How to Get a Mortgage ( Step-by-step)
Step 1: Find Out How Much You Can Borrow
The first step in obtaining a loan is to determine how much money you can borrow. In case of buying a home, you should determine how much home you can afford even before you begin looking. By answering a few simple questions, we will calculate your buying power, based on standard lender guidelines.
You may also elect to get pre-approved for a loan which requires verification of your income, credit, assets and liabilities. It is recommended that you get pre-approved before you start looking for your new house so you:
- Look for properties within your range.
- Be in a better position when negotiating with the seller (seller knows your loan is already approved).
- Close your loan quicker
Step 2: Select The Right Loan Program
Borrowers have a number of choices when it comes to choosing a mortgage. Deciding which loan makes the most sense for your unique situation and goals means understanding the benefits of each as well as how that loan will fit into your overall financial picture. Whether you are buying a home or refinancing, there are 2 basic types of home loans. Each has different reasons you’d choose them.
1) Fixed Rate Mortgage
Fixed rate mortgages usually have terms lasting 15 or 30 years. Throughout those years, the interest rate and monthly payments remain the same. You would typically select this type of loan when you:
- Plan to live in home more than 7-years.
- Like the stability of a fixed principal/interest payment
- Do not want to run the risk of future monthly payment increases.
- Think your income and spending will stay the same.
2) Adjustable-Rate Mortgage
Adjustable-Rate Mortgages (often called ARMs) typically last for 15 or 30 years, just like fixed rate mortgages. But during those years, the interest rate on the loan may go up or down. Monthly payments increase or decrease. Factors to consider when accessing if this loan is right for you includes:
- Do you plan to stay in this home less than 5 years?
- How will monthly payment that periodically change (up or down) impact your budget?
- Are you comfortable with the risk of possible payment increases in future?
By carefully considering the above factors and working with one of our mortgage professionals, you will be able to select the one loan that matches your present condition as well as your future financial goals.
More on Pre-Qualification
LTV or Loan-To-Value ratio is a statistic indicating how much debt a property has versus its market value.
Lenders use this to determine the financial exposure they have when they underwrite your loan. The higher the LTV percentage, the riskier the loan is to the lender; the lower the LTV the less risky as if the borrower defaults, the lender has more choices as to how they can get their money back.
Calculating your loan to value ratio is simple. All you do is take your loan amount and divide it by the purchase price — or, if you’re refinancing, divide by the appraised value.
Loan Amount\Purchase Price or Appraised Value = Loans to value.
The loan to value ratio is always expressed as a percent. So if your result is 0.75, for example, your LTV is 75%.
Lenders are usually prepared to lend a higher percentage of the value, even up to 100%, to creditworthy borrowers but will typically require the borrower to purchase form of mortgage insurance to protect their interest (not the borrowers.)
A FICO™ Credit Scores give a value to your credit worthiness by giving a score between 300 and 850.
FICO scores are widely used by almost all types of lenders in their credit decision. The scores are based on a number of factors including past payment history, total amount of borrowing, length of credit history, search for new credit, and type of credit established.
When you apply for any type of loan, the credit report a lender runs against your credit to see your credit score will adversely effect it.
It is, therefore, advisable that you authorize the lender/broker to run your credit report only after you have chosen to apply for a loan through them.
Self-employed individuals will find that there are more hurdles to overcome to borrow money than thoese faced by people who “have a job.”
For many conventional lenders the problem with lending to the self employed person is documenting an applicant’s income.
Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information through their employer.
In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for 2 years.
Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan.
Generally, down payment requirements are made with funds the borrowers have saved. If a borrower does not have the required down payment they may receive “gift funds” from an acceptable donor with a signed letter stating that the gifted funds do not have to be paid back.
Any money borrowed from another source and earmarked for various mortgage requirements will need to be “seasoned” (i.e. – have been in borrowers account) for as much as 90-days prior to applying for a new mortgage loan.
Step 3: Apply for A Loan
Step 4: Begin Loan Processing
Although lenders conform to standards set by government agencies, loan approval guidelines vary depending on the terms of each loan. In general, approval is based on two factors: your ability and willingness to repay the loan and the value of the property.
Once your loan application has been received, we will start the loan approval process immediately. Your loan processor will verify all the information you have given. If any discrepancies are found, either the processor or your loan officer will troubleshoot to straighten them out. This information includes:
Income/Employment Check
Is your income sufficient to cover monthly payments? Industry guidelines are used to evaluate your income and your debts.
Credit Check
What is your ability to repay debts when due? Your credit report is reviewed to determine the type and terms of previous loans. Any lapses or delays in payment are considered and must be explained.
Asset Evaluation
Do you have the funds necessary to make the down payment and pay closing costs?
Property Appraisal
Is there sufficient value in the property? The property is appraised to determine market value. Location and zoning play a part in the evaluation.
Other Documentation
In some cases, additional documentation might be required before making a final determination regarding your loan approval.
To improve your chances of getting a loan approval:
- Be thorough with the information you provide during the application process. Our online forms begin the process but we will work with you to be sure all the correct information is accounted for to expedite the process.
- Therefore, respond promptly to any requests for additional documentation especially if your rate is locked or if your loan is to close by a certain date.
- Do not move money into or from your bank accounts without a paper trail. If you are receiving money from friends, family or other relatives, please prepare a gift letter and contact us.
- Do not make any major purchases with debt until your loan is closed. Taking out a new loan will cause your debts to increase and might have an adverse effect on your current application.
- Do not go out of town around your loan’s closing date. If you plan to be out of town, you may want to sign a Power of Attorney.
Note: When making a purchase, having a professional inspect your property may not be a requirement. However, to ensure that there are not “hidden” problems with the property, it is advised you have this performed so there are no surprises down the road.
Step 5: Close Your Loan
After your loan is approved, you are ready to sign the final loan documents. You must review the documents prior to signing and make sure that the interest rate and loan terms are what you were promised. Also, verify that the name and address on the loan documents are accurate.
The signing normally takes place in front of a notary public.
There are also several fees associated with obtaining a mortgage and transferring property ownership which you will be expected to pay at closing. Bring a cashier’s check for the down payment and closing costs if required. Personal checks are normally not accepted.
You also will need to show your homeowner’s insurance policy, and any other requirements such as flood insurance, plus proof of payment.
Your loan will normally close shortly after you have signed the loan documents. On owner occupied refinance loan transactions federal law requires that you have 3 days to review the documents before your loan transaction can close
MLO Kevin Wenke NMLS #1910000
Mortages Provided by Freedom Mortgage NMLS Lendor #2767