First-Time Buyers

September 10, 2015

Key Steps To Getting A Mortgage: Buyers Survival Guide

Unless you can buy a home in cash, qualifying for a mortgage is an essential step to becoming a homeowner. You and your lender are entering into a business relationship that is likely to last years or even decades — so it makes sense that you will both put thought and effort into the process. You want to secure the best interest rate possible, and your lender wants to know whether you are likely to be a responsible borrower who will repay the debt. Start by learning how to prepare and what you need to do to get a mortgage.

Know the 4 Essential Steps to Getting a Mortgage 

1. Boost Your Credit Score

Lenders want to know how likely you are to pay your mortgage back, and your past payment history on other debts is the best indicator. The lowest mortgage interest rates are typically given to borrowers who have credit scores over 750, although each lender sets its own interest rate tiers.

You can’t do anything to erase past mistakes from your credit report, but you can take a few steps to getting a mortgage at the lowest possible interest rate. Pull your credit report at least a few months before applying for a mortgage and correct any mistakes that may be dragging your score down. You can also work on making all of your payments on time, paying credit card debt, and not applying for any new loans or credit cards.

2. Have Savings and a Down Payment

You will need to submit bank statements or investment statements to demonstrate your liquid assets as part of qualifying for a mortgage. The ideal scenario is for you to have a down payment of 20 percent of the purchase price, but you can get a mortgage with a down payment as low as 3.5 percent if you pay mortgage insurance. In addition, lenders like to see that you will have a cushion of at least two or three months of mortgage payments after covering the down payment and closing costs.

It’s best to start saving well before you plan to buy a home so you have the money available when you need it. If you don’t have much money to put down, you can look into grants and other homebuyer assistance, which may be able to cover part of the down payment. You can also ask the seller to pay part of the closing costs.

3. Demonstrate Steady Income

Lenders need to see that you have reliable income that will allow you to make mortgage payments. You will need to show pay stubs from your current job and W-2 forms from the past two years. If you are self-employed, you will typically need to furnish tax returns from the past two years and accounting reports for this year.

The strongest mortgage applicants will have been at their current job for at least two years. If you haven’t, it will help if you can show proof of steady employment for two years, and ideally that the move to your current job was a natural advancement in your career.

4. Minimize Debt-to-Income Ratios

The last major thing you need to get a mortgage is a low debt-to-income ratio. Lenders want your housing costs (which include mortgage payments, property taxes and homeowner’s insurance) to be less than 28 percent of your monthly gross income, or 31 percent for FHA loans. In addition, your housing costs plus all other monthly debt payments should be no more than 36 percent of your gross income, or 43 percent for FHA loans.

If you have a lot of other debt, like student loans, auto loans and credit cards, this can make qualifying for a mortgage difficult. If you’re close to paying off a debt with a large monthly payment, work on that before applying for a mortgage. Another option is to consolidate debt with a longer repayment period to make monthly payments smaller.

Final Tips for Navigating the Process of Qualifying for a Mortgage

  • Begin the process early by getting pre-qualified for a mortgage before you shop for a home. This helps you look within your price range and makes you a more attractive buyer.
  • Stay organized by keeping a folder of all the financial documents you have submitted or might need to submit.
  • Check in with your loan processor regularly to ensure you are on track for an on-time closing.

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