The process of buying a home hasn’t changed in years, yet it seems more complex and daunting to the average home-buyer. Do I qualify? What are the costs? How long does it take? What is my interest rate? There are countless questions you tend to ask yourself before the mortgage process even begins. What I’m here to do is take you step by step through the home-buying basics and simplify the biggest investment of your life.
What is a Mortgage?
When you go to buy a house and your paying in cash, stop right here as you don’t need to read any further. For the rest of us, you must go to a bank or mortgage lender and get a loan to borrow the money and pay it off. This is considered a mortgage. You receive long-term financing options for your home and you make payments until paid in full. Your mortgage payment consists of Principal (the money you borrowed), Interest (what you pay to borrow the money), property taxes (per your county), and insurance.
What is my first step?
Your first step when you are ready to get a home is to check your credit score. Mortgage lenders pull all three of your scores and use the mid-fico (the middle score) to determine if it qualifies. If you are getting a loan with your spouse, the lender will take the lower mid-fico of the two. For a conventional loan, you’ll need a score of at least 620+. For a FHA or VA (Military) loan, you’ll need a score of at least 550+. Be aware most free credit report services don’t always provide the most accurate scores. I recommend going directly to Equifax, Transunion, and Experian and pulling your scores. You get a free report once a year through the bureau so you know exactly where you stand.
Great! My credit score qualifies for a Mortgage. What’s next?
Check your Debt-to-Income Ratio (DTI). All banks and mortgage lenders want you to be able to manage your debt with a max ratio of 43%. You get this number by taking your total monthly debt and dividing it by your gross monthly income (money you make before taxes). Some lenders may accept a ratio of up to 50%, but I’d recommend managing your debt to keep it lower. For example, if you make $10,000 a month and your total debt per month is $4,000, your ratio is 40%.
Save up for your down payment.
It’s suggested that you want to save up 20% of your purchase price as a down payment for your home. The reason why is because if you put 20% down you will avoid paying Private Mortgage Insurance (PMI), which is usually about 1% of your loan. You can avoid PMI by having a 80% Loan-to-Value ratio (LTV). To save up that much money could be a challenge given today’s home prices. There are loan programs that allow as little as 3% down for an FHA loan and 5% down for a Conventional loan. Active duty Military and Veterans get the benefit of 0% down with a VA Loan.
Get Pre-Qualified and Pre-Approved
There is a difference between being pre-qualified and pre-approved. Getting pre-qualified is based on a simple conversation with a loan originator (LO). The LO will ask you for your income and how much money you have saved up. From there they can usually give you an idea of what price range you want to stay in. *A pre-qualification gives you a general idea of what you can afford and you can begin to plan on saving up.
Getting pre-approved involves a process of providing your income documentation and having your credit scores and history pulled to generate your DTI. This let’s all sellers know that you are a serious buyer. Once you are pre-approved you will receive a written commitment from your originator that you can hand over to your realtor. This will let the realtor know the max amount that you can afford for a mortgage.
Apply for a mortgage
There are many different avenues you can go through to get a mortgage. You can reach out to credit unions, banks, mortgage lenders, and mortgage brokers. Each option has it’s own advantage. The best option would be a mortgage broker (me!). The reason is because you get personal service from a licensed professional. As a broker I have the access to see all the interest rates offered from different banks and provide you with consultations and the best options.
There are a few documents you will have to gather when you apply such as:
- Pay stubs for the last 30 days
- Bank statements for the last 60 days
- 2 years of W2s or Tax Returns
- 2 forms of ID
Once your Application is Approved
Once you are approved, the processors and underwriters will work to clear line item conditions for you on the back end of the loan. This is all done for you, and if any information is needed your LO will reach out and request it from you.
Go to Closing
It has been 30-45 days since you first applied for your loan, and you are now Clear to Close. You’ll need to have the funds you are planning to bring to closing, a pen, and some patience. You go to the Title Company to sign your documents, and once the loan has Funded you will be handed the keys to your brand new home! It should be one of the most exciting days for you closing on your biggest investment.
This is the overall basics to getting a mortgage. The process may seem daunting, but just take it step by step.