By Christina Kass
The Loan of Your Life: Steps to Obtaining a Mortgage
With home ownership comes what’s usually the largest debt obligation of your life — a mortgage. While applying for a mortgage can be intimidating, especially for first-time homebuyers, arming yourself with information can demystify the process.
In simple terms, a mortgage is a type of loan used to purchase a home or other real estate. With the property itself as collateral, the borrower agrees to pay back the loan back over time, plus interest. The cost of a mortgage depends upon several factors, including the type of loan, the term and the interest rate charged by the lender.
Here’s what you need to know when obtaining a mortgage:
Get prequalified and preapproved
Even before you start your home search, it’s wise to take some preliminary steps that will pay off later. With a prequalification, you informally provide an overview of your finances, income and debts to a lender, who determines if you qualify for a mortgage and estimates your loan amount.
The next step is the preapproval process, where a lender pulls your credit report and verifies your income, assets and debts. Once preapproved, your lender will issue a preapproval letter, which signals to real estate agents and sellers that you’re a serious home buyer.
According to Ken Dunneback, senior mortgage consultant with MiMutual Mortgage in Livonia, Mich., getting preapproved is increasingly important in today’s sellers’ market. “Right now, demand for available homes far exceeds supply,” he says. “In order for a buyer to increase the chances of getting an offer accepted, their offer must be accompanied by a preapproval letter.”
Dunneback also urges buyers to be educated on the numbers involved when buying a home, including the down payment and costs associated with appraisals, credit reports and escrow accounts. “An educated buyer is a prepared buyer,” he says. “Nobody likes to be surprised when purchasing a house.”
Check your credit score and shop interest rates
Well in advance of reaching out to a lender, it’s a good idea to check your credit score, as this will impact the type of loan you qualify for and your interest rate. Most lenders use a baseline credit score to approve or deny mortgage applicants.
A credit score of at least 620 is recommended for conventional mortgages, with scores in the 700s or above translating to the lowest interest rates. Lenders can offer direction to improve your score if necessary.
“Your credit score is vitally important in all aspects of purchasing a home,” says Lynn Dillon, mortgage consultant at Genisys Credit Union Mortgage in Auburn Hills, Mich. “It affects everything from the interest rate on the note itself, to how costly the private mortgage insurance premium will be, and even the amount of your homeowner’s insurance policy.”
Determine what loan type works best for you
Just as there is no “one size fits all” approach to finding the perfect home, there are several mortgage types available to suit the diverse needs of borrowers. Here’s a breakdown on some of the most common types of loans:
- Conventional Fixed Rate Mortgage – The interest rate remains the same throughout the entire life of the loan. The most popular and predictable of all home loans, these come in terms of 30, 15 or 10 years.
- Adjustable Rate Mortgage (ARM) – The interest rate changes based on a specific schedule after a fixed period at the beginning of the loan. These are best for homebuyers who don’t plan on having the mortgage for a long period of time.
- FHA Mortgage – A home loan insured by the Federal Housing Administration and designed for borrowers of more modest means including a lower down payment or those that have lower credit scores going as low as 500.
In addition, there are loans backed by the Department of Veterans Affairs and the U.S. Department of Agriculture, as well as balloon mortgages — loans with an initial period of low to no monthly payments, at the end of which the borrower pays the full balance in a lump sum.
Get your documents in order
No matter what type of loan works best for you, you’ll need to set aside some time to round up the documents and data needed for your application, which include:
- Employment – Your employer, job title, salary and length of time employed
- Income – Two years of W-2s (or profits and losses if self-employed), pensions, Social Security, child support and alimony
- Assets – Your bank accounts, real property, investments and proceeds from the sale of your current home
- Debts – Your current mortgage, other liens that have monthly payments, credit cards, car loans, child support and alimony
- Property – Your estimated closing date, size and type of home, expected sales price, real estate taxes and homeowner’s association dues
- Financial Blemishes (if applicable) – Any bankruptcies, collections, foreclosures or delinquencies
Partner with trusted professionals
While the details of the mortgage process can seem overwhelming, the good news is that you don’t have to go it alone. Vanguard Title or your Realtor® can help you find a reputable mortgage lender and your loan officer will guide you through the mortgage process. And, when it’s time to close on your new home, you can count on Vanguard to make it seamless and easy.
From pre-qualification to closing, being prepared for each phase in the mortgage process can go a long way toward a smooth homebuying experience.