Steps to Take Before Applying for a Home Loan will help you succeed. A home loan lets you borrow money to buy a house. This article talks about 10 key steps to take first. Doing these things will help you find the best loan and get approved.
The first step is learning about home buying and the types of loans. There are many kinds, like conventional, FHA, VA, and jumbo loans. Each has different rules, down payments, and interest rates. Knowing the choices will help pick the right one.
The next big step is checking your credit score. Good credit gets better loan rates. You can check for mistakes on your credit report and fix them. Paying off debt can raise your score too.
Understand the home buying process and loan types
Buying a home is an exciting journey! Here is a quick overview of the key steps:
- Get pre-approved for a mortgage. This shows sellers you can get financing and locks in an interest rate.
- Find a real estate agent to help you search for homes in your price range.
- Make an offer when you find “the one”! This starts negotiations with the seller.
- Your offer is officially accepted – time to get a home inspection and appraisal. These make sure there are no surprises.
- Final walkthrough time! Do one last check before closing to ensure repairs were made.
- At the closing you sign all final paperwork and get the keys. The home is officially yours!
There are several mortgage options to know about:
- Conventional loans – Provided by private lenders with the least restrictions but usually require higher credit scores and bigger down payments.
- FHA loans – Insured by the Federal Housing Administration and offer low down payments for borrowers with lower credit scores.
- VA loans – Offered to veterans and active military with no down payment or private mortgage insurance required.
- USDA loans – Help eligible borrowers in rural areas buy with no down payment and low interest rates.
- Jumbo loans – For luxury homes above conventional conforming loan limits, typically higher down payments needed.
- Adjustable-rate mortgages (ARMs) – Interest rates start low but can get higher over the life of the loan.
Here is a comparison of some key features of these loan types:
| Loan Type | Down Payment | Credit Score | Interest Rates |
|---|---|---|---|
| Conventional | 3-20% | 620+ | Varies |
| FHA | 3.5% | 500+ | Varies |
| VA | 0% | 620+ | Below market rates |
| USDA | 0% | 640+ | Set by USDA |
| Jumbo | 10-20%+ | 700+ | Varies |
| ARMs | Varies | 620+ | Starts low, varies |
The best loan for you depends on your financial situation! Talk to a lender to discuss all your options and decide what works for your budget and home buying goals. They can guide you in pre-approval.
Some key things to ask potential lenders:
- What loan types and rates do you offer?
- What down payments and fees are needed?
- How can you help me if my credit isn’t perfect?
- Do you have any special first-time buyer programs?
Being informed sets you up to find the optimal home loan!
Check and improve your credit score
Your credit score plays a huge role in determining if you’ll qualify for a home loan and what interest rate you’ll pay. Before applying for a mortgage, it’s essential to check your credit reports and scores from all three bureaus – Experian, Equifax, and TransUnion.
First, order your free annual credit reports from AnnualCreditReport.com. Comb through your reports and dispute any inaccurate or outdated information, like closed accounts still listed as open. Paying down credit card balances and other revolving debt is also key to improving your credit utilization ratio.
Next, access your credit scores from each bureau’s website or a site like Credit Karma. Scores typically range from 300-850. FICO scores over 740 are considered excellent for the best mortgage rates. If your scores need work:
- Pay all bills early or on time
- Don’t open new credit cards or loans
- Don’t make large purchases that require a credit check
Give yourself 3-6 months before applying to improve your credit profile. Having excellent credit means better loan term offers from lenders.
How Different Credit Score Ranges Affect Your Mortgage
| Credit Score Range | Impact on Mortgage Rates and Approval |
|---|---|
| 760+ | Qualify for the lowest rates from most lenders |
| 700-759 | Decent rates, likely to be approved |
| 620-699 | May pay up to 2% higher rates, risk denials |
| Below 620 | Difficult to qualify, high chance of denial |
Be sure you know your scores before starting mortgage applications. Suddenly applying for new credit can lower your scores. To track your progress, check your scores every 2-3 months leading up to your home purchase.
The more issues you can resolve ahead of time, the better position you’ll be in when seeking loan pre-approval and competing against other buyers. Don’t let credit problems derail your homeownership dreams!
Calculate costs and shop mortgage rates
Finding the best mortgage rate can save you tens of thousands of dollars over the lifetime of your home loan. Here are some tips to calculate your costs and compare rates smartly:
- Get pre-qualified or pre-approved for a specific loan amount from a lender. This allows them to assess your finances and provide a good faith estimate of the amount you can borrow.
- Use free online mortgage calculators to estimate your potential monthly payments, interest costs, and other figures. Plugging in your loan amount, interest rate, down payment, and loan term generates custom estimates.
- Research average national and regional mortgage rates so you know what’s competitive. Rates fluctuate daily and vary by loan type. Conventional loans often have the lowest rates while FHA loans have slightly higher rates but lower down payment requirements.
Here’s a snapshot of current average 30-year fixed mortgage rates to give you an idea:
| Loan Type | Interest Rate |
|---|---|
| Conventional | 6.14% |
| FHA | 5.82% |
| VA | 5.85% |
| USDA | 5.00% |
- Shop rates from multiple lenders. Banks, credit unions, and online lenders all offer mortgages, but rates and fees differ. Getting multiple rate quotes allows you to compare options.
- Connect with mortgage brokers who have access to loan products from a variety of wholesale lenders. This expands your range of rates to consider. Brokers may also guide you to specialized loan programs you wouldn’t find on your own.
- Pay attention to lender fees like application fees, underwriting fees, and origination charges. The interest rate is not the only cost factor. Calculate your total closing costs.
- Consider getting pre-approved once you’ve identified 2-3 competitive rate offers. Pre-approval locks in a rate for 60-90 days typically. This prevents your rate and monthly costs from rising later.
Shopping smart allows you to secure the best possible rate and clearly understand the monthly and total costs of your mortgage. Comparing personalized quotes rather than just average rates is key to saving money. With a methodical process, you can find both a great rate and lender to work with.
Subheading on Pre-approval
Getting pre-approved should be one of the final steps after researching rates and lenders. This locks in your mortgage rate and loan terms for 60-90 days generally. While not a 100% guarantee of final approval, it shows sellers you are a serious buyer able to obtain financing.
Determine your budget and down payment amount
Figuring out your budget and down payment is a big step before you apply for a home loan. You need to know how much house you can afford each month and how much money you’ll need upfront.
First, make a list of all your current expenses like groceries, gas, utilities, and student loans. Don’t forget small costs like coffee and eating out. Add up everything to get your total monthly expenses.
Next, think about what you feel comfortable paying for your mortgage. Most experts say to spend less than 30% of your income on housing. But also factor in costs that come with owning like property taxes and home insurance.
Use an online calculator to estimate your payment. Enter details like:
- Loan amount
- Interest rate
- Loan term
- Down payment
This will show your potential monthly payment. See if it fits your budget. If not, adjust the numbers until you find an amount that works.
| Loan Amount | Interest Rate | Term | Down Payment | Monthly Payment |
|---|---|---|---|---|
| $200,000 | 4% | 30 years | $40,000 (20%) | $843 |
When it comes to your down payment, aim for at least 20% of the home’s price. This helps avoid paying private mortgage insurance (an extra cost added to your monthly payment).
So on a $200,000 home, save around $40,000 for the down payment. Some first-time buyers put down less, but it leads to higher payments.
If you don’t have enough savings, here are some options to reach 20%:
- Ask family for gift money
- Take out a 401(k) or home equity loan
- Use grant programs for qualifying buyers
Following these planning steps now sets you up to apply for a mortgage you can actually afford. Know your numbers, shop lenders, and get pre-approved once your budget and down payment are figured out.
Gather required documents and paperwork
When applying for a home loan, lenders will ask for several documents to verify your income, assets, debts, and other financial information. Having all your paperwork ready ahead of time prevents delays during the mortgage process.
Pay stubs and tax returns covering the last 2 years are key to confirming your income. Collect W-2s and recent pay stubs from all your employers. Also gather federal tax returns, including all schedules and attachments. Self-employed borrowers will need even more documentation like business tax returns and financial statements.
Bank statements provide critical details about your savings, spending habits, account balances, and recurring deposits. Lenders generally ask for 2-3 months of statements from all your checking, savings, and investment accounts. Highlight key deposits and include documentation explaining where large deposits came from.
Credit reports and scores from Experian, Equifax, and TransUnion verify your payment history across all your credit accounts. Having recently ordered reports makes it easy for lenders to pull your scores. Expect to explain any late payments, collections accounts, or other credit report issues.
What Documents Do Most Lenders Require?
| Document Type | Specific Items Needed |
|---|---|
| Income verification | Pay stubs, W-2s, tax returns, profit/loss statements |
| Asset verification | Bank/investment statements, retirement account balances |
| Identity and residency | ID card, Social Security card, utility bills |
| Property information | Purchase contract, home inspection report |
| Credit and debts | Credit reports, score breakdowns, payment histories |
In your loan application, account for all your financial obligations, including other mortgages, rent payments, car loans, student loans, child support, alimony, and credit cards. Having organized records about your income sources, monthly debts, account balances, and credit history gives lenders confidence.
Draft an explanation letter for any credit report items that need clarification, like collections accounts, late payments, or credit inquiries. Context about one-time events or past financial struggles helps reassure lenders about your current situation.
The bottom line is diligently gathering paperwork reduces headaches during underwriting. Confirm with your lender exactly which documents they require and their submission process. Having your financial life organized sets you up for an efficient home loan process.
Research lenders and get pre-approved
Choosing the right lender is one of the most important steps before applying for a home loan. You’ll want to thoroughly research multiple lending options to find the best rates, fees, and overall fit.
Start by checking online lender websites like Quicken Loans, loanDepot, and Better.com. Compare their advertised mortgage rates, closing costs, and eligibility requirements. Online lenders typically offer very low rates but you work primarily over the phone and email rather than with a local branch.
Next, check rates from banks and credit unions in your area. Community banks like credit unions often have great customer service since they operate locally. They also may be more flexible than big, national lenders. As you shop rates, keep detailed notes on each loan offer so you can easily compare the options.
In addition to banks and online lenders, connect with local mortgage brokers. Brokers have access to wholesale lender rates from a variety of national, regional, and community banks. They can be a great option if you want very customized service and access to niche loan programs. The broker acts as your representative and advocate throughout the process.
As you narrow down your top choices, get pre-approved with 2-3 different lenders. The pre-approval process involves completing a full application and submitting all of your financial documentation. In exchange, the lenders provide a pre-approval letter that locks in an estimated interest rate for up to 60-90 days. With letters in hand from multiple lenders, you’ll be in a great position to compare offers and negotiate on rates/fees as you later shop for homes.
Key Factors When Choosing a Lender
| Factor | Description |
|---|---|
| Interest rates and fees | Compare interest rates first, then look at origination fees, appraisal fees, and other closing costs. |
| Customer reviews | Check third-party review sites and the CFPB complaint database. |
| Loan types | Each lender offers different combinations of conventional, FHA, VA, USDA, and jumbo loans. |
| Rates for your credit score | Rates vary considerably based on your credit score and history. |
| Local branches | Nearby branches can provide more personalized guidance. |
The lender you choose can have a big impact on your interest rate, monthly payment, and overall experience. Conducting due diligence on the front-end will pay major dividends and set you up for success as you navigate the home buying journey.
Achieve Your Goal of Homeownership
Following these 10 essential steps puts you well on your way to achieving your goal of homeownership. Improving your credit score, calculating costs, gathering paperwork, researching lenders, and getting pre-approved sets the foundation for success. Give yourself at least 3-6 months to prepare so you can find the best possible mortgage option. Rushing in without taking key preparatory actions could derail your chances or saddle you with a less than ideal loan.
At Anew Lending, our experienced team of mortgage brokers walk with you each step of the journey. We offer personalized guidance and a wide selection of home mortgage products to fit your unique situation. Contact us today at (916) 226-9991 to start a complimentary consultation. Our mortgage professionals will answer all your questions and help you take the right steps pre-approval. Let us support your dream of owning a home in Elk Grove by finding you the perfect loan match. The first step starts with a phone call.