Basics in Getting a Loan
1. FIND THE RIGHT HOME FOR YOU
There are many factors to consider, before purchasing a home. How big is your family? What neighborhoods are you willing to consider? Are schools a factor? Is a single-family home a requirement or is a condo an option? Based on your income and assets, what kind of home can you afford?
For some home buyers, living in a specific neighborhood takes precedence above all else, whereas for others, the home itself is more important. In a perfect world, you’d find the ideal home, in your neighborhood of choice, at a price you can afford, but realistically, most people will have to make some compromises.
Make a list of the features you want in a home–number of bedrooms, a fenced yard, granite countertops, a garage, etc.–and then rank them in terms of priorities. Decide whether the house or the neighborhood matters more to you, or whether you’re willing to make a longer commute in order to own a home with a larger lot. These kinds of decisions need to be made before beginning the search for your new home.
2. SAVE FOR A DOWN PAYMENT
Nearly all mortgage loans and lenders require some amount of cash as a down payment. The amount you’ve set aside for this will determine the kind of mortgage you qualify for. It will also impact how much you can afford to borrow for a home.
If you’re searching for “how to buy a house” you’ve probably already put away some savings so onward to step 3…
3. CALCULATE WHAT YOU CAN AFFORD
Consider Your Income
Many banks will require that your monthly costs can’t exceed a percentage of your income (for example 28%). That means if you earn $50,000 per year, your total monthly housing costs should not exceed $1166 (28% of your monthly income). Using a mortgage calculator you can use this number to figure out how much you can afford.
Consider Your Debts
In addition to your income, if you have recurring debts, the total monthly payments on existing debt plus new payments for your mortgage may not be allowed to exceed a certain threshold (for example 41%). Using the example above that would mean that if your monthly debt payments are in excess of $541 per month (bringing your total debt of $541 + $1166 = $1708 or 41% in total)
Consider The Down Payment
Most lenders prefer a down payment of 5% or higher to qualify for a conventional loan, but there are loan options where you can put down less. However, you should be aware that with a smaller down payment, you’ll likely be required to pay for mortgage insurance, and your loan application will be subject to greater scrutiny.
Here are several loan types that allow a smaller down payment amount:
FHA: The Federal Housing Administration offers 3.5% down payment mortgages through participating lenders. FHA loans are also easier to qualify for and have slightly lower rates than conventional mortgages.
GSE-backed loans: Fannie Mae and Freddie Mac are both currently insuring 97% loan-to-value loans. That enables lenders to offer 3% down payment mortgages to qualified buyers.
USDA: Home buyers in rural and suburban areas may be able to qualify for home loans offered by the U.S. Department of Agriculture. USDA loans offer low rates and 100% financing.
VA: Eligible veterans, as well as active duty service members and their families, can qualify for Veterans Administration loans. A VA mortgage requires no down payment or mortgage insurance.
There are all kinds of online calculators that can help you determine what your down payment amount will be based on the type of loan, the price of your house, your location, and credit rating. But if you don’t want to do all the math yourself, you might simply move on to step 4 which is arguably the most common step people skip!
4. COMPARE MORTGAGE LENDERS
One of the number 1 mistakes made by home buyers is NOT shopping around for a mortgage! Your Realtor knows a guy, or maybe your parents used a mortgage broker in the past. Don’t fall into this trap. It can take some time, but you’re going to have your mortgage for the next 30 years, so it’s really worth prioritizing.
Also don’t assume you can shop one mortgage lender today and another one next week. There is market volatility in the mortgage market so you really need to sit down, and get ready to contact a few banks. If you do it now, odds are good you can lock in your rate for a while.
Qualifying for a mortgage loan in order to buy a home can often be a stressful and strenuous process. In the end, the pride, security, comfort, and freedom that comes from owning your own home makes all the effort worthwhile.
5. GET PRE-QUALIFIED
By this point, you should have a pretty good idea about what kind of home you’re looking for, and the neighborhood you’d like to live in. You also know how much you’ve saved for a down payment, which in turn will determine the type of loan you obtain. If you’ve compared a few rates you should request a pre-qualification letter.
Getting pre-qualified for a mortgage loan requires that you select a mortgage lender to work with and obtain your loan. Essentially, mortgage pre-qualification is a promise from the lender that you’re qualified to borrow up to a certain amount of money at a specific interest rate, subject to a property appraisal and other documentation.
In today’s competitive housing market, it is not uncommon for a seller to receive multiple offers on their home. Having a pre-qualification letter in hand could be the difference in purchasing or not purchasing the house you desire. If you are well qualified, your lender should indicate this in his or her letter which will show the seller you are serious, and gives you bargaining power over other buyers.