If you don’t know how to get a home loan, simple mistakes like forgetting to list a bank account or an outdated address can create problems later. Many lenders offer an online mode to submit the loan application, which makes the loan process easier.
In this article, we will tell you how to get a home loan. Follow these six steps to learn how to get a loan and apply for a mortgage to avoid delaying the loan process.
1. Gather Your Financial Paperwork
Gathering your financial paperwork can help you provide accurate answers to the home loan application questions. If you provide the right documents, you’ll probably enjoy a smoother mortgage experience.
The following is the list of important documents:
Full Name: Enter your full legal name in the name field and add suffixes to ensure that only your credit information is pulled.
Address History: You need to provide an address worth at least two years. Your address information should match your credit information.
Dependents: The dependents are different for every loan type. For example, if your loan grant is from the U.S. Department of Veterans Affairs (VA), you need to provide the ages and numbers of your family members.
Employment and Income Information: You need to provide the company name, address, and phone number for your current employer, including pay stubs and W-2s for the last two years.
Total Assets: Collect bank and retirement account statements worth two months. If you have money that you invest in retirement funds or a 401(k), adding those to your total assets can strengthen your application.
2. Know Basic Mortgage Loan Requirements
The minimum mortgage requirements are based on capacity, collateral, and credit reputation. These three words refer to your assets, debt-to-income (DTI) ratio, and credit score. If you don’t know how to get a home loan, the following guidelines will help you learn more about your application.
You can qualify for a mortgage if your credit score is at least 500 with a 10% down payment. If your credit score is 780 or higher, you will qualify for a loan with a low interest rate. Keeping your credit balances low and paying bills on time can boost your credit score by up to 30%.
The DTI ratio is determined by dividing your total debt by your pretax income. It’s an important step to know that you can repay the loan. A DTI ratio of 40% or below is considered a good ratio. But if your ratio is higher than 40%, then your interest on the loan can be higher.
Loan-to-value ratio (LTV)
A loan-to-value ratio is the value of your home that you’re going to borrow against in a mortgage. The LTV ratio can affect how much you can borrow, your interest rate, and your monthly payments.
If your interest rate is lower than 5%, you will get a lower interest rate. But if your interest rate is higher than 5%, you may end up with a higher interest rate.
The three important factors lenders consider related to your assets when you’re getting a loan are:
How much have you set aside for closing assets and a down payment: Your payment will be lower if you put down a down payment and close assets.
How much extra money do you have: The extra money is known as cash reserves in lending terms. Extra cash from mortgage payments can increase your approval chances.
How the money got there: Large cash deposits can create a problem for you. A lender may disapprove of your mortgage if there is no paper trail for the money.
3. Choose The Right Mortgage Type
A loan officer will check your loan application to see what type of loan you qualify for. Some of the best types are:
FHA loans are a good choice for those who have a less-established credit history. They have more forgiving financial requirements; you can qualify with a credit score of 580 or lower.
Pros: Lenient credit score and low down payment requirements
Cons: Higher interest rates, mortgage insurance, and more upfront fees.
VA loans are no-down-payment mortgages offered for qualifying military personnel and veterans. In this type, lenders don’t require borrowers to pay mortgage insurance.
Pros: No mortgage insurance or down payment required; competitive mortgage rate.
Cons: Must be retired from military service or an eligible active-duty member.
USDA mortgage loans for homebuyers in selected rural areas with a population under 35,000 are eligible. They are directed or funded by the U.S. Department of Agriculture.
Pros: No down payment needed and flexible credit score
Cons: Limited for rural area houses, and mortgage insurance required
In these types of loans, you don’t have to pay the principal balance; you just need to pay mortgage interest rates. But the interest rate isn’t permanent; for example, for a 30-year period, interest only lasts for 10 years.
Pros: Limited amount of equity, lower mortgage payments
Cons: higher mortgage than conventional loans, interest period isn’t permanent
Jumbo loans are conventional loans. Jumbo loans exceed the limit set by the Federal Housing Finance Agency. The limit is high countries with high costs of living: nearly $970,800.
Pros: Give loan for urgent repairs or build your own home equity
Cons: Complicated process, not offered by all lenders
4. Think About Factors Not Listed On The Mortgage Application
You may be committing to one of the biggest debts of your life when you apply for a home loan. Keep in mind that you shouldn’t try to apply for a loan that you can’t afford, and become aware of the cost of homeownership.
Before applying for a loan, consider your “payment comfort level.” A lender may allow you to borrow up to 43% (or higher in some cases) of your total income, but that doesn’t mean that you blindly follow the instructions. Lenders don’t consider your expenses, bills, or lifestyle, so choose your monthly payments according to your financial comfort. While deciding on a monthly payment, make sure that you have space for:
• Education goals
• Health care costs
• Child care costs
• Savings goals
A broken water heater, landscape enhancements, and little maintenance are the homeownership costs in your budget. An average homeowner will spend $2,467 on home maintenance in 2022, according to Angi’s State of Home Spending report. Many insurance providers suggest setting aside 1% of your sales price for these expenses.
5. Select The Best Type of Mortgage Lender
Create a list of mortgage companies and ask at least three to five lenders for loan estimates. Alternatively, before submitting a mortgage loan application, use a rate comparison tool to have the lender contact you. There are many types of mortgage lender options, such as:
Mortgage Bankers: Mortgage banks have a large variety of programs, and the entire process is performed in-house. The process is fast and more flexible for those with unique situations.
Mortgage Brokers: Mortgage brokers are the type of brokers who work with various lenders and provide better options than a single mortgage bank. But brokers are dependent on banks because they have to wait until they approve and fund your loan. Brokers can’t do or say anything until the bank approves the funds.
Institutional Banks: If you have a large deposit balance, your local bank may offer mortgages with a lower interest rate. The loan offer depends on the bank.
6. Fill Out a Mortgage Application
This is an important step in the journey of learning how to get a home loan. If you perform the above step carefully, your actual application process will become easy and quick. After receiving your loan application, lenders have to provide a loan estimate within three days after you apply. Keep copies of the estimate you receive to compare your closing costs and interest rate in the future.
Online application: Many lenders provide an online method to apply for a loan, whether it’s on your desktop, smart phone, or laptop.
Applications received over the phone: Many lenders accept phone applications from borrowers. A loan officer will ask for details and give you feedback along the way.
In-person application: You can meet your loan officer in an office for a face-to-face process or remotely. This can help you understand the information correctly and avoid providing incorrect information.
Frequently Asked Questions
How much of your income is required for a home loan?
According to the 28% mortgage rule, you should spend 28% of your total monthly income on your monthly loan payment. Your monthly loan payments are the sum of principal, interest, insurance, and taxes. So, you can estimate your monthly loan payments by multiplying 28% by your total monthly income.
Is it difficult to obtain a mortgage loan from a bank?
The answer is simple: you need a credit score of 580 or higher to get a bank loan for a house. The Federal Housing Administration helps first time buyers get a home loan. But if your credit score is lower than 580, you will have a harder time.
How does the bank evaluate you for a mortgage?
Most lenders consider your monthly gross income and your monthly expenses for loan qualifications. The monthly expenses include PMI, taxes, insurance, association dues, and credit card payments.
What credit score is required for a house loan?
A credit score of 620 or higher is considered a good credit score for a conventional loan. But if your credit score is lower than 620, a lender may not be able to give you credit or offer a loan with a high interest rate.