How to Get a Mortgage Loan

How to Get a Mortgage Loan

Before you start house hunting you’re going to want to make sure you can get a mortgage.

Loans are often be intimidating to first-time home buyers, but they don’t have to be.

In this article were going to show you how to get a mortgage loan and explain the steps you need to take to become a homeowner.

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What it Takes to Get Approved for a Mortgage

  • Steady employment history and income
  • Debt-to-Income ratio below 41%
  • Minimum credit score of 580-620
  • Down payment of at least 3.5%
  • Get pre-approved
  • Make sure you can afford the monthly payment

Work History and Income Guidelines

Mortgage lenders like to see that you have been employed with the same company, or in the same field of work for at least the past 2 years. If you are taking a salary, that’s even better. If you’re a commission or contract employee the last 2 years of tax returns will be used to average your annual income.

Self employed borrowers need to show at least 2 years of tax returns with a steady flow of income to qualify.

Eligible Types of Income for a Mortgage

  • W2 income
  • Overtime
  • Child support (if court ordered and has at least 3 years left)
  • Social Security
  • Rental Property income

Debt-to-Income Requirements

Your debt-to-income ratio (DTI ratio) is your monthly debt obligations divided by your gross pre-tax income.

Monthly debt divided by Monthly income = DTI ratio

For example if you make $5,000 per month and your total debt payments including your mortgage comes to $2,000 per month your DTI ratio is 40%.

Most mortgage loans require a DTI ratio no higher than 41%. VA and FHA loans do have more wiggle room when it comes to your debt-to-income ratios which can be as high as 50% in some situations.

See how much house you can afford including PMI

Compensating Factors for High Debt-to-Income Ratios

  • High credit score
  • Large down payment (low LTV ratio)
  • More than 5 years at current employer
  • Large amount of cash reserves

Credit Score Requirements

Your credit score is one of the biggest determining factors in whether a borrower will qualify for a mortgage or not. Conventional mortgages require a minimum 620-640 credit score with most lenders. FHA loans allow for the lowest credit scores of any other type of mortgage loan.

The FHA will insure a mortgage if the borrower has at least a 500 credit score and 10% down. A 580 credit score can be insured by the FHA with just a 3.5% down payment. However, lenders can, and do set their own credit guidelines often requiring higher scores than the FHA requires.

Minimum Credit Score Guidelines by Loan Type

  • FHA Loans – 500 with 10% down – 580 with 3.5% down
  • VA loans – 620
  • USDA Loans – 640
  • 203k Loans – 640
  • Conventional Loans – 620-640
  • Conventional 97 – 640
  • Jumbo Loans – 680 – 700

Down Payment

The down payment amount you’ll need for a mortgage will vary based on the type of mortgage you’re using. Conventional loans require a down payment between 5% – 20%, while Government loans offer low down payment mortgages between 0% – 3.5% down.

FHA loans, as mentioned above will have a down payment that depends on your FICO score.

FHA credit requirements

Down Payment by Loan Type

  • FHA Loans – 3.5% with 580 score, 10% with 500 score
  • VA Loans – No down payment
  • USDA – No down payment
  • 203k Loans – 3.5% down payment
  • Conventional Loans – 5% – 20%
  • Conventional 97 Loans – 3%

Get Pre-Approved for a Mortgage First

Before you can start house hunting you need a pre-approval letter first. A pre-approval is much different from pre-qualified, a pre-qualified letter will not be as strong as a pre-approval.

In fact, most real estate agents will not even begin showing you homes until you are pre-approved. Getting approved is quick and easy and can usually be done in one phone call.

What You’ll Need

The first step is letting your mortgage lender pull a copy of your credit history and scores. As long as you meet the minimum score requirements the loan officer will then need to verify your income and assets.

Documents Needed to Be Pre-Approved

  • W2’s from the past 2 years
  • 2 years of tax returns
  • most current pay-stubs
  • most recent 2-3 bank statements

Make Sure You can Afford the Monthly Payment

There are other costs associated with a mortgage besides just the interest and principal payments. Included in your mortgage payment is private mortgage insurance, property taxes, and homeowners insurance.

Mortgage insurance (PMI) insures the mortgage loan in the event a borrower defaults the lender is reimbursed. PMI is required for all mortgages with a loan-to-value ratio higher than 80%. FHA loans require mortgage insurance for the life of the loan in most cases, regardless of the loan-to-value ratio.

Homeowners insurance insures the home against property damage. On average homeowners pay around $1000-$1200 per year for homeowners insurance.

Property taxes vary based on the state and county you’re home is located in. Some states such as Texas have very high property taxes above 2% of the market value of the home.

An escrow account is opened by your mortgage company and a portion of your payment goes into the escrow account to pay your homeowners insurance, PMI, and property taxes.

Use our home affordability calculator that includes PMI, insurance and property taxes to see how much home you can afford.