There are few things more exciting than buying a home, and an essential step for most homebuyers is qualifying for a mortgage.
Here’s what you need to know about the mortgage process, including moves you can make to help increase your chances of approval.
1. Estimating Your Budget
Before you start to look at homes, you’ll want an idea of how much you’ll be able to afford. Getting pre-qualified and then pre-approved will allow you to look at homes in a price range you can qualify for.
Here are the main considerations.
Your income is one of the most important factors when a lender decides to approve a mortgage or not. Lenders want to be sure of their investment, so they look closely at borrowers’ ability to repay the loan. There are a few general guidelines that can help you determine what kind of payment you’ll be able to afford.
• The 28% Rule. Under this guideline, you should aim to spend no more than 28% of your gross monthly income on a mortgage payment. If your income is $10,000 a month, for example, your mortgage payment should be $2,800 or less.
• The 35% / 45% Guideline. This guideline says your total monthly debt shouldn’t be more than 35% of your pre-tax income or 45% of your after-tax income. With a pre-tax income of $10,000, for example, your total debts (including the new mortgage payment) shouldn’t be more than $3,500. If your after-tax amount is $8,000, then your total debts are not to exceed $3,600. The 35/45 guideline allows for a greater amount of your income to be put toward a mortgage, especially if your other debts are minimal.
Most people think of the down payment as the biggest expense when buying a home, and it often is. A down payment greater than 20% can help you avoid expensive PMI or MIP: private mortgage insurance or mortgage insurance premiums. At the same time, there are many other costs involved in the mortgage loan process. Some may be rolled into the loan, but some need to be paid at closing.
There are programs that offer down payment assistance. Your agent can also make some smart moves to reduce the amount of money coming out of your pocket for closing costs. Even so, you still need to be prepared to bring some money to the table. Costs you’ll encounter include:
• Home inspection fees
• Appraisal fees
• Prepaid property taxes
• Prepaid homeowners insurance
• Title insurance
• Prepaid interest
• Origination fee
• FHA, USDA, and VA fees if you choose one of those loans
It is recommended that you plan to pay between 2% and 5% of the loan principal for closing costs. A good amount of savings will go a long way toward covering these costs.
A calculator for home loans can help you estimate what your monthly payment could be. It’s an easy way to see how your monthly payment could change with different down payment options. Keep in mind you’ll also need to figure in homeowners insurance, any homeowners association fees, and possibly PMI.
2. What Mortgage Lenders Look At
Mortgage lenders value creditworthy borrowers. Those with higher incomes, low debt, a healthy amount in savings, and high credit scores are ideal borrowers.
Income, Savings, Assets
A lender’s primary job is to verify that you have enough income, savings, and assets to afford the mortgage you’re applying for. When you submit your mortgage application, you’ll submit bank statements, tax returns, W-2s, retirement account statements, and other documents that show you’ll be able to afford the mortgage.
If you received help from a family member to fund your down payment, you’ll need to provide a gift letter to the lender. This is to verify the source and intention of the funds given to you.
Mortgage lenders prefer borrowers who have stable, predictable incomes. A steady employment history signals to the lender that you have regular income coming in to make the monthly payments of a mortgage. That’s why it’s easier to get approval as a W-2 employee than as a self-employed worker.
In general, lenders like to see two years of employment in a loan application. Self-employed individuals will submit two years of tax returns.
Buyers often wonder what credit score is needed to buy a house. In general, the better your credit score, the better the mortgage rate you’ll be able to qualify for. If your score is above 740, you’ll qualify for the best rates.
A homebuyer usually needs a credit score of at least 620 to get a conventional mortgage (one not insured by a government agency). If your credit is below that, there may still be mortgages available to you. FHA loans require a score of 580 to qualify for the 3.5% down payment advantage. If you have a 10% down payment, you can have a score as low as 500 and may still be able to get a mortgage.
Lenders also take a deep dive into the details on your credit reports, including your payment history, recent applications, credit utilization, major derogatory reports, disputes, and authorized users.
Building credit is a lengthy process, but it’s important if you want to qualify for the best rates.
3. Choosing a Mortgage Type
There are many different mortgage types, and choosing one will depend on your budget, down payment, location, personal preference, and life situation.
Some choices you’ll need to make on a mortgage are:
• A fixed-rate or adjustable-rate mortgage
• A conventional or government-insured loan (FHA, USDA, or VA loan)
• A conforming or nonconforming loan (such as a jumbo loan)
• If a reverse mortgage makes sense
• If you should opt for an interest-only mortgage
A good lender can walk you through your options, whether it’s a HUD home requiring an FHA mortgage or a high-priced home with a jumbo loan. The lender can help you make a decision that’s right for you.
4. Getting Pre-Approved
In the mortgage pre-approval process, homebuyers complete a full mortgage application. The lender will perform a hard credit inquiry and issue a letter confirming your ability to borrow a certain amount of money.
Getting pre-approved is as close to a guarantee of funding as a lender can give. A pre-approval letter, usually good for 60 to 90 days, can also improve your odds of winning over a seller in a bidding war. In certain competitive markets, having a pre-approval letter may even be a requirement.
5. Finding a Property and Making an Offer
Your real estate agent will guide you through the process of finding a property and making an offer. The offer is typically written by the buyer’s agent on a standardized form.
Be sure to look for and only make offers on properties that fall under the amount you’ve been pre-approved for. If you make an offer on a property over what you’ve been pre-approved for, the lender will need to run a full application on your finances again. If you don’t qualify for the new, larger amount, you may not be able to secure a loan on the property.
If your offer is accepted, you’ll send the signed paperwork to your lender. You’ll probably also want to run through a home inspection checklist to complete your due diligence on the property.
6. Making a Final Decision About Your Lender
Your lender will have an impact on your financial life for as long as you’re responsible for that mortgage. Finding one who can not only offer a great rate but can also walk with you as you navigate the mortgage process is one of the smartest things you can do.
If you want to narrow down your search for a mortgage lender, you can take a look at these questions to ask a lender to help you decide.
7. Completing a Full Mortgage Application
Lenders are required to do a second credit check before final loan approval and will likely ask for further documentation. If you’ve opened a new account, changed jobs, or made a major purchase since pre-approval, those actions will have to be vetted.
Many of the same details you used to obtain pre-approval are the same, but a loan processor will ask for full documentation to submit to underwriting.
Responding to your lender’s request for documentation can help keep your mortgage on track. It may seem like a constant game of “hurry up and wait,” and you’ll often need to update documents you’ve already sent.
You will also get requests that come as the underwriter is reviewing your documents, credit, and property.
8. Getting an Appraisal
The lending institution will order an appraisal once it has received your contract and a full application on the property you’re buying. An appraisal is an independent property evaluation of a home’s value. The appraisal will describe the home and what makes it valuable. Factors that affect the appraisal value include the location, condition, amenities and features, and market conditions in the area.
A lender requires a home appraisal to ensure that it isn’t lending more than the property is worth.
Appraisal issues have led to delays in 22% of contracts recently. If the appraisal comes in too low, the lender won’t lend extra money on the gap. Buyers will need to cover the difference with their own money or renegotiate the price with the seller to match the appraisal.
9. Mortgage Underwriting and Processing
Wondering what mortgage underwriting is? The underwriting process begins after you complete your mortgage application and ends after all the documentation has been completed. The underwriter examines the documents submitted for the mortgage application in evaluating the borrower’s credit and ability to repay the mortgage. The underwriter will also examine the appraisal, title search, and proof of homeowners insurance.
Once all documentation has been reviewed and verified, the underwriter will recommend approval, denial, or a pending decision. A pending decision is given when information is incomplete. You may still be able to get the loan by providing the documentation asked for.
After underwriting approval with a “clear to close,” you don’t need to provide any more information. You’re set to close on your loan. Congratulations!
SoFi Mortgage Rates
If you’re ready to launch the mortgage loan process, include SoFi in your hunt for a home loan.
Why SoFi? You’ll find competitive fixed rates on mortgages. Qualified first-time buyers can put just 3% down. And you can get access to a range of member benefits at no cost.
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