Shopping for and buying a new home is thrilling. Sometimes it’s also frustrating, confusing, and tiring. But starting well means ending well. The whole process begins with securing a home loan. There are advantages to getting a loan before finding a home. First, you don’t have to worry about finding a home that you can’t get financing for. Nothing is more disappointing than picking out your first home only to learn you can’t buy it. Second, you know what price range to look for. That means you aren’t shopping for less home or more home than you can actually afford. In addition, sellers take you seriously when you have guaranteed home financing already in place. Here’s how to get the home mortgage process underway.
How Do You Prepare to Apply for a Home Loan/Mortgage?
The quickest, easiest way to become a home owner is to begin by securing the home loan, and then finding the perfect home.
There are several factors in getting approved for a home loan. These factors also determine how much loan you can get, and how much interest you’ll pay. While the requirements differ from one mortgage lender to another, the primary considerations are:
- Your income
- How much down payment you have
- Your credit rating and credit history
- Money left over after making the down payment
- Your current employment and employment history
Of course, the mortgage company won’t take your word for these things. You’ll have to back up your application with the right documentation. The documents you’ll need to prove your income and other factors may include:
- Social security cards and birth certificates for all loan applicants
- Proof of residency for the past two years
- Proof of employment for the past two years
- Pay stubs for the past two or three months
- Copies of your W-2 forms for the past two years
- Bank statements (including savings accounts, checking accounts, retirement accounts, and investment accounts) for the past two to three months
- Tax returns for the past two years (almost always required if you’re self-employed)
Don’t be surprised if the mortgage underwriter asks for more documents, like extra bank statements or documents from your landlord or employer. Every company has different guidelines and requirements. It’s a good plan to get these documents together before applying for a mortgage. Get a folder to keep all your mortgage-related documents together and organized. Make several copies of each document so you have them when a home lender asks for them.
How Can You Decide How Big a Mortgage Loan You Can Afford?
The amount a home lender allows you to borrow for a home depends on:
- Your income (You can usually get a loan for as much as 28 to 30 percent of your income)
- The amount you can put down as a down payment (Some lenders ask for as little as zero down payment. Others require as much as 20 percent, especially if you have bad credit or no credit. The more you put down, the less you owe, the less interest you pay and the lower your monthly payments are.)
- Your debt-to-income ratio (How much money you already owe and how big a percentage of your income it is.)
- Other factors determined by the home mortgage lender.
It’s important to understand that you don’t have to buy the most expensive home you qualify for. There are many reasons to buy a less expensive home than your lender approves. For example, you may want to keep more money for vacations, or maybe you are saving money for college for yourself or your kids, or you might have another goal, such as buying furniture. Many people buy homes cheap and use the savings to fix it up. Some people just aren’t comfortable owing the highest amount they can borrow. There’s no rule that you have to buy the most home you can afford.
How Long Does It Take to Get a Home Loan?
Usually, home mortgage lenders close loans within 30 to 45 days from the time you submit an application. However, this can vary some, depending on your circumstances. For example, self-employed people may have to submit extra paperwork. This might delay the process. The lending process also slows down in times of a slow or weak economy and speeds up in a strong economy.
It’s best to go into the process with an open mind and no deadlines. When you’re pressed for time to get out of your current home, it’s easy to make bad decisions or to settle for less. Having plenty of time lets you mull over difficult decisions and take your time comparing lenders or loan offers.
What Types of Home Loans are Available to You?
Don’t let the sheer number of different types of mortgages available scare you. Your mortgage underwriter may toss terms around that confuse you, but these terms are easy for most homebuyers to learn. You’ll hear terms like “fixed rate” and “adjustable rate”, which are almost self-explanatory. Fixed rate means that the interest rate is “fixed” and will not change during the length of the mortgage. Adjustable rate means the interest rate goes up or down according to the prime interest rate.
There are many types of loans, including:
- Conventional loans, which are not guaranteed by the federal government
- FHA loans, issued through the Federal Housing Administration administered by HUD
- VA loans, which are available to members of the US armed forces and their families
- USDA or RHS loans, offered by the Department of Agriculture and available to certain rural homebuyers
- You may qualify for one or more of these loans. Make sure your mortgage broker looks for the best option for you, based on your particular situation.
What Mistakes Do First-Time Homebuyers Need to Avoid?
It’s important to understand the most common mistakes by first-time homebuyers and to know how to avoid them from the beginning of the process:
Don’t buy before you’re ready
There are advantages for renting when you’re first starting out and at other stages of life. Don’t feel like renting is a bad financial move, because often it isn’t.
Never buy before you have enough cash on hand
Even if all goes well, home buying brings lots of unexpected expenses. You’ll need window dressing, floor mats, cleaning supplies, and tons of other unexpected items. Don’t leave yourself strapped for cash, because that takes the fun out of owning a home. Wait until you have enough cash for the down payment plus any surprise expenses.
Don’t buy too much car
Having an expensive car does two things. First, it takes away from the money you have to invest in a home. Second, it increases your debt-to-income ratio. Mortgage lenders look at this ratio to decide if you qualify for a home loan and how much money you qualify for. If you owe too much on a car, you won’t be able to buy as much home. Go with a cheaper car to get the most home you can afford.
Avoid expecting home values to skyrocket
There are many factors that cause home prices to stay level or even drop. While real estate prices usually climb over many years, homebuyers shouldn’t sink all their money into a home expecting it to go up in value immediately. Sometimes that takes many years.
Keep your emotions in check
Home buying is an exciting time and emotions can cloud your ability to make smart decisions. Think with your head, and let your heart get happy later.
What is the Difference Between Getting Pre-Approved and Pre-Qualified for a Home Loan?
Before you offer a contract, understand the difference between pre-approval and pre-qualification. Pre-qualification is usually a fast, simple process. The lender takes some basic information (income, debt, financial assets, etc.), and gives you an idea of the loan you might qualify for. Pre-approval is a lengthier process. It involves a full application, as well as the documentation we talked about earlier. After reviewing your information well, the mortgage underwriter either approves you for a loan or denies your application. In some cases, you may be denied pending an action. For example, you might be denied pending payment of back income taxes.
When you’re pre-approved, all that’s left is to find your home and get the homeowner to accept a contract. Before closing, the lender will go through a few more steps, such as a home appraisal and a check of whether the title to the property is clear of other claims. Sometimes lenders require other actions, but after these steps, you’re ready to close. That’s the point at which the bank pays the seller, and you take possession of the home.
Where Do You Find the Best Mortgage/Home Loan Quotes?
There are many reputable sources for home loans. Banks are an obvious choice. Your real estate agent may have recommendations for you, too. Mortgage companies, mortgage brokers, and credit unions offer loans. It’s fine to speak to several home lenders and find the one that best meets your needs. Some offer better loan options, and others are just friendlier to work with. Shop around until you find the right fit for your home buying needs. Check out for free what other homebuyers say about your mortgage company here.