You’re itching to buy a house. You have the perfect location picked out, and you’ve even started saving for a down payment. The only thing left to do is get a mortgage loan, right? Not so fast.
Before looking around for the best mortgage rate, you need to understand how the process works. This includes knowing which loans are available, what you need to qualify for a loan, and what the application process is like.
This might seem like a lot of information, but don’t worry. We’ve got you covered with this complete guide to getting a mortgage loan.
How Much Your Down Payment Should Be
Before we get into the application process, mortgage types, and closing disclosure, we want to start at the basics. So, let us explain all things down payment.
The down payment is the money you’ll put toward purchasing your home. It’s important to have a healthy down payment because it will affect both your monthly mortgage payments and the total interest you’ll pay over the life of your loan.
Ideally, you should aim for a down payment of 20% of the purchase price of your home. This will help you avoid paying private mortgage insurance (PMI), giving you the best chance of getting a low-interest rate on your loan.
If you can’t afford a 20% down payment, don’t worry. Some loan programs allow for smaller down payments, such as the FHA loan program. Just be aware that you’ll likely have to pay PMI if you put down less than 20%.
Your Credit Score Matters
Your credit score is one of the most crucial factors in getting approved for a mortgage loan. Lenders use your credit score to determine your risk level; the higher your score, the lower your interest rate will be.
Even if you have a low credit score, no need to despair. There are still multiple loan programs available to you. You may just have to pay a higher interest rate.
Employment History Is Crucial
Lenders will also want to see a strong employment history. This is because your employment status is one of the biggest factors in determining whether or not you’ll be able to make your monthly mortgage payments.
If you’ve been employed at the same job for several years, that’s great. If you’re self-employed or have had multiple jobs in recent years, that’s not necessarily a deal-breaker. But you may have to provide additional documentation to prove your income.
Your Budget Is an Important Factor
The last thing you want is to get approved for a loan that’s more than you can comfortably afford, right? So, sit down and create a budget. Include all of your monthly expenses, such as your car payment, credit card payments, student loan payments, and other debts. Then, factor in your down payment, monthly mortgage, property taxes, and homeowners insurance.
Once you know what you can afford, you can start applying for loans. Remember that your budget may change as you go through the mortgage process. For example, you may be required to get homeowners insurance, which can add to your monthly expenses.
Don’t Forget about Mortgage Fees
When budgeting for your mortgage, don’t forget to factor in fees. Mortgage fees can add up, and they’re often ignored by first-time homebuyers.
You’ll have to pay a loan origination fee, a home appraisal, and a home inspection. You may also have to pay for title insurance and other closing costs. Be sure to ask your lender about the fees you’ll be responsible for.
Available Mortgage Options
Now that you know the basics of getting a mortgage loan, it’s time to start searching for the best deal. Here’s a look at some of the most popular types of mortgage loans:
- Conventional Loans: Conventional loans are available through banks, credit unions, and online lenders. Conventional loans typically have fixed interest rates and terms of 15, 20, or 30 years.
- Jumbo Loans: Jumbo loans are larger than conventional ones and available through some lenders. Jumbo loans normally have higher interest rates than conventional loans.
- FHA Loans: FHA loans are available through the Federal Housing Administration. They’re designed for first-time homebuyers and have more flexible guidelines than other loan types.
- Fixed-Rate Loans: Fixed-rate loans have an interest rate that stays the same for the life of the loan. The most common type of fixed-rate loan is the 30-year fixed-rate loan.
- Adjustable-Rate Loans: Adjustable-rate loans have an interest rate that can change over time.
- VA Loans: VA loans are available to veterans and active-duty military members. VA loans have more flexible guidelines than other loan types.
The Application Process
Now that you know the basics of getting a mortgage loan, it’s time to start the application process.
- The first step is to find a lender. You can search for the best deal on interest rates and fees. Once you’ve found a lender, you’ll need to fill out an application.
- You’ll need to provide information about your employment, income, debts, and assets. You also need to consent to a credit check.
- Once your application is approved, the lender will order a home appraisal. This is to ensure the home is worth the amount you’re borrowing.
- Next, you need to sign the loan documents. This is a legally binding agreement, so make sure you understand everything before you sign.
- Once you’ve signed the loan documents, the lender will send the money to your closing agent. The closing agent will then pay off your existing debts and transfer the ownership of the property to you.
Mortgage Preapproval vs. Mortgage Prequalification
When to put in an offer on the house, you may want to get preapproved or prequalified. These are two different things.
Mortgage preapproval means that a lender has reviewed your financial information and decided how much money they’re willing to lend you. This is based on factors such as your credit score, employment history, and income.
Getting pre-approved for a mortgage loan is the best way to know how much money you can borrow. It’s a good idea to get preapproved before you start looking for a home. That way, you’ll know your budget, and you won’t waste time looking at homes that are out of your price range.
Mortgage prequalification is a less formal process. It’s a basic overview of your finances. The lender will look at factors like your credit score and debt-to-income ratio. But they won’t verify your information.
Keep in mind that preapproval is not the same as final approval. Your mortgage loan still needs to be approved by underwriters before you can close on the loan.
The final piece of paperwork you’ll need to sign when you close on your mortgage loan is the closing disclosure. This document outlines your loan’s final terms and costs, and it’s important to review it carefully before you sign.
The closing disclosure will include the following:
- The loan amount
- The interest rate
- The monthly principal and interest payment (P&I)
- The loan term
- The total closing costs
- The escrow account information, if applicable
Once you’ve reviewed and signed the closing disclosure, you’re ready to close on your loan and move into your new home!
The Bottom Line
A mortgage loan can help you finance the purchase of a home. But there’s a lot to consider before you apply for a loan. Make sure you understand the different types of loans, the application process, and the terms of your loan. That way, you’ll be prepared when it’s time to close on your new home.