Get Mortgage Loans: A mortgage is likely to be the largest debt you’ll ever take on, so it’s important to choose a suitable lender when applying for one.
There are a number of factors a lender will consider when deciding whether or not to finance your purchase of a home.
Some of those factors involve your assets, income, credit and debt.
While others concern the value and condition of the property you hope to purchase.
You, too, should consider various matters when choosing a lender to work with.
Such as loan fees, commission rates and the way the lender treats you.
Purchasing a home can be a significant undertaking, but with the right preparation.
You can ensure that you won’t regret your decision or your investment.
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What Is a Mortgage?
A mortgage is a loan that the borrower uses to purchase.
Or maintain a home or other form of real estate and agrees to pay back over time.
Typically in a series of regular payments.
The property serves as collateral to secure the loan.
1.Estimate your home-payment capacity.
In order to apply for a mortgage, you should first determine the monthly payment you can afford.
Take an inventory of all your monthly expenses and compare it to your monthly income.
Use these figures to establish a budget that allows room for a monthly mortgage payment.
- Remember to factor in all of the costs of home ownership, including insurance, taxes, and maintenance. You should also consider the cost of any new furnishings you might want for your new home.
- Seeing how much you can afford per month will help determine the price range for your new home.
- You can use a mortgage calculator to determine how much you can pay for a house based on the monthly payment you can afford.
- By determining what your outgoing expenses are, you can begin to establish a working budget.
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2. Calculate your down-payment capability.
The standard down payment required when purchasing a house is 20% of the sale price.
That means you would need to have $60,000 on hand for the down payment on a $300,000 house.
Some banks are willing to work with you on how much you’ll need to put down.
But the closer you get to the 20% mark, the better your chances become of being approved.
- With a conventional mortgage, a down payment of at least 20% of the selling price will allow you to avoid buying private mortgage insurance, also known as lenders mortgage insurance. (This insurance serves only to protect the lender.)
- You can use your savings or investments to cover the down payment, including 401(k)s and IRAs. Alternately, you can sell valuable assets like antiques, jewelry, or extra vehicles to get the money.
- You may also qualify for state programs that can reduce the down payment required, particularly if you are a veteran or qualify for low-income home-buying assistance. Investigate these programs by searching online for homebuyer assistance programs in your area.
- You will also need to set money aside for other expenses such as closing and moving costs. Closing costs are fees associated with finalizing the mortgage. They include the cost of obtaining your credit report, as well as attorney fees, underwriting fees and a recording fee paid to a local government for registering the sale.
- Closing costs are usually between 2% and 5% of the sale price of the house, meaning they could be $6,000 to $15,000 on a $300,000 house.
- Moving costs will vary widely depending on how much and how far you’re moving.
3. Confirm your credit score.
It’s important to be fully aware of your credit score and what elements of it are important to lenders.
There are a number of free ways you can access your credit score.
Or you can choose to pay a credit monitoring service to provide you with a copy.
Most lenders will not approve a mortgage application for someone with a credit score below 580.
- There are a number of websites where you can get a free copy of your credit report.
- Use your credit report to identify negative information that you may need to explain to a lender such as late or missed payments or defaulted loans.
- As you review your credit report, look for items that are not accurate or should not be on your credit report at all. You can contact the credit bureaus to challenge inaccurate information and ultimately have it removed from your credit report.
- Removing inaccurate, negative information will increase your credit score and improve your chances of being approved for a mortgage.
- You can submit a dispute letter that identifies the erroneous information to the credit bureau to have it removed from your credit report.
- If necessary, you can use a number of strategies to repair damaged credit.
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4. Review different programs and requirements for mortgage loans.
Homebuyers typically have a variety of options when it comes to choosing a mortgage loan.
Many borrowers can qualify for a conventional home loan provided by a bank or credit union.
Such a loan is not insured or backed by the government and will require good credit and a 20-percent down payment.
Those borrowers who can’t qualify for a conventional loan do have other options:
- VA loans. These are guaranteed by the Department of Veterans Affairs for veterans and their families. VA loans allow borrowers to finance the full cost of the home, meaning that no down payment is required.
- FHA loans. The Federal Housing Administration offers a similar program. FHA loans are guaranteed by the government and offer down payments as low as 3.5 percent. However, you will need to buy private mortgage insurance (PMI) with this type of loan.
- Another option is to get a mortgage loan through the seller of the property. This strategy, called owner financing, allows you to repay the seller of the home directly. However, not all sellers will be willing to do this.
5. Understand the types of mortgages.
There are a number of different types of mortgages, each with its own options.
The two most common types of mortgages you will hear about are fixed-rate and variable-rate mortgages.
Fixed-rate mortgages are similar to loans you may have taken out in the past for things like a car.
They include a set payment for a fixed amount of time.
Upon the completion of those payments, the home is paid off.
Variable-rate mortgages, on the other hand, typically feature lower initial payments.
Which can be increased after a certain amount of time.
- You may find it easier to qualify for a variable-rate mortgage because of the lower initial monthly cost.
- You should, however, consider the possibility of rising payments during the life of the loan because of that variable interest rate. (The rate could also go down.)
- Fixed-rate mortgages often cost more per month at first but are simpler to understand, and their monthly payments will never change.
- There is one type of loan that combines these two elements. An example is a Treasury ARM (adjustable rate mortgage), which has a fixed rate for a set amount of time, followed by a variable rate that is adjusted each year.
- Mortgage loans will also vary in their terms (lengths). The two most common terms are 15 and 30 years.
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6. Determine home purchase limits.
Various components of your mortgage loan will affect how large a home loan you can afford.
For instance, making a substantial down payment will reduce the amount you finance.
Thus reducing your monthly payment (assuming the same loan conditions otherwise).
You can also reduce your monthly payments by extending your loan term (from 15 to 30 years, for example).
In addition, other costs like homeowner’s insurance and property taxes should be factored in when computing how much you can afford to pay each month.
- Calculate your expected mortgage payments given other purchase information by using an online mortgage payment calculator. These can be found by entering “mortgage payment calculator” into a search engine.
- Alternately, you can calculate a mortgage payment by hand using the strategies described at how to calculate mortgage payments.
6. Confirm your mortgage-loan eligibility.
Check online to see the qualifications required by the specific type of financing you are applying for.
Make sure you qualify by considering your income, credit score, home price, and other factors.
If you are unsure of whether you qualify for a loan.
Contact the lender or sponsoring organization (the FHA or VA).
To speak to a representative, and check your qualifications.
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7. Decide whether to use a mortgage broker.
A mortgage broker serves as a middleman between you and lending institutions.
Mortgage brokers work directly with both you and the lenders.
To help you to qualify for a mortgage loan and to find the right one for you.
A mortgage broker can help make the process of applying for a mortgage easier.
Instead of using a mortgage broker, however, you may want to go directly to a lender to apply for a mortgage.
While avoiding a broker’s fee, this method will require more effort on your part.
It will be up to you to shop for lenders and compare their fees and interest rates.
- A mortgage broker will collect all of the same documents from you that a lender would request when you apply for a mortgage.
- Remember that mortgage brokers are paid for their service, which may result in increased costs to you. Sometimes brokers are paid a commission by the lending institution.
- Other times they bill loan-origination fees to the borrower.
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- There are many lenders you can choose from when applying for a mortgage, and each will include their own conditions in the loan agreement. It’s important to review your options carefully when choosing a lending institution, as a mortgage is a long-term investment.
- One lender may be more tolerant than another as you apply for a loan.
- Credit unions are sometimes more lenient than commercial banks regarding lower credit scores.
- Make a short list of possible lenders you might want to apply to for a mortgage.
- Then narrow down your list as you eliminate options.
- You may be able to see if you could qualify for a mortgage loan from a specific lender by using their online application. This is a simple way to narrow down your lender options.
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8. Review lender satisfaction scores.
Another great way to eliminate some lenders from your list is to research them online.
Look for independent review sites where previous customers tell about their experiences with a particular lender.
You may also want to check with the Better Business Bureau online.
To see if there have been formal complaints filed against the lending institutions you are considering.
- Access the Better Business Bureau online at http://www.BBB.org.
- You can find reviews of lenders at LendingTree.com and ConsumerAffairs.com.
9. Confirm your choice of lender.
When researching your lender options.
It’s important that you feel as though the lender you work with is committed to working with you and making you comfortable with the process.
Pay attention to how the lender’s representatives treat you and answer your questions.
- Do you receive a prompt response when calling or e-mailing with questions?
- Are they happy to answer your questions about the process and what they can offer you?
- Make sure you are comfortable with the lender you deal with. If not, that lender may not be right for you.
- Walk away if you are dissatisfied with the initial service you are given. Poor service might get worse as time goes on.
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10. Learn the difference between “pre-qualified” and “pre-approved.”
When applying for a mortgage, some lenders may offer to pre-qualify or pre-approve you for a mortgage.
It’s important that you understand the distinction between the two and what they mean for your chances of purchasing a home.
Pre-qualification can help you understand how much you can afford and can serve as an aid when choosing which houses to consider.
Ultimately, however, pre-qualification adds little else to the process.
Being pre-approved, on the other hand, can demonstrate to all concerned that you are serious about purchasing a home and add weight to your offer.
- Being pre-qualified means a lender discussed your financial situation, credit and income and determined that you are qualified for a mortgage level indicated in the letter of qualification.
- Being pre-approved means the lender actually examined your credit and confirmed your financial information. A pre-approval is the more significant of the two steps, because it is supported by documented evidence.
- Being pre-qualified is no guarantee that you will be approved for a mortgage. Being pre-approved is also not a guarantee but is generally seen as indicating a high likelihood that the applicant will be approved.
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11. Identify additional fees and prepayment penalties.
There are a number of possible fees associated with mortgage lending.
So it’s important that you discuss them with a lender before applying for a mortgage.
Be sure you have a thorough understanding of the fees and additional expenses you will be expected to cover as a part of the mortgage process with each lender.
- Ask for a written estimate of your costs that includes a breakdown of all associated expenses and fees.
- Ask questions about any fees that you don’t completely understand. It is your money. Don’t be shy about asking.
- Lenders may also charge “points” on your mortgage. A point is equal to 1 percent of the mortgage loan amount. In contrast, “discount” points might be offered, which is an opportunity to reduce the interest paid on the loan by prepaying it in the form of points.
- A lender might charge “origination fee points,” which is a vague but profit-boosting fee added to the cost of your loan.
12. Negotiate where you can.
The different costs associated with purchasing a home are divided into two categories: real and negotiable costs.
“Real” costs are non-negotiable and cannot be adjusted.
While you may be able to negotiate the remaining costs.
Understanding the differences between the two can help you approach the discussion well equipped to limit any additional expenses attached to the home-buying process.
- Examples of real costs are: expenses associated with obtaining your credit reports, inspecting the house and the appraisal of the property.
- Negotiable costs include the commission the lender charges you for their work. Lenders usually receive a commission of between 1% and 2% of the price of the house, but a commission of up 4% is not unheard of. This cost is completely negotiable, however. It’s best to discuss this commission with the lender well before the day that escrow closes.
13. Analyze lenders’ posted offerings.
The best way to get a good mortgage rate is to present a good credit history.
In addition, you will want to do some homework to find the best rate(s) available.
Your interest rate determines how much interest you will pay over the life of the loan.
A lower interest rate will reduce your monthly payments and the total amount you pay for the house.
Compare the interest rates offered by several lenders, and consider any special programs you may be qualified for.
- You can track current mortgage rates online from different lenders in your area on websites like BankRate.com. To look at current rates, go to http://www.bankrate.com/funnel/mortgages/
- Get your paperwork to the lender as soon as possible when you find a rate you like. Rates can change overnight.
- Check with your bank or credit union about any incentives or special mortgage programs they offer existing customers.
14. Select a lender.
After researching your lending options and making sure all of your questions are answered.
Compare the lenders you haven’t eliminated.
And choose the one that seems right for you.
You should feel comfortable working with the lender you choose.
And you should be confident that they can help you navigate the mortgage process.
- Remember that mortgages can last for decades, so it’s important to choose a lender you can work with.
- The lender you choose should be willing to provide you with advice on how to improve your credit and get approved through the application process.
15. Gather all the necessary documentation.
There are a number of documents you will need to gather when preparing to apply for a mortgage.
Some documents serve as proof of employment, some are proof of your income, and others speak to your level of debt.
Gathering these documents ahead of time will make the application process quicker and smoother.
Gather the following documents:
- Pay stubs from the last several months
- W-2s from the past two years
- Documents pertaining to long-term debts like car or student loans
- Bank statements from the past few months
- Proof of any other income
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16. Complete the application.
Once you’ve chosen a lender, you will need to fill out their mortgage application.
The lender may provide you with some assistance in completing the forms.
You will need to provide information regarding your identity, finances and debt as a part of the application.
The application may be fairly lengthy.
It will include information about the house you are attempting to buy and the terms and conditions of the loan.
- Provide the lender with the documents you’ve gathered to support your application.
- It’s possible the lender may ask for other documents as well. For example:
- You will need to provide evidence of your income and your assets.
- You will likely need to provide information regarding your taxes.
- You will need to provide documents pertaining to outstanding debts and be able to speak about them if asked.
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17. Have a home inspection completed on the house you hope to buy.
Most lenders require an inspection to be conducted by a qualified home inspector before approving a mortgage application.
Home inspectors look for signs of structural damage to the home.
And identify things that may need to be repaired prior to financing your purchase of the home.
- If damage is identified, it will likely need to be repaired prior to a lender approving your application.
- You can use the information provided by the inspection to renegotiate the price of the house if you will be required to pay for repairs.
18. Wait for the appraisal to be completed.
The lender will likely arrange to have the home you intend to purchase independently appraised to determine its value.
The lender will then compare the appraised value of the home.
Tith the selling price and determine if they are willing to finance the purchase at that price point.
- The appraisal is intended to ensure you are paying a fair price for the home.
- The bank also wants to ensure the price is fair in the event you default on the mortgage.
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19. Review the loan estimate.
After submitting your application, if the lender decides to extend you a loan.
You will receive a letter containing a loan estimate within three business days.
This document will provide you with the estimated costs associated with your mortgage.
Including all closing costs and fees. It will show you what your expected monthly costs will be in repaying the mortgage loan.
This gives you an opportunity to review the overall cost of your home purchase.
- The first page of the loan estimate includes loan terms, monthly payment and cash needed at closing.
- The second page of the loan estimate includes all of the details of your closing costs.
- The third page will include any additional information pertaining to your loan request and repayment.
- If the lender approves your mortgage application, they will send you a commitment letter that will state much of the same financial information that was estimated in the loan estimate.
- This letter will provide you with the concrete details regarding the amount being loaned to you, the terms of repayment, and the interest you will be charged on the loan.
- Review the commitment letter thoroughly and ask questions about anything that doesn’t seem right or that you are unsure of.
- Sign the commitment letter and return it to the lender.