If you’ve decided you’re ready to become a homeowner you’ll need to get home loan.
Getting a mortgage doesn’t need to be a difficult process.
Here are a few things you can do to make applying for a home loan easier than ever.
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5 Steps to Getting Approved for a Mortgage
1. Calculate Your Mortgage Budget
Your debt-to-income ratio, or DTI ratio, is the amount of your monthly income compared to your monthly debt obligations.
For example, if your gross monthly income is $5,000 and your total debt payments are $1,000 per month. Your front-end DTI ratio is 20%.
Front-end ratio is your DTI ratio before adding your mortgage payment. 31% max for mortgage types of mortgages.
Back-end ratio is your DTI ratio after including your mortgage. 41% max for most loan types.
2. Budget for all Expenses
A mortgage is much more than just a principal and interest payment. There are many other mortgage expenses you need to budget for.
Private mortgage insurance is something that is required on most mortgage loans. PMI insures the mortgage itself in the event a borrower defaults on the loan, the lender will be reimbursed. PMI rates vary between 0.50% to 1.0% depending on the type of home loan you have.
PMI is not required on VA loans and conventional loans with a loan-to-value ratio of 80%, or lower.
Property taxes vary widely based on the city and state you live in. Property taxes are an annual tax that are put into an escrow account that you pay towards on a monthly basis.
Homeowners insurance, or hazard insurance, protects the property against major damages. This is also included in your escrow payment. You should shop around to get the best insurance rate available.
If your buying a home in a community that has a homeowners association, you’ll have to pay an HOA fee. HOA fees vary widely based on the community but shouldn’t be more than thousands dollars.
3. Make sure You have the Down Payment Saved
A down payment is a percentage of the purchase price that the buyer pays in cash. How much of a down payment you need for a mortgage will depend on the type of home loan used.
Down Payment Requirements by Loan Type
- FHA Loan – 3.5% – 10% down
- VA Loan – Zero down
- USDA Loan – Zero down
- 203k Loan – 3.5% down
- Conventional 97 Loan – 3%
- Conventional Loan – 5%-20%
- Jumbo Loan – 15%-30%
Some loans, such as VA and USDA loans are available with no money down if you met the requirements
4. Know Your Credit Score
Your credit score is not only a determining factor in getting approved for a loan, but your interest rate is also tied to how good, or bad your score is.
Most mortgage loans have a minimum credit score requirement of 640 to be approved. However, there are some loans that allow for a lower credit score.
FHA loans in particular may be available to borrower with just a 500 credit score and a 10% down payment.
Tip: Maximize your FICO score before you complete a mortgage application by paying the balances on your credit cards below 15% of their credit limit.
5. Prepare Your Documents
To get pre-approved you need to contact a mortgage lender to have your credit pulled. A loan officer will also verify your income and assets. Be prepared and have the following documents ready.
- Previous two years of tax returns
- 2 years of all w2’s
- Last several pay stubs
- 2 months of bank statements
- Drivers License
- Social security card
6. Find a Lender
Now it’s time to find a lender to work with. In the old days this meant walking into your local bank or credit union. Nowadays, there are many reputable online lenders that can help you get approved and issue a loan.
A brick and mortar location may not have all of the programs available to you. Applying for a home loan online has become very popular because you are often given a more competitive rate and have more programs available.
You will want to compare loan estimates from at least 3 or 4 different lenders before choosing a lender to make sure you’re getting the best deal.
7. Get Pre-Approved
The first step in applying for a home loan is to get pre-approved. Pre-approved is different from being pre-qualified.
Pre-qualified just means you meet the basics requirements for a mortgage but nothing has been verified. Pre-approved means a loan officer has pulled credit and verified income documentation.
Many realtors will not start showing you homes until you have a pre-approval letter in hand. Sellers will not accept offers without a pre-approval attached.
Normally, this can be done in one phone call and no more than 30 minutes. Your lender will issue you a pre-approval letter stating how much you’re approved for.
8. Start House Hunting
Once you’ve been pre-approved, it’s time to start house hunting to find your new home. You should be working with an experienced real estate agent to help you through the entire home buying process.
When you find a home that you love, you’ll need to submit an offer on the home. If accepted, you’re in contract and it’s time to fill out an official mortgage loan application, you can apply online, by phone, or in person.
The lender will verify all mortgage documents and process the application. You will receive a loan estimate from your lender that details the loan terms. Closing costs, interest rate, and all other lender fees will be outlined in the loan estimate.
The average time it takes to close on a mortgage is approximately 45 days.
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If you’re a first-time buyer then you should think about getting an FHA home loan. FHA loans are very popular with first-time home buyers because of their low credit and down payment requirements.
Which Type of Mortgage Should I Get?
There are several different types of mortgages available. Fixed-rate mortgages, adjustable-rate, interest-only loans. Your individual situation will determine which one his best for you.
An adjustable rate mortgage, or ARM, is a type of loan that comes with an initial low interest rate that will change after the initial period is up. The most common type is a 5/1 ARM. The 5 means the initial rate is locked in for 5 years. 1 means the rate will adjust every year.
An adjustable-rate loan is good for people who do not plan on staying in the home for more than 5 years. ARM rates are usually much lower than fixed-rates.
A 30 year fixed-rate mortgage is the most common type of loan used today. The rate is fixed for the life of the loan, ensuring your monthly payment never changes.
A 15 year fixed-rate mortgage is another popular option for people wanting to pay off their mortgage faster. 15 yr rates are similar to ARM rates, but the low mortgage rate will be locked in for life.
Frequently Asked Questions
What credit score do you need to buy a house?
Most mortgage require at least a 620 credit score. However, you may qualify for an FHA loan with a 580 credit score and 3.5% down.
How do you apply for an FHA loan?
FHA loans are not offered by the Government, they are insured by it. You can apply for an FHA mortgage with most mortgage lenders.
What do you need to apply for a mortgage?
To apply you’ll need to have w2’s, pay stubs, bank statements, tax returns, drivers license or photo ID.
Where do I apply for a loan?
You can apply for a home loan online, in person, or by phone.
The Bottom Line…
Applying for a loan is a fairly straight forward process. Know your credit score and what you can afford, be sure to have a down payment saved, and have your documents ready to go.
Are you ready to apply for a home loan?