Not sure how to get a loan for a house? Here’s a step-by-step guide.
Getting a home loan isn’t just a big step, it’s an entire staircase — and it can take a long time to reach the top. There are times when the climb will feel dizzying, but knowing how to get a mortgage before you start can help you stay organized and feel more in control.
Ready to learn what it takes? Here’s how to get a mortgage, step by step.
1. Give yourself a financial checkup
Before you set off to get a mortgage, make sure you’re financially prepared for homeownership. Do you have a lot of debt? Do you have enough saved for a down payment? What about closing costs?
A home is a major purchase — maybe the biggest one you’ll ever make — so it’s no surprise that lenders really dig into borrowers’ finances before handing out house loans. If you’ve got substantial debt or don’t have much of a credit history, you may want to improve your financial health before applying for a mortgage.
A thorough understanding of your income and debts will help you know exactly how much house you can afford.
Additionally, know that lenders look closely at your credit score when determining your eligibility for a mortgage. The interest rate you’ll be offered depends heavily on your credit score.
Check your credit score, and if it needs work, build up your credit before you begin applying for a home loan. That can include paying down outstanding debt, disputing errors on your credit reports, and not opening any new accounts.
2. Identify the right mortgage
There are many types of house loans available. The one that’s best for you will depend on your financial situation and homeownership priorities. Here are some of the loan options you can consider:
Conventional or government-backed?
Conventional loans have stricter qualification requirements because they aren’t insured by the government, so they’re a better fit for borrowers with strong credit. The application process may have fewer hurdles than that for government-backed loans.
FHA loans are insured by the Federal Housing Administration. These loans can have more lenient credit score minimums and allow the use of gift money as part of the down payment.
VA loans are only available to active service members or veterans, and they’re backed by the Department of Veterans Affairs. These loans often require no down payment.
USDA loans are a program of the U.S. Department of Agriculture. These zero-down-payment home loans are for lower-income borrowers who live in rural areas.
Jumbo loans are conventional loans for properties that exceed conforming loan limits. They offer a way to buy homes in more expensive areas.
Fixed or adjustable rate?
Fixed-rate mortgages are popular because the mortgage interest rate doesn’t change over the life of the loan. The rate to which you initially agree will be the rate you keep until you sell the home or refinance.
Adjustable-rate mortgages have low introductory rates that start out fixed but can then fluctuate. If you don’t plan to stay in the home long, an adjustable-rate mortgage could yield savings.
A 30-year mortgage is the most common term. Monthly payments are generally smaller, but you’ll pay more interest overall than you would with a shorter-term loan.
Shorter term house loans, like 10- or 15-year mortgages, are also available. You pay less interest, but monthly payments can be steep. Lenders may offer other options, such as 20-year mortgages, that fall somewhere in between.
Some conventional loans can allow for a down payment as low as 3%, but if your down payment is less than 20%, you’ll also probably have to pay for private mortgage insurance, or PMI. This monthly expense is typical on low-down-payment mortgages to protect lenders in case the borrower fails to repay their loan. Once you get up to 20% equity in the home, you can take steps to cancel your PMI.
Some government-backed home loans do not require a down payment, while others let you make lower down payments. Depending on the type of loan and the amount of your down payment, you’ll have different requirements for mortgage insurance.
3. Research mortgage lenders
Look at multiple home loan lenders to find the one for you. There’s a wide array of lenders to consider, including traditional banks, online non-bank lenders, and credit unions. Consider starting with your own bank or credit union. Some offer lower interest rates for existing customers.
If you’re looking for a particular type of mortgage, you may want to zero in on specialty lenders. For example, if you know you want a VA loan, a lender that focuses on working with military borrowers may best fit your needs.
No matter what kind of loan you’re seeking, you’ll want to consider:
How do you prefer to communicate with the lender? Do you want an in-person experience, or are you comfortable with phone calls, emails or even texts?
Whether any sample rates you’re shown include points. These fees are interest that’s paid upfront, lowering the rate.
What the minimum qualifications are. For example, knowing a lender’s minimum credit score or down payment can help you determine if you’re ready to apply for pre-approval.
Whether the lender offers any unique programs that would fit your needs (for example, down payment assistance for first-time home buyers).
4. Get preapproved for a home loan
There are a couple of big advantages to getting a mortgage pre-approval. One, it shows sellers that you can make a solid offer up to a specific price. Two, it helps you figure out what your mortgage will really cost since you’ll get details on the rate, APR, fees, and other closing costs.
It’s smart to get preapproved by at least three lenders. Hey, you’ve already gone to the trouble of digging up all those preapproval documents — and comparing rates could potentially save thousands of dollars over the life of the loan. Plus, if you get all the preapprovals within a short period of time (30 days is safe), it only counts as one hard inquiry on your credit report.
5. Submit your application
Even if you’ve been preapproved, you’ll have to submit your most recent financial information when you formally apply for a home loan. This can include:
- W-2 forms from the past two years.
- Pay stubs from the past 30 days.
- Federal tax returns from the past two years.
- Proof of other sources of income.
- Recent bank statements.
- Details on long-term debts such as a car or student loans.
- ID and Social Security number.
- Documentation of sources for recent deposits in your bank accounts.
- Documentation of any gifts or other funds used for your down payment.
There may be other kinds of documentation required, depending on the type of mortgage you’re getting.
Within three days of receiving your application, your lender will give you an initial loan estimate, which includes:
How much the loan will cost?
Associated fees and closing costs, including information on which costs you can shop for.
Interest rate and APR, or the annual cost a borrower pays for a loan, including certain fees, such as discount points.
Now that you know your interest rate, you can decide whether to buy discount points. These are upfront fee that lowers your rate by essentially prepaying interest. (If you opt to buy points, they’re included in your closing costs.) Points can be a good option if you plan on staying in your home for at least seven years.
6. Begin the underwriting process
Underwriting can be the most nerve-racking part of getting a mortgage, even if you’ve been preapproved. It’s more waiting, this time to get officially approved for the loan. You may also find yourself working with an underwriter rather than the loan officer who’s helped you up until this point.
During the underwriting process, the lender determines whether you’re eligible for the loan. Factors evaluated include:
- Credit and job history.
- Debt-to-income ratio.
- Current debt obligations.
The lender will take a look at your updated credit report and order a home appraisal. An appraisal tells the lender the market value of the home, since they won’t lend you more than the home is truly worth.
Meanwhile, you will schedule a home inspection, which will look for any defects in the home. Depending on how it goes, you may want to negotiate with the seller for repairs or a lower price before closing.
During the underwriting process, you’ll want to avoid making changes to your finances, such as switching jobs or taking out another line of credit. The same goes for large purchases that increase your debt, such as buying a car. Increasing your debt can lower your credit score, which could make the loan costlier — or even jeopardize your qualification.
7. Prepare for closing
Finally, your loan is approved! But you’ve got a few more steps to take before the process is complete.
Purchase homeowners insurance. Your lender will require you to do this. Shop around for the best policies.
Buy a lender’s title insurance policy. And while it’s not required, it’s wise to also purchase owner’s title insurance. Both policies offer protection in case there are problems with the title to the property down the road.
Do a final walk-through of the home. Make sure nothing has changed — and any agreed-upon repairs have been made — since the home inspection.
Review your updated loan estimate and closing disclosure. You’ll get this three days before the scheduled closing date. Compare these new documents to what you got when you were initially approved, so you can see if and how any costs have changed unexpectedly.
Get funds for your cash to close. Depending on what your lender requires, you may need a cashier’s check from your bank or a wire transfer to pay the final closing costs. Typically, you’ll pay between 2% and 5% of the home’s purchase price in closing costs. You can estimate your expenses using a closing costs calculator.
8. Close on the home
You’re almost done!
If you start having serious second thoughts at this point, you can still walk away. However, you might lose your deposit — also called earnest money — if you decide not to close.
Don’t be afraid to ask questions of your lender. Getting a mortgage comes with a lot of paperwork. Take the time to understand it all. Know what you’re signing and what you’re paying.
Your state’s laws will determine who’s present at closing. These people may include:
- Your mortgage broker.
- Your real estate agent.
- Your attorney.
- The seller’s attorney.
- A title company representative.
- The seller and the seller’s agent.
And that’s it — you made it to the top, and the loan is yours. It’s finally time to move into your new home!
Source: keepingcurrentmatters.com ~ Image: keepingcurrentmatters.com