Getting a loan for your first home can be difficult when you’re not sure where to look for financing. Since market prices are always rising, you might be wondering where to get a home loan as fast as possible.
Working with a lender is the best way to get a loan as fast as possible. To begin working with a lender, you need to know what lenders are looking for and be ready to go mortgage shopping.
Learning how to get a mortgage and applying for one can be nerve-wracking, but this guide will make the entire process much simpler.
Before You Get A Mortgage
Before getting a loan for something as big as a home, you want to make sure your credit score is the highest it can be. A high credit score shows lenders that you are responsible and a low-risk borrower. People with high credit scores are more likely to be able to pay their monthly payments.
Just because your credit score is low doesn’t mean you can’t get a loan. It just means your interest rate will be higher. Luckily, there are many ways you can build your credit score quickly.
You also need to know what you can afford. Monthly payments will depend on the current market, as interest rates might rise as the market values rise.
You should also build your savings. You need a savings account to put a down payment on the house. Almost all lenders require you to put a down payment on the home before you can receive funding.
The higher the down payment you can put down, the lower your repayment term and interest will be.
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Strengthen Your Credit
A strong credit score shows lenders that you can manage your debt, add a mortgage to your debt, and make monthly payments. If you have a good credit score, you will be able to get more favorable terms, including a low-interest rate.
If your credit score is on the lower side, there are several things you can do to increase it:
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Make all payments on time and make sure you’re reducing your credit card balance every month.
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Bring past due accounts into current status if you can.
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Review your credit reports regularly to ensure there are no mistakes.
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Check your credit score in the few months leading up to your wanting to apply for a mortgage.
Following these steps can help you to know where you stand when it comes to credit scores. It will help you determine if you can get a mortgage or not. If you see that your credit score is on the lower side, you can follow the above steps to help you raise it in just a few months.
Determine What You Can Afford
Although you might have a dream home in mind, you might not be able to afford your dream home as your first home. You need to be realistic about what you can afford and make sure not to go over your budget.
Since monthly payments tend to be rising, you might need to lower your budget a bit so that you can find a home you can afford.
Many financial advisors will tell you that a mortgage should not be more than 30 percent of your monthly income, and you should count utilities and maintenance into this figure.
You should also determine your debt-to-income ratio. Most loans will only increase debt to income ratio by 45 percent or less. Ideally, the ratio needs to be closer to 36 percent, though.
You also need to make a budget and determine your monthly expenses. This includes all monthly payments you have, including your down payment, your mortgage, food, healthcare, medical costs, childcare, and entertainment expenses. You should also make it a goal to save something every month.
Build Your Savings
The first thing you need to save for is your down payment. When you want to buy a home, the most important savings goal is the down payment. Most lenders will not want to work with you without a down payment of any kind.
When it comes to savings goals in general, you will need to put about six months’ worth of mortgage payments into a savings account. This will help you if you lose your job and don’t have an income for several months.
Also, make sure to include closing costs in your savings so that you have everything you need to start the mortgage-buying process. You need to aim to save as much as possible so that you continue to stay financially stable even when unforeseen circumstances come up.
Choose The Right Mortgage For You
Once you know you have the savings you need, and your credit score is where it needs to be, you can start looking at loan options. Here are the main mortgages to look at and the most common ones that people get:
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Jumbo loans: These loans are for very expensive properties. They are usually if you need to refinance more than $647,200 in most parts of the country, although it can be $970,800 in certain places.
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Conventional loans: These are the best types of loans if you have a good credit score and a decent down payment. You can get them through most banks and online lenders.
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Government-issued loans: FHA, VA, and USDA loans are all government-issued loans and are good choices for those who do not meet the conventional loan requirements. You need to meet other criteria, though, such as being a member of the military or VA.
First-time home buyers can also benefit from the FHA loan since you only need a minimum credit score of 500 with a 10 percent down payment. Some FHA loans only require you to put in a 3.5 percent down payment.
You also need to consider whether you want a fixed or adjustable rate. Fixed rates mean the interest will stay the same over time, but an adjustable rate means that the loan’s interest rates will change over time. Adjustable rates might have lower monthly payments that can become lower or rise over time, depending on the market conditions.
What Documents Do You Need To Get A Mortgage?
Before applying for a mortgage, you must ensure you have the right documents in order. Here are some of the things you need to make sure you have to show to a lender.
Proof Of Income
Your lender will ask you for many things, including these pieces of paperwork:
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After two years of federal tax returns, some lenders will ask for more
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Your two most recent W-2s and pay stubs
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1099 forms, you can show the profit and loss statements if you are self-employed
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Divorce decrees, child support decisions, and other legal documentation that shows you receive payments for at least three years or more
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Legal documentation showing you receive alimony, child support, or other types of income for at least six months or more
Credit Report
Before being able to look at your credit report, a lender will have to ask for written permission. Once they gain permission, they will look at your credit history and make sure there are no negative factors on the report, like bankruptcy or foreclosure.
If you had an extenuating circumstance that gave you poor credit, you need to explain this to the lender and provide them with some documentation to show why you had these circumstances. Sometimes, lenders will be willing to work with you if you can show them proof.
For example, you can show that you had a medical emergency that caused you to miss several credit card payments.
Proof Of Assets & Liabilities
Your lender will need to ask you a few things so they can verify assets:
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Up to 60 days’ worth of account statements that show your assets that are in your checking and savings accounts
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The most recent statement from your retirement or investment accounts
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Documents that show the sale of assets that you sold before you are applying for the mortgage
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Proof and verification of gift funds that have been put into your account within the last two months
A lender might also ask for information about the debts you owe, such as auto loans and student loans.
What Do Mortgage Lenders Look For?
It’s no secret that lenders are looking for certain things when they’re considering a loan. But what exactly are they looking for? Here are some of the most important factors that mortgage lenders take into account:
1. Your Credit Score
This is perhaps the single most important factor lenders look at. They want to see how you’ve managed your credit in the past, and a high score shows that you’re a responsible borrower. If you have a low score, it could mean that you are a higher risk and may be more likely to default on your loan.
2. Your Income
Lenders want to see proof of your income so they can determine how much you can afford to borrow. They’ll look at your pay stubs, tax returns, and other financial documents to get a clear picture of your financial standing.
3. Your Employment History
Lenders want to see that you have a stable job history and income. They’ll often look at your employment history for the past few years. Your employment history often serves as a good indicator of your future ability to repay the loan.
4. Your Debt-to-Income Ratio
This is a key factor that lenders look at when considering a loan. Your debt-to-income ratio is a measure of how much income you spend to pay off debts. A high debt-to-income ratio means that you may have a harder time making your loan payments.
5. Your Assets
Your assets are equally important to lenders as your income. They’ll want to see proof of your assets, such as bank statements and investment accounts. Your assets show the lender that you have the financial resources to repay the loan.
6. Your Down Payment
The size of your down payment is another important factor that lenders consider. A larger down payment shows that you’re more invested in the property and less likely to default on the loan.
7. Your Property’s Value
The value of the property you’re buying is also important to lenders. They’ll want to make sure that the property is worth at least as much as the loan amount. The value of the property will be determined by an appraisal.
How To Get A Mortgage In 5 Steps
If you have all your documents ready, you will need to begin looking for lenders and searching for the perfect loan. Here are the steps you can take to make the process smooth and easy.
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Apply For Mortgage Preapproval
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Obtain An Approval Letter
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Make An Offer On A Property
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Verify Your Information
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Attend A Closing Meeting
1. Apply For Mortgage Preapproval
You will need to start with a pre-approval process because it gives you an idea of how much a lender is willing to give you. Lenders will take a look at your assets, income, and credit. They will also determine your interest rate.
Getting preapproved for a loan and knowing the amount you can take will help you narrow down your search for a loan and make you more appealing to real estate agents you might want to look for.
2. Obtain An Approval Letter
Once you have applied for a mortgage and submitted all the proper paperwork, you can see if you are approved online. The company or bank will send you a pre-approval letter, and then you can take it when you have begun house hunting that shows you have funding available to you.
This allows sellers and real estate agents you have access to the money they need for you to be able to make an offer on the home. It also makes them more comfortable being able to sell to you knowing that you can already obtain the money.
3. Make An Offer On A Property
Once you start going around and looking at properties, you need to be able to make an offer. Make sure the property has all the amenities and features you want. Keep in mind that a house in your price range might not have everything you want, but it should at least have most of the things you need to live comfortably.
Once you have a home that fits your budget and your needs, you can make an offer. The real estate agent will help you do this. If the real estate agent accepts your offer, you can move into the next steps in the process.
4. Verify Your Information
Next, all your information will need to be verified. An underwriter will need to take a close look at all your assets and finances to ensure they are in order and that all the information you submitted was real.
They will also ask you for copies of all the paperwork you submitted. The lender will also verify the property details, including the home’s titles and other inspections that are required by your state.
You will need to review the closing disclosure once it has been sent to you. It should have everything on it you need to know, including loan information, your monthly payment, your interest rate, your closing costs, and your down payment.
Your closing disclosure is similar to your loan estimate. If it’s not, for whatever reason, you need to reevaluate it. You should have been given a loan estimate from the lender within about 3 days after you applied for the loan.
5. Attend A Closing Meeting
Once you have been approved for the mortgage, you will need just complete the closing procedure. The closing process is a little different depending on which state you live in. They will need to verify that the house belongs to the seller, and they will need to transfer the title.
You also need to make sure you are aware of closing costs which include:
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Credit check fee
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Appraisal fee
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Origination and underwriting fee
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Prepaids
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Title insurance and the service fees that come with it
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Recording fees
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Attorney fees
Before you finish the process, you will need to sign a ton of paperwork. Make sure you read it all and review it very carefully so there are no surprises later.
Summary
If you’re ready to be a homeowner but aren’t sure how to get a mortgage, there are some simple steps you can take. Learning how to get a mortgage may seem intimidating, but it is really quite simple. Just make sure your credit score is high and that you can get pre-approved for mortgages. This will allow sellers and real estate agents more likely to work with you.
Once you have your pre-approval for a mortgage, you can begin looking at homes and making offers. An agent will then walk you through the verification and closing procedures.
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