How to get a mortgage

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Eager to take advantage of historically low interest rates and buy a home? For many people, getting a mortgage is a key step toward the biggest and most meaningful financial transaction of their life, and there are several steps involved in the process.

How to get a mortgage, step by step

1. Strengthen your credit

Your credit score is meant to tell lenders just how much you can be trusted to repay, and how likely you are to make your mortgage payments on time. In general, the lower your credit score, the more you’ll pay in interest.

“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.

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

  • Make all payments on time and reduce your credit card balances.
  • Bring any past-due accounts current, if possible.
  • Review your credit reports for free at AnnualCreditReport.com, as well as your credit score (often available free from your credit card or bank) at least three to six months before applying for a mortgage. When you receive your credit score, you’ll get a list of the top factors impacting your score, which can tell you what changes to make to get your credit in shape.

Taking these steps can boost your score, which will help you snag a lower interest rate on your loan. Be sure to check for errors on your credit reports, as well. Contact the reporting bureau immediately if you spot any.

2. Know what you can afford

It’s fun to fantasize about a dream home with every imaginable bell and whistle, but you should really only purchase what you can reasonably afford.

“Most analysts believe you should not spend more than 30 percent of your gross monthly income on home-related costs,” says Katsiaryna Bardos, associate professor of finance at Fairfield University in Fairfield, Connecticut.

Bardos says one way to determine how much you can afford is to calculate your debt-to-income ratio (DTI). This is determined by summing up all of your monthly debt payments and dividing that by your gross monthly income.

“Fannie Mae and Freddie Mac loans accept a maximum DTI ratio of 45 percent. If your ratio is higher than that, you might want to wait to buy a house until you reduce your debt,” Bardos suggests.

Andrea Woroch, a Bakersfield, California-based finance expert, says it’s essential to take into account all your monthly expenses — including food, healthcare and medical costs, childcare, transportation, vacation and entertainment expenses — and other savings goals.

“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,” Woroch says.

You can determine what you can afford by using Bankrate’s calculator, which factors in your income, monthly obligations, estimated down payment, the details of your mortgage like the interest rate, and homeowners insurance and property taxes.

3. Build your savings

To be able to afford your monthly housing costs, which will include payments toward the mortgage principal, interest, insurance and taxes as well as upkeep, you should prepare to put away a large sum.

Your first savings goal, however, should be your down payment.

“Saving for a down payment is crucial so that you can put the most money down — preferably 20 percent to reduce your mortgage loan, qualify for a better interest rate and avoid having to pay private mortgage insurance,” Woroch explains.

One general rule of thumb is to have the equivalent of roughly six months of mortgage payments in a savings account, even after you fork over the down payment.

Don’t forget that closing costs, which are the fees you’ll pay to finalize the mortgage, typically run between 2 percent to 5 percent of the loan’s principal value. You’ll also generally need around 3 percent of the home’s price for maintenance and repair costs annually.

Overall, aim to save as much as possible until you reach your desired down payment and reserve savings objectives.

“Start small if necessary but remain committed. Try to prioritize your savings before spending on any discretionary items,” Bardos recommends. “Open a separate account for down payment savings that you don’t use for any other expenses. This will help you stick to your savings goals.”

4. Choose the right mortgage

Once you have your credit and savings in place and a good idea of what you can afford, it’s time to start searching for a lender, comparing interest rates and terms and finding the right kind of mortgage for your situation.

The main types of mortgages include:

  • Conventional loans – These are best for homebuyers with solid credit and a decent down payment saved up. They’re available at most banks and through many independent mortgage lenders.
  • Government-insured loans (FHA, USDA or VA) – These can be great options for qualified borrowers who may otherwise struggle to buy a home. Government-insured loans are widely available through many institutions, but are targeted at borrowers with less-than-stellar credit. USDA loans have some geographical restrictions, and VA loans can only go to members of the military, veterans or their spouses.
  • Jumbo loans – These are for the big spenders out there. Conventional loans have a maximum allowable value, and if you need to finance more than that ($548,250 in most parts of the country or $822,375 in more expensive areas), you’ll need to get a jumbo loan.

A first-time homebuyer, for instance, might consider an FHA loan, which requires a minimum credit score of 500 with a 10 percent down payment or a minimum score of 580 with as little as 3.5 percent down.

Mortgages can be either fixed- or adjustable-rate, meaning the interest rate is either fixed for the duration of the loan term or changes at predetermined intervals. They commonly come in 15- or 30-year terms, although there may be 10-year, 20-year, 25-year or even 40-year mortgages available.

Sign up for a Bankrate account to determine the right time to strike on your mortgage with our daily rate trends.

5. Find a mortgage lender

Once you have your financial ducks in a row, it’s time to find a mortgage lender. It’s important to shop around for multiple offers to make sure you’re getting the best possible deal, not just the lowest interest rate. When you’re looking around, make sure you pay attention to all the fees and other conditions of every offer.

To find the right lender, “speak with friends, family members and your agent and ask for referrals,” advises 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,” says Silas. “You will rely heavily on your lender for accurate preapproval information, assistance with your agent in contract negotiations and trusted advice.”

Remember that interest rates, fees and terms can vary substantially from lender to lender.

“That’s why it’s important to shop around carefully and ask questions,” Woroch says.

For many borrowers, applying for a mortgage is overwhelming. If you’re not sure exactly what to look for, you may want to work with a mortgage broker. A broker can help you navigate all the different loan options available to you and might be able to secure you more favorable loan terms than you’d be able to get by applying on your own.

6. Get preapproved for a loan

Once you find lenders you’re interested in, it’s a good idea to get preapproved for a mortgage. With a preapproval, a lender has determined that you’re creditworthy based on your financial picture, and has issued a preapproval letter indicating it’s willing to lend you a particular amount for a mortgage.

“Getting preapproved before shopping for a home is best because it means you can place an offer as soon as you find the right home,” Griffin says. “Many sellers won’t entertain offers from someone who hasn’t already secured a preapproval. Getting preapproved is also important because you’ll know exactly how much money you’re approved to borrow.”

Keep in mind: Preapproval is different from prequalification. Mortgage preapproval involves much more documentation and will get you a more serious loan offer. Prequalification is less formal and is essentially a way for banks to tell you that you’d be a good applicant, but it doesn’t guarantee any particular loan terms.

7. Begin house hunting

With preapproval in hand, you can begin seriously searching for a property that meets your needs. Take the time to search for and choose a home that you can envision yourself living in.

When you find a home that has the perfect blend of affordability and livability, be ready to pounce quickly. In a competitive market where available homes go fast and bidding wars are common, you’ll need to be aggressive.

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

“Utilize social media and ask your agent for leads on homes going on the market before they are listed on the MLS,” Bardos also recommends.

8. Submit your loan application

If you’ve found a home you’re interested in purchasing, you’re ready to complete a mortgage application. These days, most applications can be done online, but it can sometimes be more efficient to apply with a loan officer in person or over the phone.

The lender will require you to submit several documents and information, including:

  • Recent tax returns, pay stubs and other proof of income (e.g., bonuses and commissions, overtime, Social Security)
  • Employment history from the past two years
  • Financial statements from your bank and other assets, such as retirement accounts or CDs

The lender will also pull your credit report to verify your creditworthiness.

9. Wait out the underwriting process

Even though you may be preapproved for a loan, that doesn’t mean you’ll ultimately get financing from the lender. The final decision will come from the lender’s underwriting department, which evaluates the risk of each prospective borrower, and determines the loan amount, how much the loan will cost and more.

“After all your financial information is gathered, this information is submitted to an underwriter — a person or committee that makes credit determinations,” explains 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.”

There are a few steps involved in the underwriting process:

  1. First, a loan processor will confirm the information you provided during the application process.
  2. After you make an offer on a home, the lender will conduct 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.
  4. Finally, you’ll get a decision from the underwriter: approved, approved with conditions, suspended (meaning more documentation is needed) or denied.

10. Close on your new home

Once you’ve been officially approved for a mortgage, you’re nearing the finish line. All that’s needed at that point is to complete the closing, which is when you’ll pay closing costs and receive the mortgage funds (and new house keys).

“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.”

The closing costs you’re responsible for can include:

  • Appraisal fee
  • Credit check fee
  • Origination and/or underwriting fee
  • Title services fee

During your closing, the closing agent will provide a detailed statement to the parties of where the money came from and went. The agent will also enter the transaction into the public record and deliver the deed to the buyer.

Bottom line

They say you shouldn’t put the cart before the horse. The same is true in the homebuying process. You’ll need to complete several steps to obtain a mortgage, so the more you learn about what’s required, the better informed your decision-making will be.

And if you’re denied a loan?

“If you are unable to qualify for a loan with favorable terms, it may make more sense to simply wait until you can make the necessary changes to improve your credit history before trying again,” Griffin suggests. “A bit of patience and planning can save a lot of money and help you get the home you want.”

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