Are you looking to purchase a home but don't know where to start? Don't worry, you're not alone. The mortgage lending process can be daunting and overwhelming, but it doesn't have to be. This comprehensive guide will walk you through the 10 steps of the mortgage lending process, from submitting your application to closing on your new home. The first step in the mortgage lending process is to submit your application.
This is an important step, as it will determine your purchasing power. A small change in interest rates can make a big difference in how much you can afford. After submitting your application, you'll receive a prequalification letter. This letter is not verified and is just an estimate of your budget based on a few questions.
A pre-approval letter, on the other hand, is a real offer from a mortgage company to lend you money. It is verified by comparing it with your credit report, bank statements, W2, etc. Of the four major loan programs, VA mortgage rates are typically the cheapest and exceed conventional mortgage rates. USDA and FHA loan rates may 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 a PMI, but only if you make a down payment of less than 20%.
Shorter loan terms cost less over time, but require higher monthly payments. Most mortgages have loan terms of 15 or 30 years, but you can also find 10- or 12-year loan terms. For most borrowers, the best loan term is the shortest one whose monthly payments they can comfortably afford. A larger down payment opens up more mortgage opportunities for borrowers, but not all new mortgages require a high down payment. USDA and VA loans offer zero-down mortgages, while conventional loans typically require at least 3 percent down payment 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 fees 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 LTV or loan-to-value ratio measures the amount of your loan compared to the value of the home you're buying. A 90 percent LTV means that the amount of the loan or lien is 90 percent of the value of the home and would require a 10 percent down payment. The credit requirements for homeownership vary between lenders and types of loans.
FHA loans generally 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 can be higher or lower. Mortgage insurance premiums help protect your lender in the event that you don't pay the loan. Foreclosure generally costs both the lender and borrower money. While mortgage insurance may seem annoying and expensive, it also helps you get approved if you can't afford a 20 percent down payment. The first thing to do is check if you are eligible for a mortgage.
Getting a mortgage depends largely on your credit rating; the higher your score, the better your chances of getting a loan approved. In general, you'll want your score to be at least 620 or higher. If it's not where you'd like it to be, there are plenty of ways to improve it such as reducing your balances or paying your bills on time. Having a strong credit score can lower your interest rate so focus on improving your credit rating. If you're ready to buy a home, you may have already started saving for it.
Review your savings and decide how much you can spend on a new home. Consider things like emergency funds, insurance premiums and any major bills you may have to pay soon and deduct what you'll need in the near future to see how much you have left. Once you've narrowed down the homes you like, estimate how much the closing costs will be. In general terms closing costs are between 2% and 5% of the sale price of the home. This can make a difference in the amount of down payment you can pay which can affect your mortgage.
If you have a real estate agent they can help you determine this cost as well as any additional costs you may have to pay. Your agent may also recommend that you negotiate these costs with the seller so make sure everything is in order before applying for a mortgage. You'll want to have items such as paystubs, W2 forms, Social Security or pension letters of award, bank statements and possibly federal tax returns (1040) available. The buyer requests the home inspection as soon as possible and should not choose to skip this step to save costs; a few hundred dollars are worth the peace of mind as inspectors often discover and recommend repairs at the seller's expense that you may not have noticed. The mortgage lender requests a home appraisal to ensure that the home you are buying is in line with your purchase offer. Once you have an idea of what type of mortgage you want contact lenders for pre-approval; for example borrowers must perform an appraisal of any property against which they apply for a mortgage. While dealing with lenders such as banks remember that final decision as to whether approve your mortgage is up to insurers; within three business days after applying for a mortgage unless rejected due to not meeting basic requirements lenders will provide loan estimate. Refinancing current mortgages can lower monthly payments pay off loans sooner or access cash for large purchases; however if unable to make 20% down payment private mortgage insurance (PMI) will be required so talk with lenders fully understand type of mortgages being considered make sure they offer desired term. The first steps in getting mortgages are determining what type best for them how much they can afford review savings decide how much spend on new home consider emergency funds insurance premiums major bills need pay soon narrow down homes like estimate closing costs negotiate costs with seller have everything order before applying for mortgage items such paystubs W2 forms Social Security pension letters award bank statements federal tax returns 1040 available request home inspection soon possible don't choose skip step save costs few hundred dollars worth peace mind inspectors often discover recommend repairs seller's expense may not noticed lender requests home appraisal ensure buying line purchase offer contact lenders pre-approval perform appraisal property against apply mortgage final decision approve insurers provide loan estimate refinancing current mortgages lower monthly payments pay off loans sooner access cash large purchases however unable make 20% down payment private mortgage insurance PMI required talk lenders fully understand type mortgages being considered make sure offer desired term.