Complete Guide to Getting a Mortgage
Owning a home is one of the biggest and most exciting decisions of our lives. Due to its significance, the final home buying generally is preceded by months of research, a number of house visits and a great deal of financial planning.
As homes are generally expensive purchases, mortgage plays an important role to fulfil this dream in almost all cases.
Getting a mortgage can be testing and draining for anybody as it involves extensive looking around for the best deals, a lot of time-consuming steps and loads of paperwork. It is a great practice to be prepared for it in advance and avoid roadblocks in your home-buying dream. Thus, you should know the basics of securing a mortgage before you go about applying for it.
To help you with the process, we have laid out a simple step-by-step guide here, which you can refer to be prepared for what comes next in your home buying journey.
The complete guide to getting a mortgage
Watch your credit score
Your credit score is an indicator of your creditworthiness. It is the first thing lenders want to know about you when you approach them for a mortgage.
Credit score is a number between 300 and 900 and is available for free at some websites or for a small fee at credit bureaus. A higher credit score means that you are a responsible user of credit and you pay your dues and bills on time.
Lenders generally ask for a credit score higher than 620. You can still qualify for a mortgage with a lower credit score if you opt for a government sponsored mortgage.
If you have not checked your credit report ever, this would be an appropriate time to check it. You should make sure that everything is in order and your credit report contains correct information about you.
If you find any errors in the report you will need to set it right by taking it up with the bureau which collated it. If your credit score is low, you need to shore it up by setting your credit behaviour right.
Ensure that you use less than 30% of your available credit, pay your bills on time, keep your old accounts active even when you are not using them and do not take new credit before you apply for a mortgage.
Watch your income and and fixed monthly payments
Once you have got your credit report right, you need to figure out your home affordability. Affordability is a function of your income, your down payment on the home and other monthly debt servicing payments that you might have.
Lenders calculate a debt-to-income ratio, which tells what percentage of your monthly income you will be shelling out for debt payments including mortgage. Lenders are typically more comfortable lending if your debt-to-income ratio is 36% or less.
Some lenders might still advance you a mortgage with debt-income ratio as high as 50%, but then you will be stretching yourself a little bit with that high a ratio.
Alternatively, your debt-to-income ratio can also be taken care of if you decide to put in a higher down payment, which will reduce your mortgage amount and your monthly payments. Ideally, a higher down payment (20% or more) will help you sail through the process and save you private mortgage insurance (PMI). Less than 10% in down payments will typically increase your monthly mortgage payments and the cost of securing a mortgage.
Choose your Mortgage
Now when you are prepared at your end, it is time to learn about the mortgage options available to you. The kind of mortgage you choose will depend on a number of factors listed below:
You will have to choose between a conventional and a government backed mortgage. A conventional mortgage will generally require higher credit score and higher down payments, while you can get a government backed mortgage with lower credit scores and lower down payments. However, government backed mortgages have higher insurance premium requirements which increase the cost of your loan.
The next thing you need to choose between is a fixed or floating rate mortgage. Fixed rate mortgages will lead you to paying a fixed interest rate for the term of the loan irrespective of which way interest rates are headed. Floating rate mortgages come with variable interest rates that can benefit you or cost you more depending on the direction of the rates. It is better to sign-up for a fixed rate loan when interest rates are at cyclically low levels.
Now choose the right term (loan period) for your mortgage. Long-term mortgages (20-30 years) will lower your monthly payments but lead to higher interest payments for the term of the loan.
Get pre-approved for a mortgage
This is an important step before you start looking for properties to buy. A lender can give you a pre-approval based on your income, credit score and other paperwork. Once you have got pre-qualified you can let your agent and sellers know, so that they also take you to be a serious homebuyer.
A pre-approval means that you are likely to get a loan. You will still have to go through the time-taking underwriting process to get the final approval.
Once you get pre-approved, make sure that you do not take additional credit that hampers your credit score, in which case, your pre-approval might get invalidated and you will have to go through the entire pre-approval process again.
Look out for the right lender
Once you have zeroed in on the home, you can shop around for the lenders. If the lender you have got pre-approved with is offering you the best deal, you can consider moving ahead towards the closure. However, if you feel that you can get better terms with other lenders, keep looking until you find a better deal.
You must take help from other people who have taken mortgages in your friends and family. You can also ask your real estate agent to get you a better mortgage deal.
Put in your application
Once you have got the right lender, you need to finally apply. You will need to submit documents including your income proofs, tax returns, bank statements, government IDs and details of other loans you may have. Your lender may ask for more documentation based on the requirements of your case.
Your lender will take 2-3 days to let you know the terms of the loan, including interest rate, fees and closing costs.
Begin the underwriting process
Once the lender is satisfied with your paperwork and gives you the estimates, you can grant your nod for the lender to begin the underwriting process.
In this process, the lender will closely assess your eligibility for the mortgage and also do its due diligence on the property you have decided to buy.
This process takes a good amount of time and it requires some waiting at your end. You can use this time to inspect the home you are buying for any defects you want the seller to fix.
You should also avoid making big financial decisions during this time. Changing jobs or taking new credit should be avoided as it might trigger additional steps in the lender’s due diligence.
Get ready to close
Once your loan gets approved, you need to prepare for the big day.
Your lender would want you to purchase a homeowner’s insurance, which you should shop for, to get the best deal. You can also consider buying a lender’s title policy to safeguard yourself from problems with the title of the property in the future.
You also need to get a cashier’s check made for the closing day based on the cost communicated to you in the closing disclosure by the lender. Your lender will send the closing disclosure to you before the closing day, which will include all the costs to be incurred in closing.
The closing day
This is the final step before you get the keys to your dream home.
Closing day will also be the final signing day and all the parties to the transaction including you, the seller, the lender, the agent and respective attorneys will be present on the day.
You will pay for the closing cost with the cashier’s check that you got before you came for the closing. Closing costs may range from 2% to 5% of the property’s purchase price. You will also have to pay for the property mortgage insurance at this step if your down payment is less than 20%.
If you have doubts or a change of mind, you can still walk away from the transaction. This won’t cost anything to you apart from the earnest money you paid to the seller to lock the property for you.
Once you have made all the payments, final signing will happen and you will become a proud homeowner.
Home buying is a lengthy, tedious process. It is natural for you to have doubts and apprehensions as it is one your life’s biggest financial decisions and its implications are pretty long-term. Therefore, it is best that you ask a lot of questions and you look around for the best deals and terms before you close the transaction. Don’t miss the tiniest detail in the process and be hands on to avoid any severe setbacks.