For many people in the United States, securing a mortgage is essential for purchasing a house. But what steps do you need to take to obtain one? This guide outlines the mortgage process to help you understand what to anticipate when you seek a home loan.
How to Get a Mortgage?
Strengthen your credit
Borrowers with credit scores in the 700 range receive the finest loan options. This is due to a solid score indicating your ability to handle debt wisely. Rod Griffin, senior director of Public Education and Advocacy at Experian, one of the leading credit reporting agencies, states, “A solid credit history and high credit score are crucial as they enable you to secure better rates and conditions when seeking a loan.” Should your credit score be below average, obtaining a loan is still possible, though you may face a steeper interest rate.
Know What You Can Afford
A method to assess your housing budget is to calculate your debt-to-income (DTI) ratio. To find the DTI ratio, you add together all your monthly debt obligations and then divide that total by your gross monthly earnings.
A lower debt-to-income (DTI) ratio provides you with greater flexibility in managing non-housing related expenses within your budget. According to Andrea Woroch, an expert on personal finance and budgeting located in Bakersfield, California, it’s crucial to consider all of your monthly expenses along with any savings for future goals.
According to Woroch, “You definitely don’t want to end up in a mortgage that restricts your ability to enjoy life and hinders your ability to reach your objectives,” a situation referred to as being “house poor.”
Build Your Savings
Nonetheless, it is important to realize that purchasing a home is still possible without having a full 20 percent down payment. For instance, while conventional loans typically ask for at least 3 percent upfront, FHA loans need a 3.5 percent contribution, and both VA and USDA loans do not demand any down payment at all.
Establishing a solid cash reserve is crucial as well. A common guideline suggests maintaining about six months’ worth of mortgage payments in your savings even after making the down payment. This financial buffer can protect you in case you face job loss or other unforeseen situations.
Compare Mortgage Rates and Loan Types
Conventional loans: Traditional loans do not carry any government guarantees or insurance. To be eligible, you typically need a minimum credit score of 620 and a down payment ranging from 3 to 5 percent.
FHA loans: FHA loans, backed by the Federal Housing Administration (FHA), offer more lenient criteria compared to traditional loans. These loans necessitate a minimum down payment of 3.5 percent, a credit score of at least 580, and a debt-to-income (DTI) ratio capped at 43 percent.
VA loans: VA loans, backed by the U.S. Department of Veterans Affairs, are accessible to eligible military personnel. These loans do not necessitate a down payment, and credit score criteria differ among lenders.
USDA loans: USDA loans, backed by the United States Department of Agriculture, can be obtained for properties located in specified rural regions. These loans do not require a down payment, and credit score standards differ depending on the lender.
Jumbo loans: Jumbo loans refer to standard loans aimed at properties that surpass the federal limit designated for conforming loans (which is $806,500 in many regions or $1,209,750 in high-cost locations). Typically, these loans necessitate a higher minimum credit score and a larger down payment.
Find a mortgage lender
Consult with your friends, relatives, and real estate agent to obtain recommendations,” advises Guy Silas, branch manager at Embrace Home Loans in Rockville, Maryland. “Additionally, explore rating websites, conduct online research, and dedicate time to thoughtfully review customer feedback regarding lenders.
Get Pre approved for a loan
After choosing a lender, seek mortgage preapproval. This process involves the lender assessing your financial situation to decide if you qualify for a loan and the specific sum they can offer you. According to Griffin, numerous sellers are unlikely to consider bids from buyers without prior preapproval.” He adds that obtaining preapproval is crucial since it clarifies the exact loan amount you’re eligible to receive.
Begin house-hunting
Having a preapproval secured allows you to effectively start your search for a property that fits your criteria. Once you discover a home that offers the ideal combination of cost and comfort, take action swiftly.
Submit your loan application
Once you’ve identified a property you want to buy, it’s time to fill out a mortgage application. Nowadays, many applications can be done online; however, you might find it more effective to work with a loan officer face-to-face or via phone. During the application process, your lender will conduct a credit assessment and ask for various documents from you, such as:
Wait out the underwriting process
Receiving preapproval for a loan doesn’t guarantee that the lender will actually provide the funds. The ultimate choice rests with the underwriting division of the lender, which assesses the potential borrower’s risk level and the specifics of the property. This team then establishes the loan amount, rates, and various conditions.
Close on your new home
After receiving official approval for your mortgage, you’re close to finalizing the process. The only step remaining is to execute the closing.
The procedure for closing varies slightly depending on the state, Ailion explains. Essentially, it requires verifying the seller’s ownership and their right to pass on the title, checking for any additional liens on the property that need to be settled, gathering funds from the buyer, and then allocating them to the seller after accounting for necessary charges and expenses.