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How to Get a Mortgage

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  • Introduction

    • When it's time to finance a home purchase, it may be tempting to simply pick the most convenient option. However, taking the time to find the right mortgage for your situation can make all the difference in your future financial security. The mortgage market has some confusing terminology, but this guide will help explain the various mortgage choices available, so you can get the right one for you.

  • Step 1: What Kind of Mortgage to Get

    • First, you'll need to choose the type of mortgage that best suits your situation. The most common mortgage types you'll find are fixed rate, adjustable rate (ARM), loans from the Federal Housing Administration (FHA), or loans from the Department of Veterans Affairs (VA).

  • Fixed Rate Mortgages

    1. Fixed rate mortgages have payments locked in at a set rate throughout the life of the loan.
    2. This can mean higher payments in the long run, but you always know what your monthly payment will be (insuring you don't have any nasty surprises later).
    3. You can also select the loan term (otherwise known as the length of the mortgage).
    4. Shorter terms mean lower interest rates and higher monthly payments.
    5. A longer term will let you have lower monthly payments, but they'll be at a higher interest rate.

  • Adjustable Rate Mortgages

    1. Adjustable rate mortgages have payments that vary with interest rates.
    2. If interest rates decrease during the life of your mortgage, you'll end up paying less than the average fixed rate homeowner.
    3. If rates skyrocket, you could potentially be stuck with payments that you can't afford.
    4. It's a good idea to have a financial cushion if you're going to choose an ARM.

  • FHA Loans

    1. FHA loans are government subsidized.
    2. They're good for buyers who:
      • Are purchasing their first home
      • Don't have terrific credit
      • Don't have the funds for a down payment
    3. There are limits in the amount that you can borrow, however.
    4. Be aware that interest rates are a little higher than a conventional fixed rate mortgage.

  • VA Loans

    1. VA loans are available only to military veterans.
    2. These loans do not require a down payment.

  • Other Options

    • There are some other fancy options out there, such as interest only loans (for a short time you pay only the interest on what you've borrowed). If you're not a financial whiz it is probably better to stick with one of the more standard options so you don't get burnt.

  • Step 2: Where to Get Your Mortgage

    • Next, you'll need to determine what kind of lender you want to work with. As with mortgage types, each type of lender has their benefits and their average rates. Check with different lenders to see which one has rates and level of service that work for you.

  • Banks

    1. Banks are a common mortgage lender.
    2. If you use the same bank for all your financial needs you could have the advantage of keeping all of your financial eggs in one basket.
    3. Local banks often have the best insight into what's required in your area.
    4. The reverse is also true: if you plan to buy outside your bank's service area, they probably won't know the requirements in your new town, and that can get you into trouble.

  • Mortgage Brokers

    1. Mortgage brokers carry a range of mortgage options from different lenders.
    2. With the number of lenders they have access to, they can sometimes offer lower rates.
    3. They may also be able to find a mortgage for someone who hasn't been able to get financed elsewhere.
    4. Using a broker means you'll have to pay some additional broker fees.

  • Savings and Loan Associations

    1. Savings and loan associations offer primarily long-term home loans.
    2. The application process can be a little easier than at commercial banks.

  • Credit Unions

    1. Credit unions often offer low mortgage rates.
    2. You must be a credit union member to apply for a loan, which means meeting the union's requirements to join.

  • Step 3: Figure Out How Much You Should Borrow

    • When it comes to figuring out how much you can afford, both house-wise and mortgage-wise, you have three factors to consider: the monthly payment, down payment, and closing costs.

  • Monthly Payments

    1. Fully evaluate your budget to determine how much you can afford to pay each month.
    2. You know your own spending and saving habits better than anyone, so consider them realistically.
    3. It might be tempting to just apply and let your lender determine your maximum total debt payments, which are usually calculated as less than 36% of your monthly gross income, but your lender doesn't know you. They don't know about your Starbucks addiction or your plans to travel Europe next year.
    4. Track your spending for two or three months to determine how much you can really afford.

  • Down Payments

    1. Determine if you can afford a down payment.
    2. If you've got cash at hand, that's great, but if not, don't think you have to throw this option out the window.
    3. While there are no-down payment options available, it's best to take the time to estimate how much you want to borrow and save at least 5% to put down.
    4. Making a down payment will lower your monthly payments and interest rate.
    5. You'll also eliminate the need for private mortgage insurance (PMI).
    6. If you can't scrape the funds together, see if someone will help you out. It's best to exhaust all of your options, because it really will save you money in the long run.

  • Closing Costs

    1. When you're calculating the amount of money you'll need up-front, don't forget to include the closing costs.
    2. These usually come out to somewhere around 2-7% of the total cost.
    3. Some sellers will agree to help cover the closing costs if your up-front cash is limited.
    4. Ask your realtor to work this request into your offer.
    • Once you've answered all of these questions, shop around and compare your options side-by-side with this downloadable spreadsheet to come up with the best choice for you.

  • Step 4: Apply for the Mortgage

    • The actual process of applying for your mortgage is time-consuming and requires a lot of paperwork, but it's actually very simple once you break it down. All you need to do is get pre-approved, make an offer, and complete the application.

  • Pre-Approval

  • Making Your Offer

    1. First you'll need to make an offer on the house you want to buy.
    2. You may have to do some bargaining over purchase price, percentage down, and earnest money, which is the money you pay with the offer to show that you're serious.
    3. Your real estate agent can help you to make an offer that accounts for the condition of the house and the local market conditions.
    4. When you make your offer, you'll select a closing date.
    5. The seller will need to approve the closing date.
    6. Depending on the date you agree on, you may or may not want to discuss locking in your interest rate with your lender.
      • If interest rates are rising, and you don't plan to close on the house for a couple of months, locking in the rate can save you money.
      • However, you will probably have to pay some fees to make this happen, and those fees will increase the longer the rates remain locked in.
    7. If you've got some extra cash, consider paying down points to lower your interest rate.
      • When you pay points, you're essentially putting down more money to pay off the interest.
    8. Paying points may be to your advantage if you plan to spend a long time in the house, but in general it won't pay off if you plan to move within the next five years or so.

  • Complete Your Mortgage Application

    1. Now it's time to complete the mortgage application with your lender or broker.
    2. This is a paperwork-intensive process that will take some time and organization to complete.
    3. Your lender will want to see a lot of documents that show how much cash you have at hand, how much you make, and what your debt situation is so they can determine if you're trustworthy enough to receive the loan.
    4. While each loan is different, you'll probably be required to produce:
      1. Recent pay stubs.
      2. W-2s and tax returns.
      3. Contact information for your employer(s).
      4. Information about things that you own: bank accounts, stocks, personal property.
      5. Information about your debts and credit.
    5. Use this mortgage application checklist to make sure you have the materials you need.

  • Step 5: Close the Deal

  • Before You Close

    1. Your real estate agent should walk you through doing a title search, finding title insurance, and doing a property survey.
    2. Your real estate agent will also help you find people to help with the closing process:
      • A closing agent who holds all of the money, coordinates the documents, and just coordinates the closing process in general.
      • A home inspector to make sure that you're getting what you're paying for.
      • An attorney (if you decide that you want one).
      • Insurance and title experts.

  • Closing

    1. At the closing, you'll get yet another stack of paperwork.
    2. This will include:
      • The HUD settlement, which summarizes all of the money that's going to be changing hands
      • The deed to your new house.
      • A note, which summarizes all the info for your mortgage payments.
      • Affidavits that verify all of your information in case you decide to stop making your payments.

  • Conclusion

    • Once this is all complete, it's time to celebrate, because you own your new home! Before you break out the bubbly, carefully store copies of all of the paperwork for your records and for tax purposes. Then start packing—you've got a new house to move into!

  • Resources for How to Get a Mortgage


 


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