How To Get A Mortgage

For most Americans, taking out a mortgage makes buying a home possible. But how do you get a mortgage? This guide breaks down the process so you’ll know what to expect.

How to get a mortgage

Step 1: Strengthen your credit

“Having a strong credit history and credit score is important because it means you can qualify for favorable rates and terms when applying for a loan,” says Rod Griffin, senior director of public education and advocacy for Experian, one of the three major credit reporting agencies.

The best loan offers go to borrowers with credit scores in the 700s. That’s because a strong score demonstrates you can responsibly manage your debt.

If your credit score is on the lower side, you could still get a loan, but you’ll likely pay a higher interest rate.

To improve your credit before applying for your mortgage, Griffin recommends:

• Making all payments on time and reducing your credit card balances: The payment history on your report goes back two years or longer, so start now if you can.
• Bringing any past-due accounts current: Past-due accounts will sink your score. Making any back payments and making on-time payments going forward can limit some of the damage.
• Reviewing your credit reports: You can check your credit reports weekly for free at AnnualCreditReport.com. Look for errors, and if you spot any, contact the reporting bureau immediately. For example, an error might be a paid-off loan that hasn’t been recorded as such or an incorrect address.
• Checking your credit score: This will show you a list of the top factors impacting it, which can help you understand how to get your credit in shape, if needed.

Step 2: Know what you can afford

One way to determine how much house you can afford is to calculate your debt-to-income (DTI) ratio. This measures the amount of your monthly gross income that’s taken up by recurring debt payments.

The lower your DTI ratio, the more room you’ll have in your budget for expenses not related to your home.

“The last thing you want to do is get locked into a mortgage payment that limits your lifestyle flexibility and keeps you from accomplishing your goals,” says Andrea Woroch, a Bakersfield, California-based personal finance and budgeting authority.

You can determine how much house you can afford by using Bankrate’s calculator, which factors in your income, monthly obligations, estimated down payment and other mortgage details.

Step 3: Build your savings

Your first savings goal should be enough for a sufficient down payment.

Saving for a down payment is crucial … preferably 20 percent to reduce your mortgage loan, qualify for a better interest rate and avoid having to pay private mortgage insurance.

Andrea Woroch

However, you don’t need 20 percent down to buy a home. Here are the minimum down payment requirements for several popular loan types.

It’s equally important to build up your cash reserves. Many experts recommend having the equivalent of six months’ worth of mortgage payments in a savings account, in addition to your down payment. This can come in handy if you lose your job or have another financial emergency.

Don’t forget to factor in closing costs, which are the fees you’ll pay to finalize the mortgage. These typically total between 2 and 5 percent of the loan’s principal. You’ll also be responsible for escrow payments — and you should expect to spend around 1 to 4 percent of the home’s price on annual maintenance and repair costs.

Step 4: Compare mortgage rates and loan types

Once your credit score and savings are in a good place, start searching for the right kind of mortgage for your situation. The main types of mortgages include:

• Conventional loans: Conventional loans aren’t guaranteed or insured by the government. You’ll need at least a 620 credit score and a down payment of 3 to 5 percent to qualify.
• FHA loans: FHA loans are insured by the Federal Housing Agency (FHA) and have more flexible financial requirements than conventional loans. If you have a credit score of at least 580, they require a 3.5 percent down payment.
• VA loans: VA loans are guaranteed by the U.S. Department of Veterans Affairs (VA) and are available to qualifying military members. They typically have no down payment requirement, and credit score requirements vary by lender.
• USDA loans: USDA loans, guaranteed by the U.S. Department of Agriculture (USDA), are available for properties in designated rural areas. They have no down payment requirement, and credit score requirements vary by lender.
• Jumbo loans: Jumbo loans are conventional loans for properties whose price tags exceed the federal threshold set for conforming loans: $806,500 in most parts of the country or $1,209,750 in more expensive areas. These loans often come with higher minimum credit score and down payment requirements.

Look at the interest rates, as well as the annual percentage rate (APR), which includes the mortgage rate and some fees. Even a small difference in interest rates can result in big savings over the long run. Also, consider factors like whether you’ll have to pay for mortgage insurance and for how long.

Mortgages are also differentiated by their rate types and term lengths:

• Term length: Most home loans have 15- or 30-year terms, although there are 10-year, 20-year, 25-year and even 40-year mortgages.
• Fixed-rate mortgage: A fixed-rate mortgage has the same interest rate throughout the length of the loan, so every principal and interest payment will be the same. This predictability makes fixed-rate mortgages the most popular option, with the 30-year fixed-rate mortgage being the standard in the United States.
• Adjustable-rate mortgage: Adjustable-rate mortgages (ARMs) are 30-year mortgages that start with a lower, introductory interest rate. After this period, the rate adjusts up or down based on a specified market index. You may see these loans referred to as 5/6 ARMs, 7/6 ARMs or 10/1 ARMs, for example.

Step 5: Find a mortgage lender

Once you’ve decided on the type of mortgage, it’s time to find a mortgage lender.

“Speak with friends, family members and your agent and ask for referrals,” says Guy Silas, branch manager for the Rockville, Maryland office of Embrace Home Loans. “Also, look on rating sites, perform internet research and invest the time to truly read consumer reviews on lenders.”

“[Your] decision should be based on more than simply price and interest rate,” Silas says. “You will rely heavily on your lender for accurate preapproval information, assistance with your agent in contract negotiations and trusted advice.”

Reading lender reviews can help you learn about the pros and cons of various lenders, helping you narrow the field.

If you’re not sure exactly what to look for, a mortgage broker can help you navigate your loan options and possibly get more favorable terms than you’d be able to secure on your own. Remember that interest rates, fees and terms can vary greatly from lender to lender. Bankrate can help you compare rates from different lenders.

Step 6: Get preapproved for a loan

Once you’ve settled on a lender, get preapproved for a mortgage. With preapproval, the lender will review your finances to determine if you’re eligible for funding and how much it might be willing to lend you.

“Many sellers won’t entertain offers from someone who hasn’t already secured a preapproval,” Griffin says. “Getting preapproved is also important because you’ll know exactly how much money you’re approved to borrow.”

Be mindful that mortgage preapproval differs from prequalification. A preapproval involves much more documentation and a hard credit check. Mortgage prequalification is less formal and is essentially a way for a lender to tell you that you’d be a good applicant.

Still, preapproval doesn’t guarantee you’ll get the mortgage. You won’t know that until you’ve made an offer on a house and successfully gone through mortgage underwriting.

Step 7: Begin house-hunting

With a preapproval in hand, you can begin seriously searching for a property. When you find a home that you’re interested in, be ready to pounce.

“It’s essential to know what you’re looking for and what is feasible in your price range,” says Katsiaryna Bardos, professor of finance at Fairfield University in Fairfield, Connecticut. “Spend time examining the housing inventory, and be prepared to move quickly once the house that meets your criteria goes on the market.”

Step 8: Submit your loan application

If you’ve found a home you’re interested in purchasing, you’re ready to complete a mortgage application. You can complete most applications online, but it may be more efficient to apply with a loan officer in person or over the phone. When you apply, your lender will perform a credit check and request documents from you, such as:

• Proof of identification: Including your driver’s license, Social Security card and/or other forms of government-issued ID
• Proof of income: Including paystubs, W-2s, 1099s, receipts of alimony and/or child support and rental income
• Proof of assets: Bank statements, investment and/or retirement account statements, bonds, stocks, etc.
• Gift letters: If a friend or relative gives you money for a down payment, you’ll need to submit a gift letter.

Step 9: Wait out the underwriting process

Even though you’ve been preapproved for a loan, that doesn’t mean you’ll get financing from the lender. The final decision comes from the lender’s underwriting department, which evaluates the risk of each prospective borrower and the nature of the property, then determines the loan amount, interest rate and other terms.

Here are some steps involved in the underwriting process:

1. A loan officer will confirm the information you provided during the application process.
2. After your offer on a home is accepted, the lender will order an appraisal of the property to determine whether the amount in your offer is appropriate. The appraised value depends on many factors, including the home’s condition and comparable properties, or “comps,” in the neighborhood.
3. A title company will conduct a title search to ensure the property can be transferred, and a title insurer will issue an insurance policy that guarantees the accuracy of this research.

“After all your financial information is gathered, this information is submitted to an underwriter — a person or committee that makes credit determinations,” says Bruce Ailion, an Atlanta-based real estate attorney and realtor. “That determination will either be yes, no or a request for more information from you.”

As you’re waiting, keep these tips in mind:

• If your lender does have questions, answer them promptly to avoid holding up your approval.
• If you can avoid it, don’t make any large purchases or apply for additional credit during underwriting. Any changes to your financial situation could jeopardize the loan.

Step 10: Close on your new home

Once you’ve been officially approved for a mortgage, you just need to complete the closing.

“The closing process differs a bit from state to state,” Ailion says. “Mainly, it involves confirming the seller has ownership and is authorized to transfer title, determining if there are other claims against the property that must be paid off, collecting the money from the buyer and distributing it to the seller after deducting and paying other charges and fees.”

There are many expenses that accompany the closing. These typically include:

• Appraisal fee: Cost for a professional appraiser to determine the value of the property you’re purchasing, often between $300 and $400
• Credit check fee: Cost of running your credit report, usually less than $30
• Origination or underwriting fee: Covers the cost of creating and processing your loan, usually 0.5 percent to 1 percent of the loan amount
• Title insurance fees: Covers title and settlement services, often equal to 0.5 percent to 1 percent of the purchase price
• Prepaids: Expenses you’ll cover upfront, such as property taxes and homeowners insurance premiums
• Attorney fee: Usually a flat fee that you’ll pay if your state requires an attorney be present at closing
• Recording fees: Flat fee to record the transaction with the proper local authority

Along with paying closing costs, you’ll review and sign lots of documentation at the closing, including paperwork detailing how funds are disbursed. The closing or settlement agent will also enter the transaction into the public record.

FAQ

• What income is required to get a mortgage?
  

  The income required to get a mortgage depends on how large a mortgage you need and how much debt you already have. Lenders like to see a DTI ratio of no more than 36 percent, although some may approve up to 50 percent in some cases.

• How do I qualify for a mortgage?
  

  You’ll need to meet the eligibility criteria for the specific type of mortgage you’re getting. This includes parameters around credit score, debt and down payment. For an FHA loan, for example, if you have a credit score of at least 580, you’ll need a down payment of at least 3.5 percent.

• Where can I get a mortgage?
  

  You can get a mortgage through a direct or retail mortgage lender, such as a credit union, bank or online lender; through a mortgage broker; or another type of lender. Start shopping for a mortgage by comparing top offers on mortgage rates.

• What mortgage questions should I ask when shopping around?
  

  Don’t be shy when it comes to asking mortgage lenders questions as you shop around. Ask for help identifying what kind of mortgage loan may be the best fit for your situation. You may also wish to ask about any down payment assistance programs you qualify for. While asking about interest rates can be beneficial, keep in mind some lenders will not disclose a rate until you’ve applied for a prequalification or preapproval.