If you’re like most people, a house is the biggest financial purchase you’ll make in your lifetime. It’s important to know how to apply for a home loan.
Let’s look at how to apply for mortgage loans, go over basic requirements, and how to make the process as stress-free as possible.
Get your documentation in order
Providing the most accurate information you have on your mortgage loan application can prevent processing delays. Whether it’s your first-time buying a home, or you’re refinancing your second home or investment property, accuracy is key.
When you assemble your mortgage documents, think about where your money comes from and where it goes, and provide any supporting documentation.
Your documents help prove your creditworthiness to potential lenders. They verify the information you include on your loan application or mortgage refinancing application.
Most mortgage loan applications will ask for:
- Your address(es) and telephone number for the two years leading up to your mortgage application
- Two months’ worth of financial statements such as bank, retirement, 401(k), etc. or your recent tax returns
- Pay stubs, W2s that show your income for the last two years
- Any proof of financial or child support you receive
- Employer name, address, phone number or other employment contact information.
- If you’ve filed for (or been discharged from) bankruptcy, you’ll need to show any relevant documentation
- And if you have any less than perfect spots on your credit report—like a late or missed credit card payment, having documents explaining the details can help
Remember, these are general guidelines; your mortgage loan application may differ depending on your situation.
Find out mortgage loan requirements
Lenders use a combination of the borrower’s debt-to-income (DTI), assets, and credit report to assess your ability to repay a loan.
Lenders calculate your DTI ratio by dividing your total debt (regular monthly payments) by your pretax monthly income. They won’t look at variable expenses like groceries or vet bills but include recurring debt like student or credit cards.
Many mortgages use the Consumer Financial Protection Bureau’s recommendation of a DTI ratio equal to or less than 43%
Different home loan programs have different credit score requirements.
For example, borrowers with a minimum credit score of 500 can be approved for certain mortgages with a 10% down payment. But, typically, higher credit scores are preferred.
Borrowers can expect to get lower interest rates the higher their credit score. Credit scores of at least 740 typically get the best mortgage terms and rates.
To verify your assets, most mortgage lenders consider how much you can afford for the down payment on your house. The larger your down payment, the lower your mortgage’s monthly payment.
Do you have any cash reserves (money in the bank equal to a few months of mortgage payments)?
Cash reserves let borrowers know you can handle mortgage payments, mortgage insurance, closing costs, or unexpected expenses should they arise.
How did you get the money? You’ll need to be able to show where your money came from—work, family gifts, etc.
Choose the right mortgage lender
Pull together a list of 3-5 lenders and request loan estimates from each lender.
Banks often have a limited choice of mortgage products, but they can sometimes offer lower rates to borrowers who are existing customers or have a large deposit balance.
Specific mortgage banks typically offer numerous loan products, including government-backed loans like FHA (Federal Housing Administration) or VA (Department of Veterans Affairs) loans. They also handle all parts of the mortgage process themselves, often resulting in quicker closing or an ability to work with borrowers with complex situations.
A mortgage broker is not a lender themselves but they act as a go-between for borrowers and lenders. It can be a good idea to speak with a broker to help you find the right lender. Brokers typically work with various lenders, so they can inform you of the many loans options you have and show you where to find them.
Because mortgage brokers don’t process your loan, they typically have no impact on whether a mortgage application is approved.
How does the mortgage application process work?
Completing a mortgage application process usually takes a few minutes.
Many lenders, like Assist Home Loans, provide an opportunity to begin your application for a mortgage online.
Each lender will provide you with a loan estimate within three business days. Once you receive your mortgage loan pre-approval, it’s time to begin looking at homes.
How long does the whole process take?
Once you’ve found the right house and the seller has accepted your offer, it’s time to finalize the terms of your home loan.
Your lender will arrange for the underwriting of your home loan and arrange for a home appraisal. This usually takes a couple of weeks and is a great time to set up insurance for your new home or gather any additional paperwork that may be requested. These are often updated versions of documents like recent pay stubs or bank statements.
Three business days before your loan’s closing date, your lender will give you a “Closing Disclosure” document detailing the final terms of your mortgage, including its interest rate. Compare this to your loan pre-approval, and as always, talk with your loan officer if you have questions or concerns.
You can expect to spend at least 4-5 weeks to complete the home loan process before getting the keys to your new house.
Get pre-approved with Assist Home Loans
Buying a home begins with pre-approval.
When it comes to applying for a home loan, lenders look at a variety of factors like employment history, income, credit history or credit score, DTI ratio, any assets you have, and the property you are interested in buying.
Mortgage pre-approval not only lets you know how much you can afford to spend on a home, but it tells sellers that you’re a trustworthy, credible buyer. And in a competitive real estate market, that can mean the difference between a seller accepting your offer to buy or their refusal.
When you’re ready for pre-approval, contact the home loan specialists at Assist Home Loans today.
Once you start the process, we’ll be with you every step of the way.
Photo by MART PRODUCTION