ager to purchase the home of your dreams and start building equity for the future in this thriving housing market? For many, shopping for a home is the fun part, but obtaining a mortgage is another story. Whether you know a little about the mortgage process or have no idea how to get a home loan, don’t fret. This guide to getting a mortgage breaks down every step of the process so you’ll know what to expect.
How to get a mortgage, step by step
- 1. Strengthen your credit
- 2. Know what you can afford
- 3. Build your savings
- 4. Choose the right mortgage
- 5. Find a mortgage lender
- 6. Get preapproved for a loan
- 7. Begin house hunting
- 8. Submit your loan application
- 9. Wait out the underwriting process
- 10. Close on your new home
Step 1: Strengthen your credit
A strong credit score demonstrates to mortgage lenders that you can responsibly manage your debt. So, you’re likely to get approved for a mortgage with a competitive interest rate if you have good or excellent credit. If your credit score is on the lower side, you could still get a loan, but you’ll likely pay more in interest.
“Having a strong credit history and credit score is important because it means you can qualify for favorable rates and terms when applying for a loan,” says Rod Griffin, senior director of Public Education and Advocacy for Experian, one of the three major credit reporting agencies.
To improve your credit before applying for your mortgage, Griffin recommends these tips:
- Make all payments on time and reduce your credit card balances.
- Bring any past-due accounts current, if possible.
- Review your credit reports for free at AnnualCreditReport.com. Check for errors on your credit reports, and contact the reporting bureau immediately if you spot any.
- Check your credit score (often available free from your credit card or bank) at least three to six months before applying for a mortgage. When you review your score, you’ll see a list of the top factors impacting it, which can tell you what changes to make to get your credit in shape, if needed.
Follow these steps to help boost your score and nab a lower interest rate on a home loan.
Step 2: Know what you can afford
It’s fun to fantasize about a dream home with every imaginable bell and whistle, but it’s much more practical to only purchase what you can reasonably afford.
“Most analysts believe you should not spend more than 30 percent of your gross monthly income on home-related costs,” says Katsiaryna Bardos, associate professor of finance at Fairfield University in Fairfield, Connecticut.
Bardos says one way to determine how much you can afford is to calculate your debt-to-income ratio (DTI). This is calculated by summing up all of your monthly debt payments and dividing that figure by your gross monthly income.
“Fannie Mae and Freddie Mac loans accept a maximum DTI ratio of 45 percent. If your ratio is higher than that, you might want to wait to buy a house until you reduce your debt,” Bardos suggests.
Andrea Woroch, a Bakersfield, California-based finance expert, says it’s essential to take into account all your monthly expenses – including food, healthcare and medical costs, childcare, transportation, vacation and entertainment expenses – and other savings goals.
“The last thing you want to do is get locked into a mortgage payment that limits your lifestyle flexibility and keeps you from accomplishing your goals,” Woroch says.
You can determine what you can afford by using Bankrate’s calculator, which factors in your income, monthly obligations, estimated down payment and other details of your mortgage, including the interest rate and homeowners insurance and property taxes.
Step 3: Build your savings
Your first savings goal should be your down payment.
“Saving for a down payment is crucial so that you can put the most money down – preferably 20 percent to reduce your mortgage loan, qualify for a better interest rate and avoid having to pay private mortgage insurance,” Woroch explains.
It’s equally important to build up your reserves. One general rule of thumb is to have the equivalent of roughly six months’ worth of mortgage payments in a savings account, even after you fork over the down payment.
Also, don’t forget closing costs, which are the fees you’ll pay to finalize the mortgage. They typically run between 2 percent to 5 percent of the loan’s principal. Generally, you’ll also need around 3 percent of the home’s price for annual maintenance and repair costs.
Overall, aim to save as much as possible until you reach your desired down payment and reserve savings objectives.
“Start small if necessary but remain committed. Try to prioritize your savings before spending on any discretionary items,” Bardos recommends. “Open a separate account for down payment savings that you don’t use for any other expenses. This will help you stick to your savings goals.”
Step 4: Choose the right mortgage
Once your credit score and savings are in an adequate place, start searching for the right kind of mortgage for your situation. You’ll also want to have an idea of how mortgages work before moving forward.
The main types of mortgages include:
- Conventional loans – These are best for homebuyers with solid credit and a decent down payment saved up. They’re available at most banks and through many independent mortgage lenders.
- Government-insured loans (FHA, VA or USDA) – These can be great options for borrowers who do not qualify for a conventional loan or meet specific criteria, such as being a member of the military for a VA loan.
- Jumbo loans – These loans are for more expensive properties. Conforming loans have a maximum allowable value, and if you need to finance more than that ($647,200 in most parts of the country or $970,800 in more expensive areas), you’ll need to get a jumbo loan.
A first-time homebuyer, for instance, might consider an FHA loan, which requires a minimum credit score of 500 with a 10 percent down payment or a minimum score of 580 with as little as 3.5 percent down. A conventional loan could be a better fit for a homebuyer with a higher credit score and more down payment savings.
