of mortgage lenders, however every activity, from application and processing to funding and repayment, happens virtually. They usually don't have a physical branch, unlike traditional banks.
Is It Possible To Get A Mortgage Without Employment?
It is difficult to get a mortgage without a job, as lenders typically require proof of income to ensure that you can make your monthly mortgage payments. However, if you have other sources of income, such as rental income or retirement savings, you may still be able to qualify for a mortgage.
Can I Take Out A Second Mortgage Loan?
Yes, you can take a second mortgage to buy another house although finding a lender may be difficult. It is called Second Home Mortgage or Vacation Home Mortgage. The lender simply allows you to borrow against the value of your first home.
However, there are requirements to qualify for a send-home loan and they vary from lender to lender. They typically would check your credit score, debt-to-income ratio, and income sources just like when you got your first mortgage. In addition, the new rate and down payment may be higher compared to the first.
Getting a mortgage can be a complex and overwhelming process, especially for first-time homebuyers. However, with the right preparation and guidance, it can be much easier than it seems.
The key to success is to follow a step-by-step approach that covers everything from improving your credit score to selecting the right lender and navigating the application process.
In this comprehensive 2023 guide, we have outlined 8 easy steps that can help you get a mortgage for your dream home. With this guide, you can take the guesswork out of the mortgage process and be well on your way to homeownership in no time.
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