Unless you have enough money saved up to buy your house outright, you will need to get a home loan. A mortgage is an important financial commitment, and making the right choice will affect your finances for many years to come.
When you get a home mortgage, the lender will cover the cost of the property upfront, which you will normally pay back monthly. Your home will be the collateral for the loan, however, so if you fail to stick to the payment schedule, you could find yourself in foreclosure.
Many people have found themselves in this position and have to get a bad credit home loan due to their past problems. Buying a house with bad credit is challenging but not impossible. It will certainly impact the interest rate and terms you receive from a lender.
You will often pay significantly above market rates, so it pays to get your finances squared away. In fact, it's vital!
How to Get a Mortgage
The process to get a home loan can be quite confusing, particularly if you are a first-time buyer. We look at how to get a mortgage, the things you can do to improve your chances and help you get a better deal.
Improving Your Credit Score
With a better credit score, you will get better terms on your loan. Home loans often have minimum credit score requirements as well. So before you begin the process, you should make sure your credit score is as good as it can be.
You can get your credit report from the credit bureaus or for free online at AnnualCreditReport.com. This will not only give you your credit score, a number between 300 and 850, but also show you the information these bureaus hold on you.
Check the reports you get to make sure there aren't any errors that could be by holding your score back. The higher your credit score, the better, and you will typically need a credit score above 620 when you apply for a conventional loan. With government-backed mortgages like the FHA loans program, you might only need a score above 500 to qualify.
A high credit score can give you better terms and lower interest rates when you get a home mortgage, so it is a good idea to boost your credit score before you apply. Some of the things you can do to help include:
- Paying your bills on time
- Avoid using more than 30% of your available credit
- Don't close any old accounts
- Don't open any new credit accounts
- Make sure any errors in your credit reports are corrected
Your Down Payment
If you have enough money saved to meet 20% of the purchase price, this is ideal. It means you can avoid paying extra fees like private mortgage insurance, and it will make applying for a home loan easier.
Finding 20% of the purchase price can be very difficult, particularly for first-time buyers, but you can still get a mortgage.
FHA loans allow for down payments of just 3.5%, and VA loans can even let you put 0% down. But even some conventional loans allow for low down payments too.
Your Debt to Income Ratio
An important consideration to lenders is how much debt you have compared to your income. The better your debt to income ratio is, the better terms you will get on your home loan.
To find your DTI ratio divide your debt by your income. Generally, lenders don't like borrower’s DTI to be higher than 36%, although there can be exceptions.
Choosing the Right Type of Mortgage
You can choose a conventional mortgage, but government-backed loans might offer you a better deal. The interest rates offered, down payment requirements, and fees charged will differ between these different options.
A careful comparison needs to be made of your different options so you select the right home loan for you.
Prequalifying for a mortgage will mean you have to answer lender’s questions to find out if they will lend to you.
It will also give you a better understanding of how much money is available to buy your home, but the process doesn't guarantee you'll get approved when full checks are made.
Prequalification doesn't involve the lender pulling your credit report or checking your income, so their findings might differ when they do these things during the mortgage application.
There is more to a mortgage preapproval than the steps involved for prequalification. The lender will check your income and employment, requiring more documentation about your finances.
Once you are preapproved for a loan, this will show sellers that you are serious. A preapproval letter is sometimes required before real estate agents will show homes to you.
Before you begin the pre-approval process, it isn't a bad idea to shop around between lenders. Compare your options so that you end up with the best mortgage rate for your home loan, and you might even consider applying to more than one lender.
Even if you win preapproval with a lender, you don't have to stick with them for the final approval. It also doesn't mean you are guaranteed to get the mortgage you expect.
Your application can still fail during the underwriting process.
To reduce the chances of things going wrong during underwriting, don't do anything that will change your financial situation. This means avoiding making any large purchases or applying for more credit after you've been preapproved.
Applying for Your Mortgage
Once you found a home you love and had your offer agreed by the seller, you need to apply for the mortgage. Even if you have a preapproval letter from one lender, you don't have to get your mortgage from them.
You might find another lender offering a better interest rate, something that could save you thousands over your repayment term.
Whether you choose to go with a bank, mortgage lender, or credit union, there are different advantages and disadvantages to each.
A mortgage broker might help you find the lowest interest rate, but this will add fees to your expenses. Another option could be using an online mortgage company, though this might lack the service you need to feel confident in your decision.
Whichever path you choose to get your mortgage, the lender will require a lot of information from you. Make sure you are ready with your financial documents to avoid delaying the process.
Prepare For Closing
When the lender has approved your mortgage, you are ready for closing day. You will get a closing disclosure at least 3 days before so that you can get the payment ready to cover the closing costs.
The closing costs are on top of your down payment and could be as much as 5% of the purchase price. On closing day, you will pay this using a cashier’s check or bank transfer. Then it is a matter of checking and signing documents before the keys to the house are yours.
Getting a mortgage is one of the essential steps in a home purchase. It is essential to do your due diligence checking with the various mortgage programs available. Having a mortgage broker and a real estate agent in your corner to help you out can really be worth it.
Hopefully, you have found these mortgage tips to be useful.