How to Get a Mortgage
Researching for a mortgage and then actually getting one can be a daunting task for someone who has never done it before. There are various documents involved and you have to work with multiple people to successfully land a mortgage for your home purchase. The key to getting a mortgage lies in knowing the process well and following certain guidelines. Take some time to understand the home buying process, read the information below, and you will be well prepared to start talking to financial institutions about a mortgage.
- Get your credit report
The first thing you can do when preparing for a mortgage is get your credit report. Federal law allows you to ask for a free copy once a year from the three biggest credit bureaus in the country. These bureaus are Experian, TransUnion, and Equifax. Once you get your copy of the credit report, read it and go through every single detail. If there is any error, then flag it and speak to the credit bureau. Make sure your credit reports are true and accurate. Almost every mortgage lender will use one of these credit reports to evaluate your file.
- Pay-off existing debts
In order to boost your credit score and potential mortgage amount, it will massively help if you can pay-off any existing loans that you have. Any small loans and credit card debt eat into your monthly cash flow as you will have to service those debts with your income. If those smaller debts are paid off, that frees up cash flow for servicing a long-term mortgage. Your credit score will also improve if you pay-off such debts.
- Pre-approval of mortgage
The next step after checking your credit report and clearing up small debts it to seek a mortgage pre-approval. Pre-approval is the first step in securing a mortgage. It involves basic paperwork and preliminary verification. The lender or financial institution that you approach for a mortgage will check your personal financial information, your credit quality and certain employment details. Once this process is complete, the lender will provide you with a specific amount that they can lend you along with an interest rate. Even though the process for a mortgage pre-approval might seem a bit involved, it has its benefits. Buyers often expect a seller to have a mortgage pre-approval, as that would indicate to them that you are a serious buyer who has the financial means to close the deal. Sometimes, buyers will not entertain someone who does not have a pre-approval or a pre-qualification.That brings us to something known as a mortgage pre-qualification. It must be pointed out that a mortgage pre-qualification is not the same thing as a mortgage pre-approval. Pre-qualification is a quick and easy way to get an idea about your financial profile and the amount of loan that a lender can offer you based on that profile. The pre-qualification process is a lot simpler and shorter than the pre-approval process. In the case of pre-qualification, the lender or financial institution will use basic personal information provided by you to come up with a mortgage amount that they can safely and conservatively lend you. Along with a mortgage amount, the lender you may also include certain preliminary terms and conditions.
Understand the features of mortgages
While you work towards getting a mortgage pre-approval, you must also choose what kind of mortgage you are comfortable borrowing. There are different types of mortgages like conventional loans and federal housing administration loans. If your credit score is not great, you could benefit from an FHA loan, as conventional institutions like banks and credit unions may not offer you a loan or do so at a very high interest rate. Next, there are different types of interest rate structures in mortgages. Some lenders may offer you a fixed interest rate while others may offer a variable interest rate option that is tied to the federal repo rates. You must also understand the term of your loan. Mortgages may have 10, 20, or 30-year terms. Depending on your financial situation and planning, you will have to select the appropriate option. Then, there are certain closing costs associated with purchasing a house. Every lender will have a different policy on these costs. Compare these costs and fees for every lender you meet. Lastly and most importantly, you will have to closely examine the interest rate and monthly payment that the lender is offering you. You want to make sure that you select an option which you can handle comfortably in terms of monthly payment.
- House hunting
Once you have a pre-approval in your hand, you may begin to search for suitable properties. You can start making house visits and meet brokers. You will know what your budget is based on the pre-approved amount and hence, it will help you narrow down the choice of homes that you can research and explore.
- Select the best lender
While you may have already received your mortgage pre-approval or pre-qualification from a particular lender, it is not necessary to stick to the same lender. If you find another lender’s offer more favorable or if you build a better rapport with a new lender, then you may change lenders while you are finalizing your house selection. You would want to speak to at least 3 to 4 different institutions about a mortgage. You may ask family and friends for recommendations and referrals for good mortgage lenders. You can even search for mortgage lenders online. Sometimes, your real estate agent or broker may recommend institutions that you can look into. Whatever you do, make sure you have a few different options that you can evaluate. Do not end the process with the very first lender that you meet. Compare and contrast because you will be working with that lender for the next few decades. That is a long time in anyone’s life, and the relationship-factor becomes very important.
- Submit your documents
Once you finalized the lender and have a good idea on the house which you will select, you can get the mortgage process rolling by gathering certain documents and then submitting them to the lender. This process takes some time, so it is a good idea to get started on this process as soon as you finalize your house selection. You may have already submitted some of these documents to a lender for pre-approval. If you are going to the same lender, then the documentation may be shorter, but if you are going to a new lender, then the list of documents to be submitted could be longer. Normally, you have to submit pay stubs for the past few weeks/months, your tax W-2 forms, tax returns from the past 2-3 years, bank statements, details of any other sources of income, details of outstanding loans, and some personal information (id, social security, etc.). If you own a business or are self-employed, then be prepared to provide information about the business and the financials as well.
- Underwriting of the loan
Once all the initial processing is over, you will go through the underwriting process. In this process, the lender will get your selected home appraised and verify if the market value of the home matches the loan amount that you are being offered. The lender will also check your risk profile, your ability to service the mortgage, and financial feasibility of the mortgage. Hence, do not change jobs or take on additional debt (even credit card debt is not good) during this time. Basically, do not take any major action which significantly changes your financial creditworthiness. It would be a good idea to start making detailed home inspections and look for defects. Get repair estimates for those defects if the house you want to purchase is an older property.
- Post mortgage approval actions
Once your mortgage is finalized and approved, decide if you want to pay the full upfront fee (discount points) or pay a lower fee. The catch is that if you pay a lower fee, your interest rate will rise. If you pay a higher fee, you can get your interest rate lowered. This call depends on your liquidity and how much upfront fee you can afford to pay at the time of closure.
Next step is to get a couple of insurance policies. The first policy is the homeowner’s policy. Lenders tend to make this a compulsory requirement. Try to buy this policy yourself, If the lender offers you a policy, it may be more expensive than you finding one independently. Second policy to buy is the title insurance. This protects you and the lender against any faults in the title of the property.
Next, do a final walk-through of the property. If there has been any agreement regarding repairs between you and the seller of the home, make sure the repairs have been carried out. Finally, get the final closing costs from the lender. This is normally given three days before the closing date. Also, get a cashier’s check from the lender for any final closing costs, if at all it is needed.
Some final words
If during the final stages, you feel that you want to change your mind and not go through with the transaction, it may be possible to back out. You may lose your deposit or earnest money, but it is better not to proceed if you have doubts. You must be absolutely sure of the mortgage and the house because you will be committed to both for a good 10, 20, or 30 years.
Dedebt has a dedicated team of experts who can help connect you to reputed mortgage providers throughout the country. Feel free to fill out the form below or give us a call to find out more.