How to obtain a home loan?
It can take a lot of time and effort to apply for a mortgage, but the funds you receive can help buy the home of your dreams.
Lenders carefully examine your financial situation to assess the probability that you will repay the home loan. To get approval, you’ll have to undergo a credit review. Lenders will also examine documents such as your bank statement and pay stub. You’ll learn the ins and outs of obtaining a mortgage so that you are prepared.
What do mortgage lenders look out for when evaluating a loan application?
What factors affect the mortgage application?
- Earnings — This is the amount you make from your job, income, alimony and child support, etc. Your income is reviewed by lenders to make sure you can afford your mortgage and maintain the home.
- Your debt to income ratio measures your gross monthly income compared with the amount of debt you pay each month. A high DTI, or high monthly percentage of income that goes to debt can indicate to lenders you may have difficulty keeping up home loan payments.
- Assets –Lenders will look at your assets, such as liquid savings or investments that you may have to determine if there is enough money in the bank to cover the mortgage in the event of a financial crisis.
- Type of property — Whether you are buying a condo, a second home or if it is an investment, the down payment and loan costs can be affected by this. Condos have higher interest rates, while second homes and investment properties require more down payment than primary residences.
- Your credit score measures your credit risk or the likelihood that you will repay your loan. Credit scores are required for mortgages. FHA mortgages allow you to have a credit score as low as 580, and only pay 3.5%. Conventional loans require credit scores of at least 600.
- Payment History —Payment record is one of your most important factors in determining credit score. A record of timely payments for student loans, installments loans, and credit cards will help you to get approved for mortgage.
- Your down payment —Your mortgage down payment is the amount you pay up front for your loan. A large deposit could reduce your rate. How much you pay as a down payment on your home can vary depending on what type of mortgage loan you are applying for. In general, loans usually require between 3% and 20% as a down payment. VA and USDA loan may not require any money to be put down.
What you need to provide for mortgage approval
You may be required to submit financial documentation to obtain a home loan.
- Paystubs W-2s, or proof of income other than that —Lenders will check documents such as child support, alimony, and W-2s to confirm income. Pay stubs, W-2s or other proof of income can be obtained directly from the employer. Bank deposits for several months could also show regular payments of child support and alimony.
- Tax Returns — You may be required to submit several years’ worth of tax returns in order to prove your income. This is especially true if you are self-employed, and do not have W-2s or pay stubs. Your accountant, or software that you use to prepare your tax return can provide copies.
- Bank Statements and Other Assets —Mortgage providers may ask for bank statements or other asset statements that show there is enough money to pay several months’ mortgage. Online application platforms may allow lenders to connect with your accounts so that you do not have to print individual statements.
- Credit History — Lenders will verify your credit as part of a loan application. This usually includes a credit check. You should always check your credit score before you borrow to determine if any actions can be taken to improve it. It can help you get a lower interest rate, and increase your chances of getting approved.
- A gift letter — When a relative or friend gives you money for down payments, the lender will ask that they provide a document stating that it is not necessary to pay back. Ask the lender for the wording of the letter. Generally, it should state that the money was given as a gift.
- Photo I.D. —Lenders verify your identity using your official government ID. A driver’s licence, passport, or other state issued ID could be presented.
- Rental history – Lenders might want to speak to past landlords about the rental history you have paid. Give lenders the names and phone numbers of past landlords to verify your rental history.
How to get a mortgage
We’ve already covered the factors that affect your mortgage, and what documents you will need in order to get a home-loan. Let’s now cover how to obtain a loan.
Calculate Your Buying Power
As a general rule, you should not spend more than 28 percent of your salary each month on housing. You can then calculate the 28% of household income, and search for houses at prices that will keep your mortgage payment below that figure. You can calculate your purchasing power using a calculator for home affordability.
Get pre-approval for a mortgage
Rate shopping and loan preapprovals are the first steps in the mortgage process. Preapprovals are conditional offers that estimate how much you may be able to borrow from a lender. When looking to obtain a loan, you should consider the following types of mortgages.
- Conventional mortgages — A conventional loan is a non-government-backed loan that’s geared toward borrowers with minimum credit scores of 620. Higher credit scores will increase your chances of qualifying for lower interest rates. If you’re covered by private mortgage insurance, lenders may be willing to accept as low as 3% as down payment on a traditional loan.
- Government-backed Mortgages – There are many government-backed loans available, such as VA loans for veterans and active duty servicemen, USDA loans to people living in rural areas, and FHA mortgages that offer low down payment and flexible credit criteria.
- Jumbo Mortgages –Jumbo mortgages are mortgages that are larger than the loan limits of Fannie Mae or Freddie Mac. Jumbo loans are available if you want to buy a bigger house or live in an area with high costs of living.
Step 3: Make offers using your letter of preapproval
With the assistance of an agent, create a list with houses that fit your budget. You can then tour the homes and make offers. Multiple offers on different properties can increase the chances of getting a seller to pay attention.
Step four: Underwrite the loan
You’ll select a loan option (if preapproved, with several options) and the loan will then go to underwriting. Underwriting is when lenders examine your documents carefully to confirm income, assets, and credit. Home inspections and appraisals will be performed to establish the market value of your home during loan processing. A title search is also necessary to ensure the seller’s right to sell and the absence of liens.
Step 6: Get your keys and close your mortgage
The mortgage closing process is completed if everything goes smoothly with the appraisal and home inspection. Closing Disclosures are sent to you at least 3 days prior to your appointment. They include loan details and costs, such as title insurance fees and appraisals.
Budgeting for closing costs is essential. They usually range from 2% to 5 percent of the loan amount. You can sometimes add the closing costs onto your loan to pay off later, or you could ask the seller to help you cover closing costs. You’ll pay the down payment and get your house keys at closing.
What’s next?
Do a financial review to check your credit score and how much money you can put down as a deposit. You can then look into loan requirements, and gather any documents needed for your application. Then you can contact lenders and start comparing rates and options.