There are many reasons that a person might need a mortgage loan (commonly called a mortgage for short). We could literally spend all day listing these reasons, but most of them come down to one basic theme: You use your property as collateral to secure a loan so that you can buy things that would otherwise be too expensive.
In this article, we will be examing the process of getting a mortgage loan in eight relatively easy steps. We will cover the entire process, and attempt to give you a good general overview of the subject.
1. Check Your Credit And Improve If Necessary
It isn’t too hard to check your credit score. If you do an internet search on the subject, you will find plenty of people that are willing to take your money. Since these services are fairly cheap, you might want to make use of their services.
Most credit scores will range between 30 and 850, with some variations. The higher the score, the better your credit. The potential problem here is that most banks will not loan money to someone with a credit score lower than 500.
There are a few things you can do to improve your credit score. Paying your bills on time and in full is a big step in the right direction. Believe it or not, your diligence in paying your rent, utility, and phone bills can affect your credit score. Over time, this effect can be pretty significant. Paying off any existing debts will also likely get you some points. There are many other ways to raise your credit score, so find the ones that work best for you.
2. Figure Out Your Debt-To-Income Ratio
This figure is almost as important as your credit score. You can find your debt to income ratio by doing the following:
- Figure out your total combined monthly income
- Figure out the total amount of debt that you owe per month. This includes bills of all kinds.
- Take a calculator and divide your debt by your income
- Add a percentage sign to the end of the number
This figure is measured as a percentage, and higher numbers are undesirable. Higher numbers indicate that you have too much debt in relation to your monthly income. Anything higher than 40% is going to make it very hard for you to get a mortgage.
3. Figure Out Your Down Payment
You will have some flexibility when it comes to your down payment. Most lenders will allow you to pay much lower than the ideal 20%. If you can put down a 20% payment, you will certainly please your lender and make them more inclined to work with you. On the other hand, this can be a lot of money.
Although a 20% payment will allow you to avoid the additional hassle of paying for private mortgage insurance, most borrowers will pay significantly less than that. FHA loans, which are typically the most forgiving, may allow down payments as low as 3.5%.
4. Choose A Mortgage Type
There are a great many different types of mortgages offered by various financial institutions. So many, in fact, that it would be outside the scope of this article to cover them all. Instead, here are a few good examples:
- Fixed-rate mortgages: So named because the interest rate is fixed. This is the kind of loan to get when interest rates are low so that you can preserve that low rate. These types of loans are the most popular among home buyers, and they offer a relatively low monthly payment in most instances.
- Adjustable-rate mortgages: So named because the interest rate can be changed. This is the kind of loan to get when interest rates are high so that you can (hopefully) find a way to reduce your payments at a later time. These loans will typically start at a fixed rate, with an annual adjustment determining rates after that point. One good thing is that the temporary fixed rate is usually lower than normal, and it can last for as long as ten years.
- Interest-only mortgages: Require no payment on the main debt. These are, of course, very generous loans. These are usually done as part of an annual payment plan, in which the borrower pays on the principal debt once a year while paying a low monthly interest rate.
- FHA mortgages: Government-backed loans designed to help low-income buyers. This type of mortgage offers the lowest down payments and is available for people with a credit score as low as 500.
- VA mortgages: Government-backed loans available only to veterans. This is an incredibly generous program, but there is no doubt that most of its recipients are deserving of special consideration. These loans require no down payment and no mortgage insurance. There is only a small VA funding fee.
- USDA mortgages: Government-backed loans designed to help rural/suburban buyers. If your income level is very low, you may qualify for one of these. Loans of this type require no down payment except in certain special cases, and can even include grants for home improvement and other purposes.
- Jumbo mortgages: Usually reserved only for the most expensive homes. Any home that is considered to be above the local norm is likely to be eligible for this. These loans give pretty generous terms, but require a credit score of 700 or higher.
5. Get Pre-Qualified
This is the point at which you will first make contact with the lender. They will set up an initial meeting, which will essentially be a question-and-answer session. They will want to know a few things about what you do for a living, how much money you make, how much you want to borrow, etc.
This step is important because it will tell you whether or not you are likely to be approved, and what kind of price range you will have. They probably won’t investigate you too deeply at this point, since this is just an initial screening.
6. Get Pre-Approved
This process is a little more involved than a pre-qualification. Pre-approval requires that you give the lender a lot more information, and they will verify all of it. You will most likely need to verify your employment, income, tax status, and anything else that relates to your finances.
Although this is a lot more trouble, it will show potential lenders that you are serious and that you have nothing to hide. You will eventually have to submit these documents anyway, so you might as well get yourself ahead of the game.
7. Choose A Lender And Put In Your Application
It might seem strange to say that you should get pre-approved before shopping around. In truth, pre-approval is also a part of the process of shopping around. However, you don’t necessarily have to take out a loan from the same company that pre-approved you. You can continue to shop around and come back to them if you don’t find a better deal.
When making this evaluation, pay particular attention to the interest rate. It may seem like a 1% difference doesn’t matter, but you have to remember that this is a long-term loan. That 1% will be multiplied every month over the lifetime of the loan, and that can make it pretty significant in the end.
When you submit your application, you will need a large number of documents. Although the exact requirements will vary from one lender to another, you should bring everything on this list:
- All your W-2 forms from the last two years
- All your pay stubs for the previous month
- State and federal income tax records from the last two years
- Proof of income, which means all income
- At least a months’ worth of bank statements
- Paperwork relating to any debts that you currently owe
- At least two forms of identification
There will be a slight delay when you undertake this process, as the lender will need time to verify your information, pull your credit report, and process your application. There seems to be a lot of variation in the processing time, as it can take anywhere from one day to one month.
8. Close The Deal
When everything has been worked out to your satisfaction, and the satisfaction of your lender, you are ready to sign on the dotted line and close the deal. You will need to make sure that you have your down payment and closing fees ready to go. The most common method of payment is a cashier’s check, but use whatever you prefer. Just make sure you read the fine print and make sure that all the terms are satisfactory.
If you don’t know anything about closing costs, you need to educate yourself before trying to negotiate a loan. These are simply fees that are applied at the end of the process to cover the salaries of the people who helped you process the loan. These fees will normally range from 2% to 5% of the total mortgage. Your lender should make you aware of the exact rate beforehand.
The good news is that you won’t have to pay the entire amount. Since the closing fees are usually paid to third-party companies, the buyer and the seller will usually share the cost. You should be aware that the buyer normally assumes the larger half of the debt.
Finally, all the documents will be signed, and the property will be yours. Arrangements will be made for monthly mortgage payments, and you can finally conclude this process.
Can I Get A Mortgage With Zero Credit?
Those whose credit is neither good nor bad are in a strange position. Although it is certainly possible for a person with no credit to get a mortgage, it will be much more difficult. This is because you will be subjected to a more arduous approval process known as manual underwriting. They will investigate many aspects of your finances and determine if you are a good risk. Before you attempt to do this, you should know that not all lenders are willing to deal with you.
What’s The Difference Between Pre-Approval And Pre-Qualification?
As we discussed earlier, these processes are two different versions of the same process. The only real difference is that pre-qualification is a lot more involved and a lot more consequential. Pre-approval means that you will probably get the loan. Pre-qualification means that you will almost certainly get the loan.
Which is better: A fixed-rate loan or an adjustable-rate loan?
Interest rates fluctuate along with the rise and fall of the economy. The Federal Reserve is the group that primarily regulates the interest rate. Whenever interest rates are low, it makes much more sense to go with a fixed-rate mortgage so that you can keep that low rate. If rates are high, it makes more sense to go with an adjustable rate so that you can have some hope of reduction later. You can get a good idea of what constitutes high and low-interest rates by looking at how the rates have fluctuated over time.
Taking out a mortgage is no small matter. Because of the large amounts of money that are likely to be involved, this is a decision that can affect your life in a major way for years to come. As such, we hope that you will do your research thoroughly before dipping your toes in this particular pond. We also hope that we have given you a good jumping-off point for that research and that you will fill out the contact form below and continue to read and enjoy our work.