Getting a home loan can seem like a daunting task, but with some preparation and knowledge, it is very achievable. Here is a step-by-step guide on everything you need to know to get pre-approved and secure financing for your new home.
Gather Documentation for Your Loan Application
The first step in applying for a mortgage is to gather all of the documentation the lender will need to pre-approve you.
You will need the following financial paperwork:
- W-2s or 1099s from the last 2 years
- Federal tax returns from the last 2 years
- Pay stubs covering the last 30 days
- Bank statements covering the last 2-3 months
- Documentation of any other income like bonuses, commissions, or investments
You will also need identification paperwork like:
- Social Security card
- Driver’s license or other government-issued ID
If you have already started the homebuying process, also gather:
- Realtor and lender contact information
- Purchase and sale agreement
- Earnest money deposit receipt
Having all of these documents ready will speed up the loan application process.
Check and Improve Your Credit Score
Lenders will thoroughly check your credit report and score when reviewing your home loan application.
Get Your Credit Reports
The first step here is to obtain copies of your credit report from all three credit bureaus – Equifax, Experian, and TransUnion.
Review the reports closely and dispute any inaccuracies with the bureaus. This can boost your score.
Review Different Credit Scores
Keep in mind that lenders may use different credit scores than the ones you can access. For example, they often use the FICO® Score. Check your FICO® scores before applying for a mortgage.
Increase Your Score
Some tips for quickly increasing your credit score include:
- Paying down revolving debt on credit cards
- Avoiding large new purchases on credit before applying
- Paying all bills on time
Giving yourself time to strengthen your credit before getting pre-approved can help you get a better mortgage rate.
Determine How Much Home You Can Afford
Preapproval from a lender involves confirming you can afford the loan amount needed for your target home purchase price.
Lenders look closely at your debt-to-income ratio (DTI) to measure your ability to take on mortgage debt.
- Front-end DTI compares your monthly housing payment to gross monthly income. Lenders usually look for front-end DTI below 28%.
- Back-end DTI compares total monthly debt payments including the new mortgage to gross monthly income. Back-end DTI should generally be below 36%.
Keeping these ratios as low as possible will get you the best mortgage rates.
Down Payment Amount
The down payment amount and percentage of the home price also affect mortgage loan approval. Conventional loans often require at least a 20% down payment to avoid extra private mortgage insurance costs.
Consider paying more up front if you can to get better rates. But also make sure to keep emergency savings.
Online Payment Calculators
Use online mortgage and debt payment calculators to estimate monthly costs and see loan amounts and terms you may qualify for based on factors like income, existing debt, down payment savings, and credit score.
Choose the Type of Mortgage
There are a few main options to consider for mortgage loan types:
Conventional loans are the most common type. They are offered by private lenders and not part of government programs.
Conventional loans come with fewer restrictions and can have lower requirements for down payments and credit scores compared to government-backed loans. But they also tend to have higher interest rates.
FHA loans are backed by the Federal Housing Administration and a good option for borrowers with lower credit scores or less savings for a down payment. These loans require as little as 3.5% down. But the trade-off is higher monthly mortgage insurance premiums.
VA loans are guaranteed by the Department of Veterans Affairs and offer great terms like no down payment and no private mortgage insurance requirement to military members, veterans, and their families.
USDA loans help low to moderate income households in rural and suburban areas buy homes with no down payment and flexible credit score requirements.
Compare the pros and cons of different loan products to see which fits your financial situation best.
Get Preapproved for a Mortgage
Once you have all of your financial paperwork in order, you can start working with lenders to get preapproved for a home loan. Here are some tips for the preapproval process:
Compare Multiple Lenders
Shop around with several lenders including banks, credit unions, and online lenders. Comparing mortgage rates and fees will help you find the most competitive loan. Get a Loan Estimate from each lender outlining the proposed loan terms.
Lock In Your Rate
If you see a great rate that works for your budget, lock it in. This guarantees you to that interest rate for a certain period while you search for your new home. Make sure to ask how long the lender will lock the rate for you.
Review the Preapproval Letter
The preapproval letter states how much home you can afford to borrow based on your financials. But it should not be treated as a guarantee you will get the final mortgage – the lender will still need to verify employment and run a full credit check later.
Lean on Your Real Estate Agent
Provide your preapproval letter to your real estate agent so they can show you homes in your price range that you are likely to get financing for. A preapproval sets you up as a serious buyer.
Compare Mortgage Rate Offers
Once you have an accepted purchase offer on a specific home, you can move forward and finalize the mortgage rate and loan terms.
See Updated Rate Quotes
Reach back out to all lenders with updated rate quotes now that you have a property and a completed loan application. Rates and terms can change frequently.
Factor In Fees
Look beyond just the interest rate – compare origination fees, discount points, and other closing costs quoted on the Loan Estimates. Opting for a slightly higher rate in exchange for lower fees can sometimes save money overall.
Consider Locking the Rate
You can lock in your rate once you are under contract before closing to avoid any increases. Ask lenders how long they will lock the rate and what the extension policy is if closing gets delayed.
Negotiate for the Best Deal
With all quotes in hand, negotiate with the lenders to see if they can beat the competing offers. Sharing the Loan Estimates may help you get lenders to lower rates or fees.
Select the full loan offer with the best combination of competitive rate along with reasonable fees and closing costs.
Final Steps to Closing on Your Home Loan
You are almost ready to close and get the keys to your new home! Follow these final steps:
Fulfill Any Remaining Requirements
Provide any other paperwork your lender requests, such as proof of homeowners insurance or a final inspection report on the property.
Review Closing Disclosure
Scrutinize the final Closing Disclosure form detailing all closing costs to ensure there are no surprises. Report any discrepancies to your loan officer.
Complete the Final Walkthrough
Do a final walkthrough of the home 24-48 hours before closing to check for damages and required repairs or fixes.
Sign Documents and Pay Closing Costs
At closing, review and sign your mountains of paperwork! Bring a cashier’s check for closing costs and down payment due at closing.
Get the Keys!
Once signed, you’ll get the keys to your new home! Remember to change locks and update your home insurance and utilities.
And that’s it – follow these steps and you’ll be prepared to take on the home loan process. Please let me know if you have any other questions about getting pre-approved, choosing the best mortgage loan, or closing on your new home!
Frequently Asked Questions About Getting a Home Loan
How long does it take to get a home loan?
The typical home loan process takes 30-45 days from completed application to closing. But allow 2-4 weeks upfront for gathering documents and getting pre-approved before making an offer. Having all paperwork ready and responding quickly to lender requests can help speed up closing.
What credit score is needed for a home loan?
Most conventional home loans require a minimum credit score of 620, but you will get better terms and rates with a score of 720+ for conventional mortgages or 640+ for FHA. Scores under 580 will be tough to get approved.
How much do you have to put down on a home loan?
A 20% down payment is ideal to avoid paying private mortgage insurance with a conventional loan. But many programs require less:
- FHA loans need just 3.5% down
- VA loans require 0% down
- USDA loans require 0% down
Can I get preapproved online for a home loan?
Yes, many lenders now offer online preapprovals where you can submit your documentation electronically. This can be quicker than applying in person. Make sure to compare multiple lenders.
Should I use a mortgage broker or go directly to a lender?
Brokers have access to multiple lenders and programs, making them able to shop for the best rates for you. But watch out for high fees. Going directly to a lender can sometimes offer lower rates. Shop around to find the best option.
What debts should I pay off before getting a mortgage?
Lenders will want to see revolving balances like credit cards paid down below 30% of the limit and no late payments. Paying off installment loans and high-interest debts can also help strengthen your application.
Can I lock in a mortgage rate before finding a home?
Most lenders only allow you to lock in an interest rate once you are under contract on a specific property. Otherwise rate locks are limited to shorter terms like 15-60 days.
While mortgages may seem complex, you now have a step-by-step guide to take you through the entire home buying process – from preapproval all the way to closing! Just focus on boosting your credit, saving for a down payment and closing costs, putting together all needed paperwork, and comparing multiple lender offers. Follow these tips and you’ll be ready to secure competitive financing on your new dream home.