Buying a home is a significant commitment, especially if you’ve never done it before. But while getting a mortgage can sound daunting, the process can go smoothly if you know what you’re doing.
The process of getting approved for a mortgage starts long before you start house hunting. If you’re wondering how to get a mortgage, here are 7 things you should do from start to finish.
How to Get a Mortgage in 7 Steps
1. Check your credit
Your credit score is one of the most influential factors in getting a mortgage. Your credit score can range from 300 to 900, and a good credit score is generally 660 or above.
The higher your credit score, the easier it will be to get approved for a mortgage loan, especially with favorable terms. But even if your credit score is in the fair to bad range, you may still be able to get approved.
In addition to checking your credit score, also take a look at your credit report withEquifax and TransUnion, the two national credit reporting agencies. By checking your credit report, you will be able to see if there is anything that may hurt your chances of getting approved.
For example, if you have accounts that are in collections, that can be a red flag to some mortgage lenders.
Also, check for potential errors that could be bringing down your credit score. You can dispute these errors with the credit reporting agencies and get them removed from your report.
The bottom line: if your credit isn’t where you want it to be, work on building your creditbefore you apply.
2. Determine your budget
You’ll have a hard time figuring out how to get a mortgage if you can’t afford one. Lenders look at two different ratios to determine how much you can afford: the gross debt service ratio (GDS) and the total debt service ratio (TDS).
Your GDS is how much of your income goes toward housing costs, including principal and interest payments, taxes and heat. Lenders typically like to see less than 35% of your gross monthly income going toward these expenses.
As its name suggests, your TDS is how much of your gross monthly income goes toward all of your debts, including car payments, credit cards, and more. The standard maximum TDS ratio is 42%, so you’ll want to keep your payments below that number.
These two ratios can help you determine how much you can afford. For example, if your gross monthly income is $6,000 and you have no other debt, your total housing costs could be as high as $2,100.
If, however, you have $1,000 in non-housing debt payments each month, the maximum housing costs you could get approved for can add up to $1,520.
3. Save up for a down payment and closing costs
You can generally get a mortgage with a down payment of 5%, but the gold standard is at least 20%. That said, you may also be on the hook for closing costs, which can run between 1.5% and 4% of your home’s purchase price.
Saving up for a 20% down payment plus closing costs can take a long time, so you’ll need to decide whether it’s worth the wait. But you should at least expect to have enough saved up to cover the minimum down payment plus the maximum closing costs amount.
What’s more, you’ll also want to have an emergency fund in case something unexpected happens after you drain your savings to close on the home.
4. Get pre-approved
Before you start looking at houses, you’ll want to get pre-approved with at least one mortgage lender. This process tells realtors and sellers that your credit and financial profiles are in good enough shape that you’d have a good chance of getting a mortgage if you officially applied.
Getting pre-approved isn’t a quick and easy process, unfortunately. You’ll need to provide the mortgage lender with complete documentation of your income, expenses, debt and other qualifying factors.
It can take time to gather all of this information, so start the process as soon as you can. Once you get pre-approved, the lender will provide you with a dollar amount that you’re approved for. This will give you an idea of how much the lender thinks you can afford.
Keep in mind, though, that a pre-approval isn’t the same as getting approval. The terms are tentative depending on a full credit check, which the lender will perform when you submit an application.
5. Shop around
Every mortgage lender has different approval requirements and terms. If you go with the first lender you see, and they decline your application, that doesn’t necessarily mean every lender will deny you.
Try to apply with at least a few lenders to see whether they’ll approve you and with what terms. If going through this process with several lenders stresses you out, consider working with a mortgage broker who can take care of it for you.
6. Avoid taking out other loans
Because your mortgage approval is dependent on your income and debt, taking out more debt during the mortgage process could mess up your chances of getting approved.
In other words, put a moratorium on applying for credit while you’re trying to get approved for a mortgage loan, including credit cards. If it’s an emergency, consider asking a trusted family member for help instead.
At the very least, make sure that any necessary debt won’t push your debt ratios beyond the standard limits. And keep the lender informed of your decision to borrow money, so the loan officer doesn’t get a surprise when he checks your credit again before closing.
7. Close the loan
Closing on your mortgage loan can be a complex process. The closing process requires that you sign a lot of documents and you may need a real estate lawyer to help you understand the terms.
So, ask your lender long before closing what information you need to provide and whether there are any other things you need to do before you close on the loan. Then make sure to attend your closing appointment and finish the process.
Getting approved for a mortgage can take a long time, but it won’t be a painful process if you’re prepared. By following these steps and staying informed, you’ll better understand the mortgage process and improve your chances of getting approved for a loan.