To get a successful mortgage approval, you need to have organized finances, a good credit score, stable income, choose a lender with favorable terms, and get preapproved before searching for a home.
The mortgage process can be intimidating, and if you’re a first-time homebuyer, you might be apprehensive about where to start. The Consumer Financial Protection Bureau (CFPB) has numerous tools to help you navigate the entire home purchase process and obtain a mortgage loan. The steps you should follow are consolidated into this simple guide for how to get approved for a mortgage.
Understanding Mortgage Basics
Buying a home is a major milestone for most people, but it can also be a daunting process, particularly when it comes to understanding the mortgage. A mortgage refers to a loan that is taken out to purchase a property. The loan is secured by the property, which means that the lender has the right to seize the property if the borrower defaults on the loan. Mortgages are typically offered by banks, credit unions and other financial institutions.
Borrowers can choose from various types of mortgages. One type is a fixed-rate mortgage, which has a set interest rate for the entire term of the loan. This means the borrower's monthly payments remain the same throughout the life of the loan. Another type is an adjustable-rate mortgage, which has an interest rate that can fluctuate over time. This means the borrower's monthly payments can vary, making it difficult to plan for the future.
You also can choose from various options when it comes to mortgage repayment. One option is a traditional repayment plan, where the borrower makes monthly payments for a set amount of time until the loan is fully repaid. Another is an interest-only mortgage, where the borrower only pays the interest on the loan for a set period of time before starting to make principal payments. A balloon payment mortgage lets the borrower makes smaller monthly payments for a set period before making a large, lump-sum payment at the end of the loan term. It's important for borrowers to carefully consider their options and choose a mortgage that best fits their financial situation and goals.
Difference Between Mortgage Preapproval vs. Approval
When you are looking to buy your dream home, you may hear the terms “mortgage preapproval” and “mortgage approval” thrown around. Although they sound similar, the terms are quite different, and it is important to understand the difference between them before you start the homebuying process.
Mortgage preapproval means that a lender has reviewed your financial information (your credit score, income, and debt) and has determined how much money they are willing to lend you for a home purchase. This pre-approval is typically quick and can usually be done online or over the phone. With pre-approval, you can get an idea about what the interest rates and mortgage terms will look like, giving you a better sense of your budget. However, a preapproval is not a guarantee of funding. Lenders will still need to conduct a thorough review of your financial information once you have found a home and made an offer. That's where mortgage approval comes in.
Mortgage approval is the final step in the mortgage process. It means the lender has thoroughly reviewed your financial information, the information about the property, and any other necessary documents and has decided to fund your loan. This approval is contingent on several factors, such as an appraisal of the property, a home inspection and a final review of your financial information. Once all of these conditions are met, you will receive a final mortgage approval and can close on your new home. Although the approval process can be more extensive and take longer, it is critical to ensure that you are able to afford your new home and to avoid any unpleasant surprises during the home-buying process.
9 Steps to Get Approved for a Mortgage
Getting approved for a mortgage doesn't have to be a daunting process. In fact, one thing that can make it easier is to get a mortgage preapproval before you start looking at properties. The process of getting approved for a mortgage is broken down below.
1. Understand Your Credit
Your credit score is a number that represents your creditworthiness or how likely you are to repay debt. Mortgage lenders use this score to determine whether you're eligible for a loan, how much you can borrow, and what interest rate you can get. Knowing your credit score will help you gauge your chances of getting approved for a mortgage.
Before applying for a mortgage, you should get a copy of your credit report from a credit-reporting agency. You're entitled to one free report per year, which can be easily accessed through www.annualcreditreport.com. Once you have the report, check for errors and inaccuracies. If you find any, dispute them with the bureau that issued the report. Inaccurate information can hurt your credit score and reduce your chances of being approved for a mortgage.
In addition to your credit report, you should also know your credit score. Credit scores range from 300 to 850, and the higher your score, the better your creditworthiness. A score of 700 or higher is usually considered good, while 800 or higher is excellent. If your score is lower than 700, you may still be eligible for a mortgage but you may have to pay a higher interest rate. If you're planning to apply for a mortgage, it's a good idea to know your credit score and work on improving it if necessary.
2. Save for the Down Payment
In almost all cases, you'll need a down payment when purchasing a property, typically ranging from 5% to 20% of the total purchase price. As a result, it's essential to save enough money to meet the down payment requirements before buying a home. Having enough of a down payment will make it easier to obtain mortgage approval and can help you lock in lower interest rates.
One of the best ways to start saving is by creating a budget and tracking your expenses to identify areas where you can cut back. Set a savings goal and work toward that goal by putting aside a portion of each paycheck. Consider opening a high-yield savings account to save more efficiently.
You may also want to consider alternative sources of income, such as selling unused items or taking on a side job, to boost your savings further. By being disciplined with your finances and making saving a priority, you'll be well on your way to meeting the down payment requirements and achieving your dream of homeownership.
3. Gather Necessary Documents
Without the right documents, lenders are unable to validate your ability to repay your loan, which can lead to you being denied a mortgage approval or a higher interest rate.
Some important documents you'll need to provide include tax returns, bank statements, and pay stubs. Tax returns provide lenders with an in-depth look at your income and finances. They can also help lenders determine whether you are eligible for certain tax breaks and deductions. Bank statements, on the other hand, offer lenders a glimpse at your spending habits and can help them determine whether you have enough savings to cover the costs of any unexpected expenses that may arise. Finally, pay stubs help lenders estimate your income, which plays a pivotal role in determining your loan eligibility and interest rate.
Gathering these documents can take some time, so it's important to start early. Make sure you read the lender's requirements carefully to ensure you provide everything they need. Keep in mind that providing false documents can have dire repercussions, so honesty is always the best policy. By submitting all the necessary documents, lenders will be able to quickly and accurately assess your financial standing, ultimately leading to a smoother loan application process.
4. Keep Your Finances Consistent
Another important step toward getting approved for a mortgage is maintaining a stable work and income history. Lenders typically prefer applicants who have worked for the same employer for at least two years and have a consistent source of income. This stability shows that the borrower is financially responsible and can make the mortgage payments on time.
5. Choose the Right Mortgage
Many different types of mortgage loans are available, each with varying terms and requirements. It's important to take the time to research and understand the differences to make an informed decision.
One of the first things to consider when choosing a mortgage is the interest rate. This will determine the amount of interest you'll pay on your loan, which can have a significant impact on your overall monthly payment and long-term financial health. You'll also want to evaluate loan terms, such as the length of the loan and whether it's fixed or adjustable. Some loans may also have fees and closing costs that should be taken into account.
6. Shop Around for a Mortgage
Don't settle for the first mortgage offer you receive. It's crucial to compare rates, terms, and fees from multiple lenders to ensure you're getting the best deal possible. The interest rate and terms of a mortgage can have a significant impact on your monthly payments and overall financial situation, so it's essential to take the time to carefully evaluate your options.
When looking for a mortgage, don't limit yourself to traditional brick-and-mortar banks. Online lenders can often offer lower interest rates and more favorable terms, as they have lower overhead costs. Plus, many online lenders have streamlined application processes, making it much easier and quicker to get a mortgage preapproval and approved for a mortgage.
7. Find a Reputable Mortgage Lender
Look for reputable institutions that offer a range of loan products and have a strong track record of customer service. You can start your search online, or ask friends and family for recommendations. Once you have a list of potential lenders, reach out to them and schedule an appointment to discuss your options.
8. Get a Mortgage Preapproval
One of the most important steps to take is to get a mortgage preapproval. This involves a lender evaluating your creditworthiness and pre-approving you for a specific loan amount with a specific interest rate.
A mortgage preapproval gives you an edge when shopping for a home, as it shows sellers that you are a serious buyer and have already taken steps to secure financing. It also helps you avoid the disappointment of falling in love with a home, only to find out later that you are not qualified to buy it. Additionally, a mortgage preapproval can help speed up the mortgage process once you find the perfect home, as the lender has already reviewed your financial documents and credit history.
Keep in mind that a preapproval is not the same as a mortgage prequalification. Prequalification is a simpler, less formal process where a lender provides an estimate of how much you may be able to borrow based on the information you provide. A mortgage preapproval, on the other hand, requires more documentation and a more detailed credit evaluation.
9. Finalizing Your Mortgage and Closing the Deal
Once you have found your dream home and your offer has been accepted, it's time to finalize the deal and the closing process. This step involves completing all legal and financial requirements while also paying the down payment and closing costs. It is important to understand all the terms and conditions of the mortgage and read through all documents carefully before signing. Once all legal documents have been signed, the seller will transfer ownership of the property to you and you will officially become a homeowner.
Final Thoughts
The key to a successful mortgage approval is to ensure that your finances are in order, your credit score is in good standing, and that you have a reliable source of income. Additionally, it's important to choose a lender that suits your needs and offers competitive rates and terms. To make the process smoother, obtain a mortgage preapproval before starting your home search.
By following these steps, you can increase your chances of getting approved for a mortgage and achieving your dream of owning a home. Remember to do your research, be honest and transparent throughout the application process, and seek the guidance of a qualified mortgage professional if you need assistance.
Frequently Asked Questions
What is the minimum credit score required to get approved for a mortgage?
The minimum credit score required varies depending on the lender and the type of mortgage. A credit score of 620 or higher is generally required for most conventional mortgages.
How much of a down payment do I need to make in order to get approved for a mortgage?
The amount of down payment required varies depending on the lender and the type of mortgage. Some lenders may require as little as 3% down, while others may require as much as 20% down.
In addition to credit score and down payment, what other factors do lenders consider when deciding whether to approve a mortgage application?
Lenders consider a variety of factors, including income, employment history, debt-to-income ratio and overall financial health.
Can I still get approved for a mortgage if I have a low credit score or a high debt-to-income ratio?
It may be more difficult to get approved for a mortgage with a low credit score or a high debt-to-income ratio, but it is still possible. Some lenders specialize in working with borrowers who have less-than-perfect credit or financial situations.
How can I improve my chances of being approved for a mortgage?
To improve your chances of being approved for a mortgage, work on improving your credit score, saving up a larger down payment and reducing your debt-to-income ratio. Make sure you have a stable job and income, and avoid making any major purchases or applying for new credit in the months leading up to your mortgage application.