How to Secure Your Mortgage Loan & Make Sense of the Process
There are a lot of moving parts involved in securing a home loan, and it can be confusing. But understanding the process and how to get approved for a mortgage loan can help you make sense of it all.
First, lenders will want to verify your income. This will require you to provide tax returns for the last two years and recent W-2 forms or pay stubs.
Get Approved
Getting approved for a mortgage loan is one of the most important steps in buying a home. It ensures that you are able to secure your dream home and makes the process easier for you, your realtor and your lender.
To get approved for a mortgage, youll need to meet certain criteria, such as income, debts and credit history. Youll also need to provide financial documents, including pay stubs, tax returns, and W2s or 1099s. Depending on the lender, you may have to submit additional documentation, such as a letter from your employer verifying your employment status.
Your income is an essential factor in determining whether you qualify for a mortgage, as it will determine how much of a home you can afford and how large of a monthly payment you can make. Lenders will compare your income to your debts to calculate your debt-to-income ratio. If you have a high ratio, you may be denied a loan or offered a smaller one.
Its critical to keep your debt-to-income ratio low and avoid taking on new debts. The less debt you have, the more likely you are to be approved for a mortgage.
You should also focus on improving your credit score, which is a critical part of the approval process. Many lenders require a credit score of at least 620, and a higher score will help you secure the best rates for your mortgage.
In addition, keeping up with your bills and paying them on time can improve your credit. If you have delinquent accounts or other negative information on your credit report, work with creditors to resolve those issues before applying for a mortgage.
If you have a good credit score, its easy to get preapproved for a mortgage. Some lenders even offer online application portals, which allow you to upload your financial documents in minutes.
Once youve completed the online application, youll need to send your information to a lender, who will evaluate your income, credit history and other factors to determine if you are qualified for a loan. If you are, youll receive a preapproval letter.
Understand Closing Costs
Closing costs are fees that you pay when securing a mortgage loan. They are about 3 to 5 percent of the loan amount and may include title insurance, attorney fees, appraisals and taxes.
There are several ways you can save money on your closing costs. One way is to shop around for lenders with lower fees and competitive interest rates. Another way is to try to reduce your down payment. You can also ask for monetary gifts from family members to help cover your closing costs.
You can find out how much your closing costs will be by reviewing your loan estimate and the closing disclosure. These documents are required by law and will include your total closing costs.
Your lender is required to give you a loan estimate and closing disclosure within three days of your application. The loan estimate will include your estimated closing costs, which can vary by lender. The closing disclosure will include your actual closing costs and the terms of your loan.
Depending on the type of loan you take, your lender will also charge an application fee and an appraisal fee. These fees are often included in your loan estimate and can help you determine how much of a mortgage you can afford.
Some lenders will also charge a document preparation fee for the legal documents they prepare at closing, such as a note or a mortgage. This fee is typically around $20, but you should challenge it if it appears on your loan estimate.
Finally, your lender may require you to set up escrow funds for your mortgage. Escrow accounts hold funds to pay your property taxes, homeowners insurance and any other expenses you have associated with the purchase of your home. These funds will be sent to the lender or other parties responsible for your loan.
You can pay your closing costs out-of-pocket or roll them into your loan, if your lender offers this option. This can save you some cash initially, but it will increase your overall mortgage cost as youll pay interest on the expenses over the life of your loan.
Get a Preapproval
Getting preapproved is the first step in securing a mortgage loan. It gives you a clear idea of what home prices you can afford and shows sellers that you’re serious about buying a house.
When you get a preapproval, the lender will check your credit and verify your financial documents. This includes a review of your income, assets and debts. The lender will also consider your credit score and determine how much of a monthly payment you can afford.
You can receive a preapproval letter from the lender in as little as one business day, depending on the lender. However, it may take several days or weeks if you are self-employed or if additional verifications are required.
In general, lenders like to see your monthly mortgage payment account for no more than 28 percent of your gross monthly income and total debt payments (including your mortgage) make up no more than 36 percent.
The good news is that getting a preapproval doesn’t affect your credit in any significant way. You might see a drop in your credit score, but it’s a small one that won’t impact your ability to obtain a mortgage at all.
Another benefit of getting a preapproval is that it will allow you to shop around for the best interest rate and terms on your mortgage loan. This will help you save money on your monthly payment and will give you the peace of mind that you’re ready to buy a home at a price you can afford.
While you’re shopping around, it’s a good idea to shop with different lenders. Each lender has its own guidelines and interest rates, so shopping around can help you find the best deal on your home loan.
If you’re interested in homes that are out of your price range, be upfront with your real estate agent and discuss the options. This will help you limit your search to properties that are within your price range and will help you avoid the heartbreak of falling in love with a home you can’t afford.
Getting a preapproval isn’t always necessary, but it is an excellent tool to use when you’re ready to start the search for your new home. It shows sellers that you’re a serious buyer, and it can help you stand out in a competitive housing market.
Shop Around
When youre securing your mortgage loan, there are many factors to consider. You need to make sure you can afford the monthly payments, that you have enough money saved up for a down payment and that you have a decent credit score.
Once you have all of these items in place, its time to shop around for the best rates and terms. That means getting rate quotes from a range of lenders, from large banks to online lenders and credit unions to regional banks and a mortgage broker.
Interest rates are determined by a number of factors, including your credit score, down payment and loan type. A low credit score may mean you pay a higher interest rate on the loan, which is why its important to build up your credit before applying for a mortgage.
Increasing your credit score by reducing your debt and paying your bills on time can help you qualify for a lower interest rate. Having a high credit score can also save you thousands of dollars in interest over the life of your mortgage, says Joe Zeibert, managing director and head of Global Mortgage Solutions.
A strong credit score tells mortgage lenders you are an established borrower who makes your payments on time and that you have no history of mismanaging your finances. You should have a credit score of 700 or higher to get the best rates and terms.
Lenders will also want to see your other financial documents, such as pay stubs for the last 60 days and two years of federal tax returns. They also will check your credit report to make sure you have no late payments or other blemishes on your credit report.
If youre shopping for a mortgage, its best to talk to at least three different lenders. Then, you can compare your estimates and decide on the best one for you.
When you shop, its important to remember that lender origination fees, points and other fees can vary a lot from one lender to the next. This can add up to a few thousand dollars over the life of your mortgage, according to Freddie Mac.
