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How to get a mortgage will walk you through the process of selecting, applying for, and closing on a mortgage to get you into your dream home. We'll introduce you to the different loan types, lenders, and payments and walk you step-by-step through the process of applying for 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).
FHA Loans
- FHA loans are government subsidized.
- 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
- There are limits in the amount that you can borrow, however.
- Be aware that interest rates are a little higher than a conventional fixed rate mortgage.
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.
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.
Closing Costs
- When you're calculating the amount of money you'll need up-front, don't forget to include the closing costs.
- These usually come out to somewhere around 2-7% of the total cost.
- Some sellers will agree to help cover the closing costs if your up-front cash is limited.
- 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
- Pre-approval isn't required, but it's a definite advantage. By finding a lender before you make your offer and getting a good faith estimate of what you can afford, you show potential sellers that you're serious about your home purchase and insure that you're not selecting a house that's out of your official price range.
Making Your Offer
- First you'll need to make an offer on the house you want to buy.
- 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.
- Your real estate agent can help you to make an offer that accounts for the condition of the house and the local market conditions.
- When you make your offer, you'll select a closing date.
- The seller will need to approve the closing date.
- 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.
- 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.
- 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
- Now it's time to complete the mortgage application with your lender or broker.
- This is a paperwork-intensive process that will take some time and organization to complete.
- 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.
- While each loan is different, you'll probably be required to produce:
- Recent pay stubs.
- W-2s and tax returns.
- Contact information for your employer(s).
- Information about things that you own: bank accounts, stocks, personal property.
- Information about your debts and credit.
- Use this mortgage application checklist to make sure you have the materials you need.
Step 5: Close the Deal
- As your closing date draws closer and your excitement grows, you've only got a few more things to do to make sure that you don't have any unpleasant surprises later.
Before You Close
- Your real estate agent should walk you through doing a title search, finding title insurance, and doing a property survey.
- 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
- At the closing, you'll get yet another stack of paperwork.
- 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!
