If seeing all your friends buying homes lately has left you thinking, “how are they doing this?” -- then you’re in the right place. Navigating the mortgage process on your own for the first time can be extremely confusing and overwhelming with so many different terms, calculations, and steps to learn about along the way. When you work with the lending experts at Vaster Capital, you’re no longer on your own -- you have a knowledgeable partner that’s here to help guide you through the entire process from application to closing.
Step 1: Consider your finances
The first step to getting a mortgage involves a careful consideration of your finances. Just because you may want a mortgage to buy a home doesn’t necessarily mean that it would be a smart financial decision. Here are some of the different financial factors that you should consider before moving forward in the mortgage process:
- Debt: Large amounts of debt could affect your ability to get a mortgage. This is because lenders calculate your “debt to income” ratio (DTI) as a part of your application. Lenders want to see a DTI below 36%, with no more than 28% being taken up by your mortgage. So to maximize your mortgage amount, you should try to pay off debts from things like credit cards, student loans, and auto loans.
- Income: Lenders want to make sure that you have a consistent income when applying for a mortgage. Generally speaking, they want to see at least two years of steady employment preferably at the same job or at least within the same industry.
- Credit score: Your credit score is a huge factor within obtaining a mortgage. If you have a low credit score, now is the time to take action to improve it. While some lenders will approve mortgages for credit scores as low as 620, ideally you should have a credit score above 700 to receive the best interest rates.
- Cash reserves: Finally, you need to ensure that you have enough cash reserves to cover the cost of a down payment and closing costs. While a 20% down payment is ideal, you could be able to put down as little as 3.5%. You also need additional funds to cover closing costs at the end of the process that run from 2% to 5% of the loan amount.
Step 2: Determine which type of mortgage you want
The second step to getting a mortgage involves determining which type of mortgage you want. There are several options to choose from based on your wants and needs. Here are some of the most common types of mortgages that you may want to consider:
- Conventional mortgage: This is the most common type of mortgage offered by many lenders. However, it may not be accessible for all buyers thanks to strict requirements. In order to apply for a conventional loan, you need a credit score above 620 and a down payment of at least 3.5%. However, if you put down less than 20%, you will be required to pay private mortgage insurance (PMI) until you reach 20% equity in the home.
- FHA mortgage: This type of mortgage is backed by the federal government to decrease the risk taken on by lenders. FHA mortgage loans come with more accessible requirements that make them ideal for lower-income buyers. For instance, you can get approved for an FHA mortgage with a credit score above 580.
- Jumbo mortgages: Jumbo mortgages are used to purchase properties over the federally-set mortgage limit. In most areas, this limit is $548,250 although it may be higher in high cost of living areas on the West Coast.
- VA and USDA mortgages: VA and USDA mortgages are also federally-backed but are reserved for active service members or veterans and lower-income borrowers in rural areas, respectively.
Other factors to consider when choosing your mortgage involve interest rates and terms.
Mortgages come with either a fixed interest rate or an adjustable interest rate. Fixed-rate mortgages maintain the same interest rate throughout the life of the loan. This is a great option if you’re able to initially lock in a low interest rate. Adjustable-rate mortgages have fluctuating interest rates that change based on market forces. Although you may begin with a low interest rate, you could end up paying more down the road after the initial fixed period. As a result, adjustable-rate mortgages are ideal for those looking for a short-term home purchase.
Mortgages are obviously long-term loans but the exact length of the term is up to you. Generally speaking, mortgages are offered at 30-year and 15-year terms. Although 30-year terms leave you with lower monthly payments, you will end up paying more in interest. On the other hand, 15-year terms come with higher monthly payments but lower interest amounts. At the end of the day, it all comes down to what you want and are able to pay.
Step 3: Decide on a mortgage broker or a lender
The third step to getting a mortgage involves deciding on a mortgage broker or a lender. A mortgage broker works with different lenders to find you the right loan packages for your financial situation and qualifications. On the other hand, lenders offer specific loan products that may or may not fit your needs. If you have a unique financial situation that requires special consideration, it may be beneficial for you to work with a mortgage broker.
Step 4: Get pre-approved for a favorable rate
No matter which route you choose, you’ll want to approach a few different lenders before making your final decision. You do this through a process referred to as “pre-approval” wherein you submit initial documentation and have your credit score run by a lender to determine how much money you’re eligible to borrow and at what interest rate.
When preparing for the pre-approval process, you will need documentation including tax returns, W-2s, 1099s, pay stubs, bank account statements, retirement account statements, investment account statements, and monthly debt statements. Lenders will use all of this information to determine your eligibility and interest rate. At the end of the day, you want to present yourself as “low risk” to the lender to justify a low interest rate.
Experts recommend that you shop around with at least three different lenders to get the best interest rate. What may seem like a small difference in interest of one-tenth of a percentage point could translate into thousands of dollars over a 30-year loan term.
Step 5: Find a home and have an offer accepted
Once you are pre-approved for a mortgage amount and an interest rate, you have a good idea of what you can afford. You can then take that information to officially launch your home search. Work with a qualified and experienced realtor that knows the market and the area to make this process easier.
Also, keep in mind that just because you’re pre-approved to borrow up to a certain amount of money by the lender, doesn’t necessarily mean that you need to spend that much on a property. Instead, you should also consider factors like down payment amounts, taxes, renovations, closing costs, etc.
Once you have found the perfect property that you can reasonably afford, it’s time to submit your offer. Hopefully, your offer is quickly accepted by the seller with no need to negotiate. However, in this competitive market, negotiation may be necessary. Many buyers these days are offering well over asking price and waiving contingencies to make their offers more competitive. These are risky moves that are totally up to you.
After you have come to an agreement with the seller in terms of price and contingencies, your offer is formally accepted and you’re ready to move forward in the process.
Step 6: Formally apply for the mortgage
The next step in the mortgage process involves formally applying for the mortgage. The actual application process goes beyond what occurred in the pre-approval process. For starters, some time has likely passed since you were initially pre-approved and your lender needs to have the most recent information about your finances.
Furthermore, your lender will take additional steps to verify all of the information that you submitted during the pre-approval process. They do this to mitigate the risk involved in loaning you hundreds of thousands of dollars. Specifically, lenders will generally ask for the following documents when the time comes to formally apply for the mortgage:
- Two years of income statements in the form of W-2s or 1099s if you’re self-employed
- Two years of federal income tax returns
- Pay stubs from the past 30 to 60 days
- Proof of other sources of income
- Bank statements from the past 30 to 60 days
- Other account statements from the past 30 to 60 days, specifically retirement accounts and investment accounts
- Details on long-term debts like student loans or auto loans
- Government identification and Social Security number
- Documentation regarding unknown sources of recent deposits in your bank account
- Documentation regarding any gifts or other funds used for your down payment
From there, the lender will provide you with an initial loan estimate with information about the total cost of the loan, associated fees and closing costs, and your official interest rate and APR.
Step 7: Go through the underwriting process
Now that your offer has been accepted and you have formally applied for the mortgage loan, it is now time for the underwriting process. This is when the lender conducts all due diligence needed to officially approve you for the loan. As before, they will consider your credit score, job history, and debt to income ratio.
However, your finances aren’t the only thing that the lender investigates during the underwriting process. Since the lender is technically investing in your property, they want to make sure that it’s a solid investment. The lender will order a home appraisal to determine the value of the home based on its qualities and features. The value is then determined by utilizing “comps” or similar properties in the immediate area that have sold within the last 30 days.
The appraisal will determine whether or not the home is actually worth what you’re paying for it. If the home appraises under the purchase price, you will have to come up with the difference on your own as the lender will not provide more money than the home is actually worth. Additionally, you may want to conduct an inspection on the home during this stage in the process to ensure that it’s structurally sound and there are no hidden issues that will end up costing you after closing.
Step 8: Close on a home
Once the underwriting process is complete with the loan approval, appraisal, and inspection, it’s finally time for closing! Closing is when you actually sign and finalize all of the mortgage and purchase documents to officially transfer the property. Be prepared to sign a lot of documents on closing day and bring your Closing Disclosure, photo identification, and certified funds for the down payment and closing costs.
After everything has been signed, certified, and notarized, the home is officially yours and you get to go home. Congratulations -- all of the stress and hard work has paid off.
The final rundown on how to get a mortgage
The process of getting a mortgage can be confusing and overwhelming -- especially if you’ve never done it before. This is where the right lender or broker can really help. The right partners can help guide you through the process from start to finish -- thoroughly explaining each step along the way.
If you’re looking for a responsive and transparent lender that also offers favorable rates, look no further than Vaster Capital. Feel free to reach out to our lending and mortgage experts if you have any more questions about the mortgage process -- we are here to help get you into your dream home.
Fortune Partners with The Related Group | Vaster Capital
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