How to Get a Mortgage – A 7 Step Guide

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May 17, 2019
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May 28, 2019
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7 Steps to Getting A Home Loan

Getting a mortgage can be stressful, especially if it is your first time. You must understand what a mortgage is before you can get one. A mortgage is a bank loan or mortgage lender loan that helps you purchase a home. Not very many people can afford to pay in full for their house, which is why a mortgage is needed. Buying a home up front will cost you lots of money, so the majority of homeowners have mortgages. Once you get your loan and home, the bank or lender sees your home collateral and makes them feel safer about not getting the money paid back. If you cannot pay for the home, they will be able to take your home back and resell it. That is why it is lower risk.

You must pay mortgages monthly just like you would renting an apartment or home. Your payment will consist of interest, your principal, property taxes, and homeowner’s insurance. Understand that your principal is the total amount of money you borrow from a lender and the interest is the cost of having a loan in the first place

There are many steps to getting a mortgage and it does take a little time to gain. You must plan ahead and do diligent research to make getting a loan easier for yourself. Here are a few steps to get a mortgage for a new home.

1.Make sure to clean up your credit score

Credit is something that affects how you borrow money and how lenders determine if they can trust you. Your credit is a reflection of your payment history and any debts you may have, from medical bills and student loans to credit cards and rent payments. Banks and mortgage lenders will analyze your credit to determine your debt-to-income ratio to figure if you are able to pay them back.  You must make sure that your credit meets minimum requirements to ensure that you get a good mortgage loan. Those with low credit scores may have more difficulty getting a lender or bank to trust them when it comes to paying back borrowed amounts.

Check your credit directly through credit bureaus or online. Credit bureaus will charge you a small fee to determine your full credit so you can see every detail, while there are online services that  are free yet don’t give you as much detail on what all your credit entails. You may ask yourself “why did my credit score drop?” if you see drastic changes. Usually, it is because of late payments, frequent hard credit runs, and high debt-to-income ratios.

The higher your score is the better opportunity for a quality mortgage loan. A score above 620 is good for conventional loans and anything lower may be able to get a federal housing administration loan or not qualify at all.

How long does it take to build credit?

If your score needs work, give yourself time to raise it to where it needs to be. It usually doesn’t take too long to repair, if you are diligent. But if you have an extremely low score it may take a little longer than someone who is close to getting the highest possible credit score. Minimizing your debts and resolving them is key to getting the highest possible credit score. Try not to apply for any extra loans or credit cards when trying to clean up your credit.

If you do need to fix poor credit, it may be best to get a loan specifically for bad credit. So long as your debt to income ratio stays within the allowable limits, this is one good option. If you aren’t sure of your DTI, talk to your mortgage lender beforehand about what options may exist.

You also want to dispute any errors or inaccuracies on your credit to ensure that your credit score is correct. Try not to waste money on credit companies that claim to clean your credit for you. Just make sure you pay all of your bills on time and keep your accounts open.

mortgage guide

2.Determine your down payment

Your down payment will also help you decide on what kind of loan you want to get. The amount you have to pay to get a mortgage depends on the type of loan you receive. Most homeowners put down less than 10% and FHA lenders require at least 3.5%. The more money you put down on your home will give you benefits like not having to pay mortgage insurance and having lower payments.

Think about the price of your home and if you can afford to put down a large payment amount. Sometimes the overall cost can make a down payment too heavy for your finances. Make sure to focus on what you can and cannot handle financially. If you aren’t able to put much down on your home and have no other options, choosing to get a personal loan to assist may be ideal.

How to get a personal loan

Finding personal loans are good if your mortgage company agrees to allow it. Shop around to find the best rates and best options for your financial situations. Decide if you want to use online services or banks. Online personal loan services have lower interest rates and a higher possibility of getting approved than your traditional bank. The lower the interest and payment for a personal loan the less amount of money you have to exert when paying monthly bills.

A personal loan should be a last resort option due to the fact that many mortgage lenders do not allow personal loans to be used for down payments. Make sure you have absolutely no other options before choosing to go this route because it will increase your overall debt-to-income ratio.

3.Shop around for the right mortgage

Once you’ve gotten your credit score where it should be, begin your search to find the right mortgage for you. Starting this process early will make your life easier when you need to determine other factors like how much you’re willing to put down and other financial situations. Determine your credit score to figure what kind of loan you need for your mortgage.

There are several types of mortgages available to you and you must research and go through everyone to make sure it fits your circumstances. Banks are the traditional way to funding your mortgage but there are other sources like lenders who specialize in mortgages and online vendors. Many people choose to go with banks as they provide personalized help and face-to-face consultations.

Conventional loans are ones that banks or credit unions provide.  These loans are a little bit tougher to get than others. These require at least 3% down payment of the cost of your home. Conventional loans are for borrowers who have less risk possibility of defaulting or ones that want to put large down payments on their homes, which results to lower monthly payments. Federal House Association or FHA loans are made to make buying a home easier and more affordable for those with low and middle incomes. These come with competitive rates and usually have more lenient lending standards. These types of loans are easier to qualify for, especially if you have little savings and low credit.

Determine what kinds of rates are available, fixed or adjustable. Research lengths of mortgage terms to find one that fits your circumstances. The longer the mortgage term, the lower monthly payments you will have and higher interests rates. Make sure to understand how much you should borrow so you don’t take on too much and end up defaulting later on. This will help you determine what kind of home you need and how much you can afford.

4.Get Pre-Approved for a mortgage

You must qualify for a mortgage before you can even get pre-approved. When you want to qualify for a loan, the lender will inquire about your financial and debt situation. If you stand within their criteria then you may get qualified. The following qualification is the process of submitting paperwork to get pre-approved. Try this at multiple banks or lenders to weigh out your options or determine which mortgage will be beneficial to you overall.

Verification of employment and income is required in your application. There may be additional paperwork requested to help lenders and bank determine if they want to approve you or not. From driver’s license and passports to bank statements and tax returns, you may want to gather the correct documents to make the decision easier and faster. Continue to shop around as you’re completing this step to get the best rates, APRs, and down payment requirements. You could also ask around to determine how certain mortgage companies handle business and their pros and cons.

You are more than likely going to receive the loan if you are pre-approved. There are still more steps you must go through to actually hold the loan. Make sure to still monitor your credit score and stay away from opening new accounts until you have finished all steps.

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5.Submit an application to the right lender

Once you’ve weighed your options and decided on the right lender for your circumstances, take the next step to make it official. When you are pre-approved for a mortgage you have a high probability of being approved overall. Think about the pros and cons of the lender you’ve chosen and decipher if it is worth it. Sometimes it’s best to keep shopping around if you don’t feel entirely comfortable with your decision.

While getting pre-approved requires a lot of documents, so does the process when you apply officially. You’ll need to submit more financial information if you choose to go with a new lender to ensure you are capable of paying back your mortgage. But if you decide on a lender that has already pre-approved you, you will need to update your information with the most recent documents.

6.Complete other paperwork and underwriting process

Once you are approved you will begin the next step before closing on your home. Underwriting is what includes more analysis by the lender, home inspections, and debt monitoring. This process takes a little time as there are many parts to completing underwriting. Mortgage companies and lenders want to make sure that they are giving a loan to a trustworthy customer and will diligently review your account.

An appraisal will take place as soon as the lender asses the detail of your credit score and debt history. An appraisal lets the lender know the value of the home and determine if the loan amount matches. They want to make sure everything makes sense and there won’t be any major issues in the future. To help lenders understand the value of the home you seek to buy, they will do an inspection. This inspection will show lenders what kind of condition the home is in and if there is any defect. If there are repairs that need to be completed, from kitchen renovations and bathroom renovations to outdoor improvements, you will have the opportunity to negotiate your price. Even smaller renovations like garage floor coats or garage cabinet insertion can determine a negotiation.

The underwriting process is important and you should wait to make changes to your financial situation like leaving a job or adding new accounts to your credit. Your lender will see any changes and deem you either irresponsible or incapable of future payments. If the credit changes you may have to pay more interest and your monthly mortgage payments can get costly.

7.Close on your home

The final step to getting a mortgage is closing on your home. Once you reach this step you have completed the most difficult parts of the mortgage process and can now breathe a little more. There is a price to pay to close your home and you will pay at least 2% of your home’s purchase cost. You will also have to pay for homeowners insurance before moving into your new home, which protects your lender if you fail to repay your loan.

Everything isn’t finalized until you submit your closing payment. Though you may lose out on money, If you still have doubts or feel overwhelmed, you have the opportunity to back out last minute. Understand the complexity of getting a mortgage and know what you’re paying and signing before completing the process. Once you’ve met with lawyers and mortgage professionals and signed all the final paperwork, you can get your keys and get ready to make your first mortgage payment.

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