Evan Fisher
Written by Evan Fisher
Last updated: Feb.23,2022

A mortgage loan can be defined as the amount of money or a loan borrowed from a lender with the sole purpose of buying a property or a piece of land. A mortgage is used in the real estate business as the aid to buy your dream house.

A mortgage can be segregated into two broad categories: short-term and long-term mortgages. 

Most people go for long term mortgage since they can pay off the amount along with the interest payment in a more extended period of time. However, some people who can not afford a long-term interest payment choose to get a short-term mortgage.

In the case of short-term mortgages, although the interest rate is lower, it comes with a high amount of mortgage payments to be paid on a monthly basis. The period of short term mortgage is not more than two years relative to long term mortgage that begins from three years and more. 

This article will discuss what a person should do before he actually applies for a mortgage. Moreover, it will provide a step-by-step guide on how to get a mortgage. Lastly, it will identify the most trusted lenders.

Things to Consider Before Applying for a Mortgage

Several financial experts claim that an individual should always carry out some due diligence at their end prior to applying for a mortgage. One highly recommended step involves the use of a mortgage financial calculator to find out the exact amount a person can afford. This will help figure out an estimated amount that takes into consideration all types of costs involved, such as interest costs that a person would have to repay.

In addition to this, an individual needs to know the running cost involved in owning a house or a property. This running cost will include utility bills like gas, electricity, maintenance, and even insurance. 

While some people take running costs as an additional expense, others, however, consider it an investment towards a prosperous life.

Having good credit can be useful as the lenders would like to see your credit history, which will show the details about your financials. That is why having a good credit line is considered advantageous. 

There can be a situation where you would need to provide additional documents like monthly personal expenses, household expenses, etc. So, it is wise to keep any records that the lender might ask in order for them to draw assurance that you will pay back the amount plus the interest payment. 

Lenders want to make sure that borrowers will not default on the amount they have borrowed in case the interest rate rises.

Lastly, a person should figure out the deposit amount they can afford. The deposit size is vital when applying for a loan to buy a property. The higher the deposit amount, the lower will be the interest rate on the mortgage. 

Along with deposits, loan to value (LTV) directly affects the interest rate. So if the LTV ratio is low, then the interest rate will also be low. The reason is that the lender involves them in a less risky investment.

How To Get a Mortgage

Are you ready to find out what it takes? Here's a step-by-step guide to getting a mortgage.

1.    Strengthen your credit

Check your credit report to ensure that all of the info on it is correct. If this is not the case, contact the credit bureau to get it corrected. Find out your credit score if the information is correct.

You may receive your credit score for a nominal fee from the credit bureaus, for free from some websites, or through your bank. Your score will range from 300 to 850, with the greater the number, the better. For a conventional loan, your credit score must be at least 620 as per the Fico scale, but it may be as low as 500 for an FHA loan.

If you need to improve your credit score, you should probably avoid firms that claim to be able to clean up your credit. Here are some samples of what's required:

  • Remember that your bills are paid on time.
  • Try to utilize no more than 30% of your credit limit.
  • Even if you don't utilize an account, keep it open.
  • No new credit accounts should be opened.
  • If you notice any mistakes on your credit report, contact the creditors and credit bureaus to dispute them.

2.    Debt-to-income ratio (DTI)

It's wonderful to imagine a new house with all of the lights and bells, but you should actually only buy what you can afford.
Lenders are interested in how much debt you have in relation to your income. The debt-to-income (DTI) ratio is what it's called, and the lower it is, the better your mortgage conditions will be. 

3.    Build your savings

You should set aside a sufficient amount to be able to cover your monthly housing bills. This amount should cover payments toward the mortgage principal, interest, taxes and insurance, as well as maintenance.

On the other hand, your down payment should be your primary savings aim.

A down payment of 20% of the home's buying price is acceptable in the eyes of a lender. You can avoid paying private mortgage insurance (PMI), which is normally between 0.5 percent and 1 percent of the loan if you put down 20%. It can also help you become a more appealing borrower.

However, 20% may be out of reach, depending on the home's price. In reality, the majority of first-time homebuyers put down less than 10% of the purchase price. Down payments on FHA loans can be as low as 3.5 percent. Furthermore, certain Veterans Affairs (VA) mortgages may not need a down payment.

4.    Consideration towards the right mortgage

An individual needs to understand that there are different types of mortgage loans. So depending upon their financial history and how much they can afford to pay every month, a person should look for the mortgage loan that suits them the best.

There are conventional and government-backed loans. Getting approved for these loans is not easy as there are strict requirements and a heavy down payment. People with poor credit can still apply for a loan with the help of FHA or VA loans, which are branches of government-backed loans.

People also need to consider whether they will go for short-term or long-term loans. Each of these loans has different requirements and duration. Also, each loan has two interest rates, known as variable interest rates and fixed interest rates. You can choose any of these options according to your financial position.

5.    Secure a mortgage pre-approval

Pre-qualification is a simple procedure in which you just answer the lender's inquiries about your income and debts. The lender will determine whether you qualify for a mortgage and for what amount based on the information you supply.

At this time, the lender is unlikely to verify your income or examine your credit record, and there's no assurance that you'll be accepted for the amount shown in your pre-qualification results. But it's a smart idea if you want to start looking at homes to see what you might be able to buy. It might be a sign that you're ready to purchase a house if it appears like you could afford the sort of property you desire. 

Also, you are not required to obtain your mortgage from the same institution with whom you pre-qualified.

6.    Pre-approval for a mortgage

If you're serious about purchasing a house, you'll need to be pre-approved for a mortgage, which is a more time-consuming procedure than pre-qualification. You'll have to provide paperwork that verifies your employment and income, as well as a variety of other financial records. Our guide to mortgage pre-approval includes a list of common papers you'll require. You can inform vendors whether you have been pre-approved. They'll consider you a serious customer after that.

At this time, it's a good idea to shop around for mortgage lenders. Banks, credit unions, mortgage lenders, mortgage brokers, and internet mortgage businesses are all options for getting a mortgage.

Keep in mind that a pre-approval for a mortgage indicates that you are likely to acquire the loan. It does not imply that you have received the loan.
Before you gain final approval, you'll need to apply and go through underwriting. So, once you've been pre-approved and applied for a mortgage, don't make any significant purchases or seek new credit. You can also ask for a mortgage with another lender to see if you can receive a lower rate, similar to pre-qualifying.

7.    Fill out a loan application

If you've selected a home you'd like to buy, you'll need to fill out a mortgage application. Although most applications may now be completed online, it is often more expedient to apply in person or over the phone with a loan officer.

  • The lender will require specific documentation, including previous tax returns, payslips, and other proof of income, e.g., overtime pay, bonuses, Social Security, etc.
  • Two years of work experience.
  • Financials of your bank and other assets such as retirement accounts or certificates of deposit (CDs).

Your credit record will be pulled by the lender to check your creditworthiness.

8.    Begin the process of underwriting

Even if you've been pre-approved, underwriting might be the most stressful aspect of the mortgage process. It's time to wait some more for the loan to be formally authorized. You may also be assigned to an underwriter rather than the loan officer who has been assisting you up to this point.
The lender evaluates if you are eligible for the loan throughout the underwriting procedure. These are among the factors considered.

  • Credit and work history 
  • The debt-to-income ratio
  • Debt obligations.

The lender will review your most recent credit report and request a house evaluation. Because lenders will not lend you more than the home is genuinely worth, an appraisal informs the lender of the property's market value.

Meanwhile, you'll arrange for a home inspection to check for any flaws in the house. Depending on how things go, you may wish to haggle with the owner for repairs or a lower price before settlement.

9.    Close on the home

You're almost there if you've been formally accepted for a mortgage. All that's left is to finish the closing because that's when you'll settle the closing expenses and get your mortgage cash and new house keys.

You may be responsible for the following closing costs:

  • Fee for appraisal
  • Fee for a credit check
  • Fee for origination and/or underwriting
  • Fee for title services

The closing agent will provide the parties with a complete explanation of where the money came from and went during the closure. The agent will also make a public record of the transaction and provide the deed to the buyer.

That's all there is to it; you've made it to the top, and the loan is yours. It's now time for you to settle into your new place!

Can Mortgage Lenders Be Trusted?

People can choose to get a mortgage from various banks within the financial sector, or they can take the aid of mortgage brokers that can differentiate which financial institution provides the best loans for housing schemes.

Some trusted mortgage lenders include the following:

New American Funding

According to the customers of this financial institution, people choose to go with New American Funding as it is a direct mortgage lender that can be trusted upon. It offers various mortgage loan options for customers with different choices and expectations. Some options include refinancing schemes and first-time home buyer loans that are further divided into categories like USDA loan, VA loan, and Good Neighbor Next Door, etc.

This financial institution is a perfect fit for those consumers that want to be analyzed according to their non-traditional credit in an array of down payment assistance programs.

Some perks that come with New American is that the application process for loans is quite simple and convenient. Everything is systematic and made to appear online such as rate quotes, loan tracking, etc. 

Moreover, mortgage applications are analyzed through a manual underwriting process where an actual underwriter evaluates their creditworthiness, unlike the automated underwriting process that uses a computer program.

To qualify for a loan, the criteria set by New American are that people should have a credit score of 620 according to the FICO scale, and a minimum down payment on the loan should at least be 3% of the total value of the mortgage. 

Guaranteed Rate

With its good reputation, Guaranteed Rate is a mortgage company that helps people make purchases of homes and property at a low cost, along with several refinancing schemes. It is highly recommended by its customers who have had experience with the company.

The mortgage company highly appeals to borrowers seeking conventional loans or government-backed loans. These types of loans carry a relatively lower interest rate. 

Furthermore, the company offers its customers a completely online environment, decreasing paperwork. Customers are offered an online experience where all the documents are submitted and signed digitally. In addition, people can also find sample rates for different kinds of loans that make things convenient for both parties.

However, one drawback for selecting Guaranteed Rate is that there are no home equity loans or lines of credit available amongst their choices of loan products.

To be guaranteed a loan, individuals need to maintain a credit score of 620, which is the minimum acceptable score set by the company. Also, people who will involve themselves with the company need to pay a 3% down payment for the mortgage.

There are several other banks and mortgage companies that people opt for to get a mortgage. They include Citibank, Reali Loans, and Chase. Each of these financial institutions has different pros and cons, along with credit score and down payment requirements.

Conclusion

The process of getting a mortgage is not that simple as an individual would need to cater for many variables like credit score, paying off bills on time to protect themselves from unwanted surplus charges, etc.

It is essential to get help from people who have done this work before, but it would not hurt to do some homework on your own to avoid inconvenience. For instance, having faith in a trusted mortgage lender should be done after thorough research and comparing it with other potential candidates in the market.

Managing your finances is key to making sure you do not overspend somewhere that might involve purchasing something on credit. Since the credit bureaus are constantly keeping track of your credit history, it is in your benefit to keep a good credit line. 


 

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