Let's nail that mortgage application
Learn the process of securing a real estate loan:
Ready to own a home, but not sure how to get started? Fear not! Here's a straightforward guide on how to secure a mortgage.
1. Strengthen your credit game
The higher your credit score, the better your chances of getting a decent interest rate. Aim for scores above 700, as it demonstrates you're trustworthy when it comes to managing debt. If your score isn't quite there, here's what to do:
- Timely payments: Make all payments on time and work on minimizing credit card debt. Your credit payment history remains relevant for at least 2 years[1].
- Sort out past-due accounts: Get all past-due accounts up to date. Late payments can significantly damage your score[1].
- Review your reports: Check your credit reports weekly for free at AnnualCreditReport.com. Look for errors and dispute them immediately[2].
2. Know what you can afford
Determine your debt-to-income (DTI) ratio by adding up all monthly debt payments and dividing it by your gross monthly income[1]. Lower DTI ratios mean more flexibility in your budget for expenses beyond home-related costs. Avoid being "house poor" and missing out on lifestyle and financial goals.
3. Save up
Down payment
Aim for a down payment of at least 20% of the home value, but don't sweat it if you can't reach that. You can still buy a home with as little as 3% down for a conventional loan, or no down payment required for VA or USDA loans[1].
Cash reserves
Set aside enough to cover about six months’ worth of mortgage payments. This emergency buffer can help you weather unexpected job loss or financial surprises[1].
4. Compare rates and loan types
Once your credit is up to snuff and savings are on track, start exploring mortgage options. Some common types include:
- Conventional loans: These require a minimum credit score of 620 and a down payment of 3%-5%. They're not backed by the government[1].
- FHA loans: Flexible credit requirements and a down payment as low as 3.5% make these loans attractive for first-time homebuyers with lower credit scores. They are insured by the Federal Housing Administration[1].
- VA loans: Available for qualifying military members, there's no down payment requirement, and credit score requirements vary by lender[1].
- USDA loans: For properties in designated rural areas, these loans have no down payment requirement and flexible credit requirements[1].
- Jumbo loans: These are for properties with prices above the federal threshold for conforming loans ($806,500 in most areas, $1.209750 in higher-cost areas). They often require higher minimum credit scores and bigger down payments[1].
5. Find the right lender
Ask friends and family for recommendations, and browse rating sites to find a reputable lender. Remember that the best mortgage lender is not always the cheapest one. You'll rely on this lender heavily during the mortgage process[1].
6. Get preapproved for a mortgage
When you've found your ideal lender, get preapproved for a loan. This lets sellers know you're a serious buyer and shows you know what you're approved to spend[1]. Just remember: preapproval doesn't guarantee final approval.
7. House-hunting time
Now that you're preapproved, go house-hunting! Keep your wants and needs in mind, and be ready to act fast when the perfect property hits the market[1].
8. Submit your application
Once you've found your dream home, submit your mortgage application. Be prepared to provide documents such as ID, proof of income, and proof of assets[1].
9. Wait for underwriting
The lender will thoroughly review your application to ensure you're a responsible borrower. An appraisal of the property, a title search, and a title insurance policy may also be required[1].
10. Close the deal
With final approval in hand, prepare to close on your new home. Keep an eye on closing costs, which typically run between 2%-5% of the loan amount, but may vary by state[1]. Good luck, and happy house-hunting!
Frequently Asked Questions
- What income is needed for a mortgage? Your mortgage eligibility depends on factors such as your DTI ratio, the amount you're borrowing, and your income. A loan officer can help you calculate this. Aim for a DTI ratio of less than 36% (though 50% might be allowed in some cases)[1].
- What's the minimum down payment required? For fixed-rate conventional loans and FHA loans, the minimum down payment is 3% and 3.5%, respectively[1].
- What are the requirements for each mortgage type? Eligibility criteria vary by mortgage type. For example, to qualify for an FHA loan, you'll need a credit score of at least 580, and a down payment of at least 3.5%.[1]
- How to shop for a mortgage? Start by comparing the best mortgage rates from various lenders. Don't hesitate to ask questions about loan options, and inquire about down payment assistance programs[1]. While interest rates can be beneficial, keep in mind that some lenders won't disclose a rate until after preapproval[1].
Enrichment Data:
Efficient Ways to Improve Your Credit Score for a Mortgage:
Improving your credit score efficiently, based on current recommendations, can be achieved by following these steps:
- Check for errors: Review your credit reports from all three bureaus (Equifax, Experian, TransUnion) to dispute inaccuracies that can significantly drag down scores[2][3][5].
- Prioritize payment history: Honoring your payment obligations is crucial. Set up autopay for minimum payments to prevent late payments, and work on resolving late payments, seeing improved ratings when accounts show "paid" status[2][5].
- Lower credit utilization: Minimizing outstanding balances is crucial. Reduce credit usage below 30% (ideally under 10%)[1][5][4]. Request credit limit increases (without spending more) to achieve lower utilization ratios. Some issuers grant these via online requests[1][4][5].
- Minimize new credit applications: Avoid applying for new credit during the mortgage process, as hard inquiries can temporarily harm scores[2][3][5].
- Use credit-building tools: Become an authorized user on a trusted person's card with a strong payment history[1][5]. Consider credit-builder loans or secured cards to demonstrate responsible borrowing, especially for those with limited credit histories[4][5].
- Maintain existing credit: Keep older accounts open to preserve credit age and avoid reducing total available credit[2][3][5].
Timeline: While significant score jumps may take 30-60 days for utilization/payment changes to reflect[1][3], resolving errors or delinquencies can yield faster results. Mortgage applicants should start at least 3-6 months ahead to allow time for adjustments[2][3].
- The average mortgage rates can significantly impact your personal finance, so it's essential to shop around and compare rates from various lenders when exploring mortgage options.
- In accordance with the guide on securing a mortgage, timely payments and reducing credit card debt are crucial steps to strengthen your credit game and boost your chances of getting a decent interest rate for your mortgage.
- When submitting your mortgage application, be prepared to provide required documentation, such as ID, proof of income, and proof of assets to the lender for verification.
- Keep in mind the potential 'cons' when juggling personal finance, such as the need for a down payment, emergency reserves, and managing debt-to-income ratios, while searching for your dream home.
