Purchasing a home is an exciting milestone in life but also requires careful planning and preparation. Getting pre-approved for a home loan early in the homebuying process can make things much smoother when it comes time to finalize loan details and close on your new home. So what exactly do you need to qualify for and obtain a home loan? Let’s break it down step-by-step.
Documentation Needed
When applying for a home loan, you’ll need to gather some key documents to provide to potential lenders:
Proof of Income
Lenders will want to see proof that you have steady income to make your mortgage payments. This usually includes:
- Pay stubs for the last 30 days
- W-2 and tax returns for the last 2 years
- Proof of any additional income like bonuses, commissions, or rental income
Proof of Assets
You’ll also need to show you have enough assets for a down payment and closing costs, such as:
- Bank statements for checking, savings, retirement, and investment accounts
- Documentation on any large deposits or transfers
- Records of any gifts, grants, or loans used for down payment
Credit History
Your credit report and score will be evaluated, so be prepared to provide:
- Authorization for lenders to check your credit
- Explanations for any issues or red flags on your credit report
Down payment Funds
One key requirement for a home loan is having sufficient funds for a down payment, usually 10-20% of the purchase price. Start saving early so you have this money ready when you want to buy.
Down payment vs. Closing Costs
The down payment goes towards the home purchase price at closing. Closing costs cover loan fees, appraisals, etc. You’ll need both.
Down payment Sources
Down payment funds can come from:
- Your savings
- Gift from family
- Your retirement account
- Down payment assistance programs
Mortgage Pre-Approval
Getting pre-approved for a mortgage early in the homebuying process is highly recommended. This shows sellers you’re serious and gives you a price range.
Why Get Pre-Approved?
Pre-approval provides a few key advantages:
- Shows sellers you’re a serious buyer
- Gives you a price range for budgeting
- Locks in an interest rate for a period
- Speeds up final loan approval later
Pre-Approval Application
To apply for pre-approval, you’ll complete an application with information on:
- Income, employment, and assets
- Monthly debts and expenses
- Credit history and score
- Property desired and down payment available
Lenders will review and issue a pre-approval letter if you qualify.
Pick the Right Home Loan
With so many loan types available, it’s essential to pick the right one for your needs and financial situation.
Loan Types
Common home loan options include:
- Conventional loans from banks
- FHA loans with low down payments
- VA loans for veterans
- USDA loans for rural buyers
- Jumbo loans for pricier homes
- ARM loans with interest rate adjustments
Factors To Consider
Some key factors when selecting a loan:
- Down payment amount you have available
- Interest rates and loan fees
- Term length (15-30 years)
- Your plans to live in the home long-term
A loan officer can help you compare options.
Interest Rates and Credit Score
While you don’t need perfect credit to qualify for a home loan, your credit score and history will impact the interest rate offered.
Credit Score Range
Most lenders require a minimum credit score between 620-640 for conventional loans or 500-580 for FHA loans. The higher your score, the better the rate.
Checking Your Credit
You can obtain free credit reports from AnnualCreditReport.com and check scores through sites like Credit Karma. Be sure to review reports for errors.
When To Check Credit
Check your credit at least 6 months before applying for a mortgage, so you have time to improve it if needed. Lenders will check again right before closing.
Mortgage Insurance
If your down payment is less than 20%, you’ll likely need mortgage insurance, adding to your monthly costs.
What It Covers
Mortgage insurance protects the lender if you default. It’s required for conforming loans with less than 20% down.
Types of Mortgage Insurance
Common options include:
- PMI – Private mortgage insurance
- FHA MIP – Mortgage insurance premiums on FHA loans
- USDA Guarantee Fee – On USDA rural housing loans
Removing Mortgage Insurance
You can typically request to cancel PMI once you reach 20% equity by appraisal or paying down the loan balance.
Homeowner’s Insurance
Lenders will require you to have homeowner’s insurance in place before closing. Shop around for the best rates.
Why It’s Required
Homeowner’s insurance protects your property and assets. It pays for damages from events like fires, storms, theft, and more.
Coverage to Include
Be sure your policy includes:
- Dwelling coverage for the home’s structure
- Personal property coverage for possessions
- Liability coverage for injuries on property
- Flood insurance if needed
When to Obtain It
Secure homeowner’s insurance 30-45 days before your closing date to allow time for inspection and documentation.
Closing Costs
In addition to the down payment, closing costs are due at closing. Expect 2-5% of the total loan amount.
Typical Fees
Closing costs include:
- Origination charges
- Appraisal fee
- Credit report fee
- Title services
- Taxes and insurance escrows
- Legal fees
Getting an Estimate
Your lender will provide a Loan Estimate outlining estimated closing fees within 3 days of applying. This helps you budget.
Prepaying and Wrapping Costs
You can pay some closing fees in advance or roll them into the total loan amount. Discuss options with your lender and real estate agent.
The Home Loan Process Timeline
It’s helpful to understand the basic timeline and order of events in obtaining a home loan:
- Pre-approval – Get pre-approved to determine budget and financing options.
- Shopping – With financing pre-approval, start seriously looking for your new home.
- Under contract – Make an offer and enter under contract when it’s accepted.
- Loan application – Apply for your final loan with updated financial details.
- Home appraisal – The lender will send out an appraiser to evaluate the property.
- Loan approval – Your loan is approved once all conditions are cleared.
- Closing – Legal documents are signed and the home is yours!
Final Tips
Here are a few final tips as you embark on the homebuying journey:
- Check your credit report and score early – this gives time to improve them if needed.
- Get pre-approved so you know your price range and can make competitive offers.
- Read loan disclosures carefully to understand your loan terms, costs, and lender requirements.
- Be upfront about all your debts, income sources, and assets – don’t risk loan denial.
- Ask your lender and real estate agent lots of questions throughout the process until you fully understand each step.
Frequently Asked Questions
How large should my down payment be?
Lenders typically want to see at least 10-20% down, though some special loans allow less. A larger down payment results in lower monthly payments and interest rates.
Does my employment history matter?
Lenders want to see stable income history through your job or business, usually requiring at least 2 years of steady employment in the same field.
Do lenders check for debt-to-income ratio?
Yes, lenders look at your total monthly debts divided by gross monthly income. 43% or lower is ideal, but some lenders allow higher.
What credit score is needed?
Most lenders want scores of at least 620-640 for conventional loans or 500-580 for FHA loans. The higher the better for your interest rate.
How do I determine my home budget?
Factor in your down payment, closing costs, monthly mortgage payments, property taxes, insurance, HOA fees, maintenance costs, and some financial cushion.
What are the steps in the home loan process?
Typical steps are: pre-approval, shopping for a home, making an offer, completing loan application and paperwork, appraisal, loan approval, and closing.
Conclusion
The home loan process involves gathering documents, saving for a down payment, improving your credit, obtaining pre-approval, selecting the right loan program, and completing the application steps. While it can seem daunting, being organized and asking your lender and real estate agent questions will ensure you get the best mortgage to make your homeownership dream come true. The upfront effort is well worth it for years of enjoyment in your new home.
