So you’re ready to take hold of the American dream and purchase a home. So what exactly is a mortgage and how do you get one? The definition of a mortgage is a debt that is secured by the collateral of real estate and that the borrower is obliged to pay back with a repayment schedule.
A mortgage is the term used for all home loans. It doesn’t matter if you are purchasing a home or refinancing an existing one, if you are obligated to pay back a loan that is secured by real estate, you have a mortgage.
The first step in the process
Before applying for a mortgage, you need to determine how much you are going to be able to afford. This is the time where you need to gather the total amount of all your bills, include your rent or estimate how much you of a mortgage payment you can afford, and then calculate the difference between the debt that you owe on a monthly basis and your current income. This is called your debt to income ratio, otherwise known as your DTI. Lenders like to see a debt to income ratio of 28% and lower. This way it insures them that they have a cushion of 22% in case the debtor decided to take on more monthly obligations.
Your credit score is also an important piece of the puzzle. You’re going to need to know what your credit scores is. If you have never missed any payments, then you should be okay. If you have had trouble paying your bills in the past, you’re going to need to pull your scores from all three credit bureaus to see what kind of shape it’s in.
Assuming that you have a job, your credit score is in good shape, and you have a healthy DTI, you are now ready to approach a lender to get qualified.
Seeking out a mortgage professional
This is the part that is really up to you. If you have good credit, there really isn’t anyone that you cannot work with. We always recommend that your first step would be trying to pre-approved with the bank that you hold a checking account with. They will be the ones that can get you approved the easiest since they have records of your incoming and outgoing expenditures. Not only will it make the approval a bit easier, it might also help you save a couple dollars on your monthly mortgage payment if you decided to have your mortgage payment direct debited (payments that come out automatically from your checking account.)
If you have less than stellar credit, we recommend using a local mortgage broker. They have access to many mortgage lenders that specialize in borrowers with bad credit. Just Google the name of your city followed by mortgage and you will find a whole herd of them. Always be aware of the fees that they are charging you, especially the mortgage brokers fee or the origination fee. These fees can be negotiated and are often times extremely high.
The mortgage process
Once you have determined the mortgage professional you’re going to work with, it’s time to start the loan process. When you go to meet with your mortgage professional, you’re going to need to bring the following documents with you. You should bring your last two pay-stubs from your employer, documents showing any assets that you may own (401k, stocks, paid off cars, etc.), and a recent appraisal of the home if you have one. This will speed up the loan process exponentially if you are able to provide these documents upon the first time meeting.
You fill out the application and assuming that you have been pre-approved, you will then be provided with a good faith estimate and a truth in lending disclosure within three business days essentially explaining the fees that will be involved if the loan were to be funded.
After you have picked out the home you like, or are offered on an interest rate that you like on a refinance, you will provide all information and documents that you will need to provide in order for the loan the close and fund.