Eager to take advantage of historically low-interest rates and buy a home? For many people, getting a mortgage is a key step toward the most significant and most meaningful financial transaction of their life, and there are several steps involved in the process.
1. Strengthen your credit
Your credit score is meant to tell lenders just how much you can be trusted to repay and how likely you are to make your mortgage payments on time. In general, the lower your credit score, the more you’ll pay in interest.
2. Know what you can afford
It’s fun to fantasize about a dream home with every imaginable bell and whistle, but you should really only purchase what you can reasonably afford.
3. Build your savings
To be able to afford your monthly housing costs, which will include payments toward the mortgage principal, interest, insurance and taxes as well as upkeep, you should prepare to put away a large sum. Your first savings goal, however, should be your down payment.
4. Choose the right mortgage
Once you have your credit and savings in place and a good idea of what you can afford, it’s time to start searching for a lender, comparing interest rates and terms, and finding the right kind of mortgage for your situation. The main types of mortgages include:
- Conventional loans – These are best for homebuyers with solid credit and a decent down payment saved up. They’re available at most banks and through many independent mortgage lenders.
- Government-insured loans (FHA, USDA, or VA) – These can be great options for qualified borrowers who may otherwise struggle to buy a home. Government-insured loans are widely available through many institutions but target borrowers with less-than-stellar credit. USDA loans have some geographical restrictions, and VA loans can only go to military members, veterans, or their spouses.
- Jumbo loans – These are for the big spenders out there. Conventional loans have a maximum allowable value, and if you need to finance more than that ($548,250 in most parts of the country or $822,375 in more expensive areas), you’ll need to get a jumbo loan.
For instance, a first-time homebuyer might consider an FHA loan, which requires a minimum credit score of 500 with a 10 percent down payment or a minimum score of 580 with as little as 3.5 percent down.
Mortgages can be either fixed- or adjustable-rate, meaning the interest rate is either fixed for the duration of the loan term or changes at predetermined intervals. They commonly come in 15- or 30-year terms, although there may be 10-year, 20-year, 25-year, or even 40-year mortgages available.
5. Find a mortgage lender
Once you have your financial ducks in a row, it’s time to find a mortgage lender. It’s important to shop around for multiple offers to make sure you’re getting the best possible deal, not just the lowest interest rate. When you’re looking around, make sure you pay attention to all the fees and other conditions of every offer.
6. Submit your loan application
If you’ve found a home you’re interested in purchasing, you’re ready to complete a mortgage application. These days, most applications can be made online, but it can sometimes be more efficient to apply with a loan officer in person or over the phone.
7. Get preapproved for a loan
Once you find lenders you’re interested in, it’s a good idea to get preapproved for a mortgage. With a preapproval, a lender has determined that you’re creditworthy based on your financial picture and has issued a preapproval letter indicating it’s willing to lend you a particular amount for a mortgage.
7. Begin house hunting
With preapproval in hand, you can begin seriously searching for a property that meets your needs. Take the time to search for and choose a home you can envision yourself living in. When you find a home with the perfect blend of affordability and livability, be ready to pounce quickly. In a competitive market where available homes go fast and bidding wars are common, you’ll need to be aggressive.
9. Wait out the underwriting process
Even though you may be preapproved for a loan, that doesn’t mean you’ll ultimately get financing from the lender. The final decision will come from the lender’s underwriting department, which evaluates each prospective borrower’s risk, determines the loan amount, how much the loan will cost, and more.
10. Close on your new home
Once you’ve been officially approved for a mortgage, you’re nearing the finish line. All that’s needed at that point is to complete the closing, which is when you’ll pay closing costs and receive the mortgage funds (and new house keys). During your closing, the closing agent will provide a detailed statement to the parties of where the money came from and went. The agent will also enter the transaction into the public record and deliver the deed to the buyer.
They say you shouldn’t put the cart before the horse. The same is true in the homebuying process. You’ll need to complete several steps to obtain a mortgage, so the more you learn about what’s required, the better informed your decision-making will be. And if you’re denied a loan?