Procedures for Securing a Home Loan
Securing a mortgage and buying a home can be attainable goals for many Americans, but the process may seem daunting. This guide outlines the essential steps to navigate the mortgage application procedure.
Essential Steps to Secure a Mortgage
Step 1: Enhance Your Credit Profile
A robust credit history with a strong credit score significantly improves your chances of qualifying for favorable mortgage terms.
According to Rod Griffin, senior director of Public Education and Advocacy for Experian, maintaining a solid credit score is crucial as lenders prefer borrowers with scores of 700 or higher.
To strengthen your credit standing before applying for a mortgage, consider these tips from Griffin:
- Pay all bills on time
- Reduce credit card balances and keep utilization rates low
- Review your credit reports for errors and dispute any found
- Pay off any outstanding collections
Step 2: Assess Your Affordability
The debt-to-income (DTI) ratio is an essential factor in determining how much house you can afford. By reducing your monthly debt obligations and ensuring you have sufficient savings, you'll ensure a favorable DTI ratio.
Andrea Woroch, a personal finance and budgeting authority, advises taking into account all your monthly expenses, savings goals, and far-off plans before making an offer on a property to avoid the "house poor" condition.
Step 3: Save for a Down Payment and Reserves
Building your savings is crucial, starting with the down payment. Although you can still purchase a home with less than a 20% down payment, having a substantial down payment can make you a more attractive borrower.
In addition to the down payment, it's also essential to set aside reserves equivalent to roughly six months' worth of mortgage payments to safeguard against unexpected expenses like job loss.
Don't forget to factor in closing costs, which typically range from 2 to 5 percent of the loan principal, and annual maintenance and repair expenses.
Step 4: Compare Mortgage Offers from Multiple Lenders
Shop around for the best mortgage deal by comparing rates and loan types from at least three lenders. Comparing offers can save you a considerable amount of money in the long run.
The main types of mortgages include conventional loans, FHA loans, VA loans, USDA loans, and jumbo loans. Each type comes with its interest rates, terms, and requirements.
Pay close attention to mortgage insurance premiums, interest rates, fees, and the loan's annual percentage rate (APR).
Step 5: Find a Reputable Lender
Once you've determined the optimal mortgage type for your situation, it's time to find a reliable lender. Seek referrals from friends, family, and real estate agents, and read lender reviews to make an informed decision.
Working with a mortgage broker can help you explore your options and secure more favorable terms, but it's essential to remember that interest rates, fees, and terms can vary significantly from lender to lender.
Step 6: Get Preapproved for a Mortgage
Preapproval allows you to establish your borrowing limit before making an offer on a property. A preapproval signifies that the lender has reviewed your finances and is willing to lend you a specific amount.
It's important to note that preapproval is different from prequalification, which is a less formal assessment of your creditworthiness.
Step 7: Begin House Hunting
Once preapproved, you can start searching for your dream home. Spend time researching the housing market and be ready to act swiftly when the right property becomes available.
Step 8: Submit Your Loan Application
When you find a property you wish to purchase, it's time to complete the mortgage application. You can usually apply online, although meeting with a loan officer in person or over the phone may be more efficient for some applicants.
During the application process, you will provide your financial documentation, including proof of income, identification, assets, and gift letters if applicable.
Step 9: Undergo Mortgage Underwriting
Despite preapproval, final approval depends on the underwriting process, which examines the risk associated with the property and your financial background. If the underwriting process is favorable, your application will move forward, and you'll receive a final approval for your mortgage.
Step 10: Close on Your New Home
Once approved, you'll proceed with the closing process, which can vary slightly by state. Typically, you'll confirm the seller's ownership, pay closing costs, and finalize the transfer of the property.
Closing costs typically include appraisal fees, credit check fees, origination or underwriting fees, title insurance fees, prepaids, attorney fees, recording fees, and other expenses.
On average, it takes 46 days to close a mortgage as of January 2025, according to ICE Mortgage Technology.
FAQ
- The income required to get a mortgage depends on several factors, including your debt level, house budget, and the lender's requirements. A loan officer can help you determine whether your income is sufficient.
- The minimum down payment for fixed-rate conventional loans and FHA loans is typically 3 to 3.5 percent of the home's purchase price. For VA or USDA loans, no down payment is required.
- Lenders have varying eligibility criteria for different mortgage types, such as credit score, debt, and down payment requirements.
- You can obtain a mortgage from direct or retail mortgage lenders, mortgage brokers, or other types of lenders. Shop around for the best mortgage rates, and don't hesitate to ask questions when gathering information.
- Maintaining a strong credit score, as lenders prefer borrowers with scores of 700 or higher, is essential in securing favorable mortgage terms, according to Rod Griffin.
- By comparing mortgage offers from at least three lenders, you can save a considerable amount of money in the long run by finding the best deal, taking into account mortgage insurance premiums, interest rates, fees, and the loan's annual percentage rate (APR).
