Are you ready to become a homeowner? If so, you need to understand the basic steps of the mortgage approval process. Follow these 8 steps to get a mortgage loan and become a new homeowner, find out what you can afford. Start by choosing a lender and getting pre-approved for a loan. Then, find your dream home and make an offer.
Finally, select your mortgage lender and close the purchase of your new home. An interest rate change of just 1 percentage point can have a huge impact on your purchasing power. This is because prequalification letters are not verified. They are just an estimate of your budget based on a few questions. On the other hand, a pre-approval letter has been checked with your credit report, bank statements, W2 forms, etc.
It's a real offer from a mortgage company to lend you, not just a budget. Of the four main loan programs, VA mortgage rates are usually the cheapest and generally exceed conventional mortgage rates. The rates on USDA and FHA loans also seem low at face value, but remember that these loans come with mandatory mortgage insurance that will increase your monthly mortgage payment. Conventional loans also have PMI, but only if you deposit a down payment of less than 20%.Shorter loan terms cost less over time, but require higher monthly payments along the way. Most mortgages have loan terms of 15 or 30 years.
You can also find loan terms for 10 or 12 years. For most borrowers, the best loan term is the shortest one whose monthly payments you can comfortably afford. A larger down payment opens up more mortgage opportunities for borrowers, but not all new mortgage loans require a large down payment. USDA and VA loans, for example, offer mortgages with no down payment. Conventional loans typically require a down payment of at least 3 percent, and FHA loans require a 3.5 percent down payment.
A loan with a low down payment usually requires mortgage insurance, which increases your monthly payment. Closing costs include a variety of charges such as loan origination fees, appraisal fees, title fees, and other legal fees. You can expect closing costs to be around 2 to 5 percent of your loan amount. The Loan-to-Value (LTV) Ratio measures the amount of your loan compared to the value of the home you're buying. A 90 percent LTV means that the loan amount or lien represents 90 percent of the home's value. A 90 percent LTV loan would require a 10 percent down payment.
The credit requirements for homeownership vary depending on lenders and types of loans. Typically, FHA loans require a credit score of at least 580; conventional and VA loans require a score of at least 620; and USDA loans require a credit score of 640 or more. However, lenders often set their own requirements which may be higher or lower. Mortgage insurance premiums help protect your lender in the event of a loan default. Foreclosure usually costs both the lender and the borrower.
While mortgage insurance may seem annoying and expensive, it also helps you get approved if you can't afford a 20 percent down payment. Your total monthly debt divided by your gross income (before taxes) is called the debt-to-income ratio (DTI). Although lenders prefer a DTI ratio of 43%, it is possible to make exceptions of up to 50% if you have good credit and extra money in the bank. You'll also need funds for down payment and closing costs. Most loan programs require at least a down payment of 3% to 3.5%, although eligible military borrowers can get financing without a down payment with U. S.-backed loans. You can expect to pay between 3% and 6% of the total mortgage amount in closing costs.
Your closing costs may include appraisal fees, discount points, loan origination fees, inspection fees, and more. Closing costs can represent a large part of the initial cost of a mortgage loan so be sure to consider them during your financial planning. The mortgage process can be easy or complicated depending on how financially prepared you are and your understanding of how mortgages work. The mortgage process is the same for refinance loans; you just won't receive a pre-approval letter. For example, borrowers must conduct an appraisal of any property against which they apply for a mortgage. If you're buying for the first time, the mortgage loan process may be unknown or complicated because your mortgage is linked to the purchase of the home; the mortgage process cannot be completed until you have accepted a purchase agreement. The mortgage application process can be complicated but there are several steps involved when it's over it's time to take the last step: close the purchase of your new home.
While you usually deal with a mortgage lender such as a bank; the final decision about approving your mortgage lies with insurance companies. It usually takes 30 to 45 days to close on a home depending on some factors such as how quickly a home inspection is carried out and whether or not there is already an approved mortgage. Knowing what steps are involved in getting approved for a mortgage loan, understanding what documents are needed during each step and being financially prepared will help make this process easier.
