A lovable, instinctive guide to home loans, simplified
Guide on Obtaining Mortgages: Steps to Secure Financing for Houses
Buying a home is a cherished dream for most folks, and getting a mortgage makes this dream achievable. But where do you start? Here's a breezy, informative breakdown of the mortgage process to help you navigate the journey.
Embracing your home-ownership adventure
Step 1: Establish credit cred
Lenders adore borrowers with robust credit histories sporting scores in the 700s. Why? Because it speaks volumes about your capacity to responsibly manage debt.
As Rod Griffin, Senior Director of Public Education and Advocacy at Experian, eloquently puts it, "A solid credit history and score paves the way for attractive loan offers featuring favorable rates and terms."
While you can still secure a mortgage with lower scores, you'll likely pay a steeper interest rate. Our friendly advice:
- Timely payments: Ensure prompt payments across the board, focusing on reducing your credit card balances.
- Rectify discrepancies: Bring overdue accounts up-to-date and persist with punctual payments thereon.
- Scrutinize reports: Regularly review your credit reports at AnnualCreditReport.com to catch errors that could see your score plummet.
- Keep tabs on your progress: Monitor your score regularly to identify areas requiring improvement.
Step 2: Nail down affording a roof over your head
By calculating your debt-to-income (DTI) ratio, you can figure out the house within your means. The DTI ratio is computed by summarizing your monthly debt obligations and dividing this figure by your gross monthly salary.
A lower DTI ratio equates to a roomier budget for non-housing expenses and financial freedom, avoiding the unfortunate fate of "house poor."
To determine how much house you can buy, utilize our user-friendly calculator, taking into account factors like income, monthly expenses, projected down payment, and all other mortgage-related costs.
Step 3: Stash away the bucks
The first financial goal should be amassing a substantial down payment, followed by building up cash reserves. A thumb rule of thumb suggests six months' worth of mortgage payments stashed away post-down payment, serving as a safeguard against unforeseen events like job loss.
Don't forget closing costs! Typically ranging between 2 to 5% of the loan amount, these fees include escrow payments, appraisal fees, loan application fees, attorney fees, and more[4].
Step 4: Compare apples and rates
Once your credit score and savings are in the green, it's time to find the right mortgage for your situation. Consider the following primary mortgage types:
- Conventional loans: Non-government-guaranteed loans with minimum credit scores of 620 and down payments ranging from 3 to 5%.
- FHA loans: Insured by the Federal Housing Administration, these loans break the mold when it comes to financial requirements, requiring a 3.5% down payment, a minimum credit score of 580, and a DTI ratio capped at 43%.
- VA loans: Guaranteed by the U.S. Department of Veterans Affairs and available to eligible military personnel. Credit score requirements vary by lender.
- USDA loans: Government-backed loans designed for homes in designated rural areas, carrying no down payment requirements and flexible credit score minimums.
- Jumbo loans: Loans earmarked for luxury properties priced above the federal threshold for conforming loans (e.g., $806,500 in most locations), featuring higher credit score and down payment requirements.
Compare the interest rates and fees for each loan, and be vigilant about extras like mortgage insurance and timeframes[7].
If you're a newbie homebuyer, consider FHA loans with their lenient standards and 580-credit-score, 3.5%-down-payment requirement. Borrowers with scores exceeding 620 might be better off with conventional loans.
Remember that mortgages differ in components such as:
- Term length: Popular choices include 15-year and 30-year terms, though shorter (10-year) and more extended (20-year, 25-year, or even 40-year) plans are available.
- Fixed-rate vs. adjustable-rate mortgages (ARMs): Fixed-rate mortgages boast consistent rates, while ARMs offer lower initial rates that adjust periodically based on market conditions.
Step 5: Find your perfect lender
After you've chosen the ideal mortgage, it's time to find the perfect lender. Seek advice from friends, family members, and real estate agents for referrals, and don't hesitate to delve into online reviews for the lowdown on various lenders' offerings and customer satisfaction levels[1].
Why settle for price and interest rate alone? You'll count on your lender during the application, negotiation, and closing process, so choose someone you can trust.
If you're unsure about the maze of loan options, a mortgage broker can be a valuable ally, helping you navigate the landscape and potentially securing more favorable terms than you could on your own.
Step 6: Get preapproved
Arrange preapproval with the lender of your choice when you've found your dream mortgage product. With preapproval, the lender scrutinizes your finances to establish your eligibility for a loan amount, providing you with peace of mind about your borrowing capacity.
Many sellers may not consider offers from preapproved applicants, so getting preapproved is essential if you want a competitive edge in the market.
Precaution: Preapproval differs from prequalification, which is a less formal process and typically lacks the thorough documentation and hard credit check of preapproval.
Step 7: House-hunting made simple
Preapproval papers securely tucked away, you're free to start browsing for a property that matches your preferences. When you've spotted the perfect abode, be ready to pounce.
According to Katsiaryna Bardos, Finance Department Chair at Fairfield University, "A solid understanding of your budget and what's attainable in your price range is crucial. Spend time exploring the inventory and prepare to make a swift move when your dream house hits the market."
Step 8: Submit the paperwork
Once you've found your dream home, it's time to complete the mortgage application. These days, you can do most applications online, but you might find it more efficient to apply in person or over the phone with a loan officer[2].
During the application process, you'll be asked to provide the following documents:
- Proof of Identification: Driver's license, Social Security card, and other forms of government-issued ID.
- Proof of Income: Pay stubs, W-2s, 1099s, receipts of alimony/child support, and rental income.
- Proof of Assets: Bank statements, investment and retirement account statements, bonds, stocks, etc.
- Evidence of Gift Funds: If a friend or relative is gifting you money for a down payment, you'll need to submit a gift letter.
Step 9: Underwriting process, demystified
Even though you've secured preapproval, that doesn't guarantee your mortgage will be sanctioned. The final decision rests with the lender's underwriting department, which assesses each potential borrower's risk and the suitability of the property, determining the loan amount, interest rate, and other terms.
Here's what to expect during the underwriting process:
- Your lender will verify the information you've provided during the application process.
- After you make a successful offer on a home, the lender orders an appraisal of the property to ensure it's worth the offered price. The appraised value considers factors like the home's condition and comparable homes (comps) in the neighborhood.
- A title company carries out a title search to confirm the property can be transferred. After verifying the title and property information, a title insurer issues an insurance policy covering any inaccuracies in the public records.
Step 10: Your keys to a new home
Once the underwriting process concludes affirmatively, you're at the finish line. All that's left is to complete the closing process.
The closing procedure varies by state but usually involves:
- Reviewing and signing nosier documents, including details about the disbursement of funds.
- Paying closing costs, such as loan application fees, appraisal fees, credit check fees, title insurance fees, escrow payments, attorney fees, and recording fees.
Enjoy your happy homeowning journey!
[1] Lender Reviews: A Comprehensive Guide to Choosing a Mortgage Lender - https://money.com/best-mortgage-lenders/[2] Tips for Choosing the Best Mortgage Loan Officer - https://www.investopedia.com/articles/mortgages-real-estate/08/071408.asp[3] How to Raise Your Credit Score in 30 Days - https://www.forbes.com/sites/ketakiashok/2021/12/22/how-to-raise-your-credit-score-in-30-days/[4] A Comprehensive Guide to Mortgage Closing Costs - https://smartasset.com/mortgage/mortgage-closing-costs[5] Lower Your Credit Card Balances to Boost Your Credit Score - https://www.experian.com/blogs/ask-experian/lower-your-credit-card-balances-to-boost-your-credit-score/[6] The Dos and Don'ts of Using Credit Cards to Boost Your Credit Score - https://www.forbes.com/advisor/credit-cards/credit-cards-boost-credit-score/[7] How to Compare Mortgage Rates - https://www.nerdwallet.com/blog/home-buying/mortgage-rates/compare-mortgage-rates/
To elevate your mortgage chances, adopt these tips:
- Consistently on-time payments: Ensure prompt payments for all bills, with a special focus on credit card payments.
- Reduce debt utilization: Prioritize reducing outstanding credit card balances to decrease your credit utilization ratio.
- Inspect your reports: Regularly review your credit reports, looking for discrepancies or unfamiliar items that, once rectified, can boost your credit score.
- Questionable entries: Dispute any suspicious findings on your credit report with the credit bureau or the reporting lender to set the record straight.
- Shield existing accounts: Keep older accounts active to maintain a solid credit history and manage them carefully to reduce the risk of fraud.
- Avoid new inquiries: Steer clear of applying for new credit or loans during the mortgage application process to maintain a stable credit profile and protect your score.
- To improve your chances of securing favorable mortgage rates, work on maintaining a strong credit history by making prompt payments toward all bills and reducing outstanding credit card balances.
- When navigating the mortgage industry, be cognizant of the types of mortgage loans available, such as conventional, FHA, VA, USDA, and jumbo loans, and compare the interest rates and fees for each option.
- Building a robust savings plan is essential for homeowners. Aside from amassing a substantial down payment, make sure to accumulate six months' worth of mortgage payments post-down payment as a safety net against unforeseen circumstances like job loss.
