A mortgage is the biggest purchase you will make in your lifetime.
These 8 things will help you get the best deal on a mortgage loan and guide you through the home buying process.
1. Know Your Budget
It’s important you know what you can afford before start looking at homes. Lenders look at your debt-to-income ratio to determine the maximum loan amount you qualify for. Your debt-to-income ratio is the amount of your income that goes towards monthly debt obligations such as car loans and credit card payments.
You also need to budget for all costs that are associated with getting a mortgage. You need to account for homeowners’ insurance, property taxes, and private mortgage insurance.
How Much House Can You Afford: Home Affordability Calculator
2. Check Your Credit
Negative information on your credit report, such as collection accounts and late payments, will affect your ability to qualify for a mortgage.
You can get a copy of your credit report for free online at annualcreditreport.com. Review your report to see if you notice any errors; if you do, you can dispute them with the three major credit bureaus.
Your credit score plays a vital role in getting approved for a home loan. You may qualify for an FHA loan with a 580 credit score; however, a credit score of at least 620 is ideal.
If you have a credit score below 620, you should take some steps to improve it before applying.
- Pay down your credit card debt to less than 25% of the credit limit.
- Don’t apply for any new credit or loans.
- Do not miss any payments.
Read More: How to improve your credit score in 30 days.
3. Determine How Much Cash You Need to Bring to the Table
There are several upfront costs associated with getting a mortgage loan. Of course, you will need to have money saved for the down payment. Depending on the type of loan you choose, you will need to put down between 3%-20%. You’ll also need to budget for closing costs, the home appraisal, and inspection, and have reserve funds in savings after closing.
- Closing costs – Fees charged by lenders for processing the loan, you can expect to pay between 2% – 5% of the loan amount.
- Home appraisal – Required before closing and paid to your lender. The home appraisal fee is typically between $300-$500 depending on the square footage of the home.
- Home inspection – A home inspection is highly recommended to help you find any potential issues with the property. The cost depends on the size of the home. Expect to pay around $300-$400.
- Reserve funds – Getting a home loan shouldn’t cause you to go broke. Lenders want to see at least 3-6 months worth of mortgage payments in cash reserves.
4. Get Pre-Approved
To get pre-approved for a mortgage, a loan officer will need to pull a copy of your credit report and scores to make sure your credit meets their guidelines. They will also verify your income with tax returns and bank statements to figure out the loan amount you qualify for.
What you need to get pre-approved for a mortgage loan:
- A lender will pull your credit report and scores.
- Proof of income with paystubs, W2’s, or tax returns
- Proof of down payment funds with bank statements
5. Choose the Right Mortgage Program
There are many different types of mortgage programs available. Which one you should get depends on your individual situation.
- FHA loans – Great for first-time homebuyers and buyers with poor credit. A 580 credit score is required with a 3.5% down payment.
- Conventional loans – Conventional loans are best for borrowers with good credit and a 20% down payment.
- VA loans – Veterans are eligible for a VA loan with no payment or mortgage insurance required. A 580-620 credit score is needed to qualify.
- USDA loans – Best for low-to-median income borrowers who plan on buying a home in a rural area. To qualify for a USDA loan, you must meet the income limits, and the home must be in a USDA eligible location.
- 203k loans – For people who want to purchase a fixer-upper. 203k loans provide financing for a home plus up to $35,000 to cover the costs of repairs and renovations.
- HomeReady / Home Possible loans – HomeReady and Home Possible loans are exclusively for low-income first-time homebuyers. 3% down payment, and a 620 credit score is required. You must meet the income limits to qualify.
Min Credit Score
Max DTI Ratio
No down payment
No down payment
115% of area median income
5% - 20%
HomeReady /Home Possible Loans
80% of area median income
6. Pick a Lender
You can get a mortgage through your local bank or credit union, but since they have limited loan products, you may not get the best deal. Mortgage brokers and online lenders have access to many different types of loan programs and lenders so you could get the best rate and lowest cost on your loan.
You should get a loan estimate from at least three lenders to compare mortgage rates and loan terms. Not only will speaking to multiple lenders help you negotiate the best deal on your loan, but it also allows you to get a feel for the loan officer. You want to work with a knowledgeable, competent loan officer who is easy to get a hold off.
7. Prepare for Closing
When your loan is in underwriting, you should start to prepare for closing day. Your loan officer and realtor should be able to help you get everything together.
Things to do before closing:
- Homeowners insurance – Homeowners insurance is required on all mortgage loans. An escrow account will be set up, and the cost will be added to your monthly payment. You should shop around to find the best rates.
- Home inspection – The home inspection should be done several weeks before closing to allow time for the seller to make repairs.
- The final walkthrough – You and your real estate agent will do a final walkthrough to ensure there are no issues and all repairs have been made.
- Closing disclosures – You will receive the closing disclosures a few days before closing. Review and sign the disclosures and return to your loan agent.
8. Close on the Home
After the unwriting process is over and you receive a clear to close, it’s time to set an appointment with the title company to close on the house. At closing, your lender will tell you the amount you need to bring to closing. You will need to get a cashier’s check from your bank to cover the upfront costs.
Who is required to attend closing depends on your state:
- Your loan officer or lender representative
- Your real estate agent
- Closing agent
- Your attorney
- Seller and sellers agent
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