An online mortgage calculator like Trulia’s is a great place to start, but actually getting a mortgage is a much more involved process. Your financial life will be 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 before you get started 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 price 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. It includes a portion of your principal (the total amount of money borrowed) and interest (the price that you pay to borrow money from your lender), and often property taxes, homeowner’s insurance, and private mortgage insurance.
1. Get your credit score where it needs to be.
Check your credit report to make sure all the information it contains is accurate. If not, contact the credit bureau to correct it. If the information is accurate, find out your credit score.
You can get your score from the credit bureaus (for a slight fee), for free from some websites, or from your bank. 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 500 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:
- Try to use 30 percent or less of your available credit.
- 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 accounts.
- If you find any errors on your credit report, dispute them with the creditors and the credit bureaus.
2. Check your debt-to-income ratio (DTI).
Mortgage lenders want to know how much debt you have compared to your income. It’s called your debt-to-income (DTI) ratio, and the better it is, the better mortgage terms you’ll get.
Find your DTI by plugging your financial numbers into Trulia’s affordability calculator. The percentage is found by dividing your debt by your income. For example, if your total debt is $3,000 a month (including your new mortgage payment), and your gross income is $6,000 a month, your DTI would be 50%. Lenders typically prefer DTI to be no more than 36%—although some types of mortgages allow for a DTI of 50%. To lower yours, you can pay down debt or bring in more income.
3. Think about your down payment.
An ideal down payment in the eyes of a lender is 20% of the home’s purchase price. By putting down 20%, you don’t have to pay private mortgage insurance (PMI), which is usually between 0.5% and 1% of the loan. It can also make you a more attractive borrower.
But depending on the price of the home, 20% could be out of reach. In fact, most first-time home buyers put down less than 10%. FHA loans allow down payments as low as 3.5%. And some Veterans Affairs (VA) mortgages allow for no down payment.
4. Pick the right type of mortgage.
You have a choice of several types of mortgage. 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 your income or pull your credit report at this point, and there is no guarantee you’ll be approved for the amount in your pre-qualification results. But if you want to start looking to see what homes you could potentially purchase, it’s a good idea. If it looks like you could afford the type of home you want, it could be a sign you’re ready to buy a house. Also, note that you don’t have to get your mortgage from the same 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 a more involved process than pre-qualification. You’ll submit paperwork that will verify your employment and income, as well as a number of other documents that detail your financial life. You can find a list of common documents you’ll need in our guide on mortgage pre-approval. If you get pre-approved, you can let sellers know. They’ll then consider you a serious buyer.
It’s a good idea to do some mortgage-lender comparison shopping at this point. You have many choices of where to get a mortgage: banks, credit unions, mortgage lenders, mortgage brokers, and online mortgage companies. You can use Trulia’s pre-qualification tool to connect with local lenders near you. Your real estate agent should be able to provide some references to good mortgage lenders, but it’s still good to do your own research as well. You’ll also want to apply with more than one lender to ensure you are getting the best rate.
Keep in mind that mortgage 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 make any large purchases 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 don’t have to apply to one of the mortgage lenders that gave you pre-approval, but if you’re happy with one of them, apply with that lender. If you want to keep shopping, go for it. Even a small difference in the interest rate can save you thousands of dollars over the lifetime of your loan.
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 (these will typically be updated versions of the same documents you needed for pre-approval), and expect to dedicate some time and patience to plenty of paperwork. Any delays in gathering your paperwork can cause delays for your closing.
8. Close on your home.
If your loan application is approved, the next step is closing on your home. The mortgage becomes official on the day you close. To be ready on the big day, you’ll need a pen and the funds for your closing costs and down payment, typically in the form of a cashier’s check. Closing costs will be 2% to 5% of the total cost of the home, and you’ll find out the exact amount on your Closing Disclosure at least three days before you close. 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.
But what if your credit isn’t strong enough to convince a mortgage lender quite yet? Here’s how to get a mortgage with a bad credit.