Homebuyers' Walkthrough: Obtaining a Mortgage
A mortgage is a pledge of real property as security for the payment of money, and today's homebuyers have a variety of options in terms of lenders and loan types. Getting a mortgage can be a daunting task, but understanding the options and process can help you find the best mortgage for your unique situation.
Get Finances in Order
The Great Recession of the late 2000s stressed the importance of being realistic when determining how much money you can reasonably afford each month for mortgage payments. It’s a good idea to take a close look at your expenses and current and projected income when deciding how much house you can afford – even if that’s less than the bank tells you.
It’s important to remember that additional expenses beyond the mortgage will be added. Insurance, property taxes, homeowners’ association dues (if any) and maintenance costs must also be considered.
Scrutinize Your Credit Score
A credit score is a numeric expression that helps lenders evaluate your credit report and estimate the risk of extending credit or loaning money to you. Your credit score is provided to lenders by the three major credit reporting agencies: Equifax, Experian and TransUnion.
Since your credit score affects your ability to qualify for different loans and varying interest rates, it’s in your best interest to achieve the highest credit score possible. Check your credit score well in advance of applying for a mortgage so you can take steps to improve your score, if necessary. (See: Credit Repair: How to Improve Your Credit Score.)
Here are a few tips for improving your credit score:
- Check your credit report to identify problem areas.
- Set up payment reminders to pay bills on time.
- Reduce debt (and stop buying stuff you don’t need).
- Pay off debt rather than move it around.
- Keep credit card and revolving credit balances low.
- Apply for and open new credit accounts only if necessary.
Choose a Lender
A variety of banks, mortgage brokers and online vendors provide mortgages to homebuyers. Banks are the traditional source of mortgage funding, offering in-person meetings, recognized name-brands and competitive fees. Banks, however, may not have a broad variety of loan programs and, as a result, may not offer the lowest interest rates or lowest fees.
Mortgage brokers act as the middle-person between lenders and borrowers, and typically offer a variety of loans – including loans for people with bad credit. Brokers may offer in-person service and be able to provide loans with lower interest rates; however, the fees may be more expensive than from other funding sources.
Online mortgage providers offer a large variety of loan types, convenient 24-hour shopping and instant comparison among multiple loans. In-person services are not available, however, which can leave you with unanswered questions.
Personal and financial factors may affect your decision to go with a bank, mortgage broker or online mortgage provider. If you want to discuss the mortgage face-to-face with a lender, for example, a bank or mortgage broker might be the best option. Conversely, if you’re web-savvy and don't mind a do-it-yourself approach to home financing, you may benefit from using an online mortgage provider. Often, the financial factors, including the loan size and type, interest rates and fees, are enough to choose one type of lender over another. (For more, see Which Online Mortgage Lender is the Best?)
Go for Pre-Qualification and Pre-Approval
A lender can help determine the amount of money you can borrow through a process called pre-qualification. Typically, you meet with a lender and provide information regarding your assets, liabilities and income. The lender then provides an estimate of the size of the potential loan – but it doesn’t formally agree to approve the mortgage at this point. Pre-qualification is intended to help you determine an ideal price range when shopping for a home.
Borrowers need to apply for the mortgage by completing the necessary paperwork. After a lender verifies all the financial information you provide (checking credit scores, verifying employment information, calculating debt-to-income ratio and the like), they can pre-approve you for a certain amount. This confirms your eligibility to qualify for a mortgage, strengthening your position when you find the perfect home and submit an offer. (For related reading, see Understanding Pre-Qualification vs. Pre-Approval and Mortgage Pre-Approval: Understanding the Process.)
Complete the Mortgage Application
Once you make an offer and the seller accepts it, the parties will determine a closing date. Certain lenders allow borrowers to "lock in" an interest rate at this point, though this typically involves paying a fee. You must complete the mortgage application process with the lender and work out the details of the loan. At the closing table, the final paperwork for the transaction will be completed. (See more: 13 Steps to Closing a Real Estate Deal.)
Find the Down Payment
Depending on the type of property and mortgage, your down payment will range from about 3.5% to 20% or more. Lenders may require up to a 50% down payment, for example, on certain condominiums that are not on the FHA-approved condominium list. (For more, see The FHA’s Minimum Property Standards.)
If you’re considering buying a home, you’ll need to save for a down payment and be willing (and in a financial position) to use the money. In addition, down payments of less than 20% may trigger a requirement that you buy private mortgage insurance, which will add to your costs (see Private Mortgage Insurance: Avoid It for These 6 Reasons).Homebuyers' Walkthrough: Buying a First Home