You may be just a loan away from your dream home. You just need to learn how to get a mortgage first.
There’s a little more to getting a mortgage than waltzing into your favorite bank and asking for one. After all, your financial life will be much of what helps lenders decide to offer you a loan, not your personality. And unless you have enough cash to buy a whole house, you’re going to need a home loan. Knowing how to get a mortgage long before you attempt to will help your odds of success.
A mortgage is a loan from a bank or mortgage lender to help finance the purchase of a home without paying the entire value of the property up front. Given the high costs of buying a home, almost every home buyer requires long-term financing in order to purchase a house. The property itself serves as collateral, which offers security to the lender should the borrower fail to pay back the loan.
A mortgage payment is normally paid on a monthly basis and consists of the principal (the total amount of money borrowed), interest (the price that you pay to borrow money from your lender), taxes (the property taxes you pay as a homeowner), and insurance (which protects the lender if payments have defaulted).
1. Get your credit score where it needs to be.
You can get your score from the credit bureaus (for a slight fee), for free from certain websites, or from your financial institution. Your score will be between 300 and 850, and the higher, the better. Your credit score needs to be at least 620 for a conventional loan and could be as low as 580 for an FHA loan.
If you need to raise your score, you can most likely ignore those companies that say they can clean up your credit. Here are some examples of what it actually takes:
- Don’t use too much of your available credit—try to use around 30 percent or less.
- Make sure to pay your bills on time.
- Keep older accounts open, even if you don’t use them.
- Don’t take out any new credit.
2. Check your debt-to-income ratio (DTI).
Mortgage lenders are concerned with how much debt you have compared to your income. It’s called your debt-to-income (DTI) ratio, and you may want to take steps to improve it. Try paying off some debt or bringing in more income, perhaps by taking a second job or asking for a raise.
Lenders typically prefer DTI to be no more than 36 percent—although some lenders will allow a DTI of 43 percent—or even higher. “Some home loan programs allow 50 percent DTI,” says Sonny Pham, branch manager at Planet Home Lending in Santa Ana, California. “But you have to factor in what it takes for you to have a comfortable living after you pay your home loan. Make the decision on how much of your income to devote to housing based on what’s right and fits your life goals.”
Find your DTI by dividing your debt by your income. For example, if your total debt is $3,500 a month, and your gross income is $8,000 a month, your DTI would be 43.75 percent, probably too high to land a mortgage. You might want to take steps to lower it.
3. Think about your down payment.
Many people pay 20 percent of the home’s purchase price as a down payment.One big reason is that by putting down 20 percent, you don’t have to pay private mortgage insurance (PMI), which is usually between 0.5 percent and 1 percent of the loan. It can also make you a more attractive borrower. So if you can save up 20 percent, you’re in good shape to land a mortgage.
But, depending on the price of the home, 20 percent could be out of reach. “Some homebuyer programs require as little as 3 percent of the selling price of the property, but most conventional lenders want a minimum of 5 percent,” says Brian Koss, executive vice president of Mortgage Network, Inc. in Danvers, Massachusetts. Note that some Veterans Affairs (VA) mortgages allow for no down payment.
4. Pick the right type of mortgage.
You have a choice of several mortgage products. One is a conventional (or a regular) loan. Of those, you can choose between a fixed-rate loan and an adjustable-rate loan. There are also government-insured loans, such as a Federal Housing Administration (FHA) loan or a Veterans Affairs (VA) loan. Each varies in terms of interest rates, down payment requirements, and other factors. Your mortgage lender can help you pick the best type for your situation.
5. Get pre-qualified for a mortgage.
Getting pre-qualified is an informal process where you just answer the lender’s questions, such as how much you make and what you owe. Based on the information you provide the lender, they’ll let you know whether you’ll qualify for a mortgage and for what amount.
The lender typically doesn’t verify anything at this point, and there is no guarantee you’ll get the mortgage. But there is a good reason to get pre-qualified. “Pre-qualifying yourself before you start looking for a home gives you a general idea of the price range you can afford,” says Koss. Also, note that you don’t have to eventually get your mortgage from the same the lender with whom you pre-qualify.
Looking for a lender to help you get pre-qualified? You can use Trulia to find a local lender near you.
6. Get pre-approved for a mortgage.
When you are serious about buying a home, you’ll want to be pre-approved for a mortgage, which is typically a more involved process than pre-qualification. “When you are pre-approved for a mortgage loan, it means a lender has looked closely at your credit report and validated your income and assets, determining that you qualify for a loan, says Koss. “The lender will provide you with a written commitment, telling you the maximum amount of a loan you qualify for.”
If you are pre-approved, you can let sellers know. They’ll then consider you a serious buyer. “Agents and sellers view a pre-approval as a start to the home buying process,” says Koss.
Keep in mind that pre-approval means you are likely to get the loan. It doesn’t mean you have the loan. You’ll still need to apply and go through underwriting before you get final approval. So don’t take out any loans or apply for new credit after you’re pre-approved and before you apply for a mortgage. And, similar to pre-qualifying, you can still apply for a loan with another lender to see if you can get a better rate.
7. Pick a mortgage lender and apply.
After you’ve found the home you want and have your offer approved, it’s time to get official by applying for your mortgage loan. You have many choices of where to get your mortgage: banks, credit unions, mortgage lenders, mortgage brokers, and online mortgage companies. Pick the one that works best for you.
There are pros and cons to each of your options. With banks, credit unions, and mortgage lenders you get personal service, but you may not get the best interest rate. Mortgage brokers will help find the best mortgage out there for you—for a fee. Online mortgage companies offer fast service and a large variety of loans but may lack a personal touch.
Applying will require a lot of documents. Be prepared by gathering all of your financial info in advance, and expect to dedicate some time and patience to plenty of paperwork.
8. Close on your home.
If your application is approved, the next step is closing. The mortgage becomes official on the day you close. You’ll need to come with your closing funds in hand, and there will be lots of paper signing, but there shouldn’t be any surprises at this point. Sign your name, get your keys, and find out when and to whom you should make your first month’s mortgage payment.