How to Get a Mortgage Loan – 8 Easy Steps to Home Ownership

how to get a mortgage loan

How to Get a Mortgage Loan

The time has come for you to invest in your first home. Congratulations! Are you ready to take the next steps to learn how to get a mortgage loan you can afford?

Owning a home is a big responsibility and a major financial investment, and it can be tricky to find the most affordable mortgage for your personal lifestyle and yearly income.

Therefore, pay close attention to our these key tips for landing your first mortgage.

how to get a mortgage loan

1. Debt-to-income Ratio

First of all, using a debt-to-income ratio can factor into your mortgage affordability. It simply calculates your income versus your debts. If you earn $10,000 a month and your debts equal $2,500 per month, then your debt-to-income ratio looks like this:

  • $2,500/$10,000, which equals 0.25.

In fact, this ratio is imperative information to mortgage officers. You need to figure out how much money you can borrow, and knowing your debt-to-income ratio determines if you can. Furthermore, Lenders like lower ratios.

2. Tackle Your Debt

Lowering your outstanding debts is important to keep your mortgage lenders confident that you will pay your mortgage fees on time.

Consider paying off credit cards and student loans down to the best of your ability. You do not want too much debt to hinder your mortgage payment options.

It may seem effective to pay off all your debt at one time, but this actually isn’t the case. Paying off an outstanding balance twice a month can help reset your credit balance and will encourage you to consider putting more money aside to quickly offset these debts.

3. Improve Your Credit Score

Do you know what your current credit score is? Find out by getting a free credit score report so you can understand how your score compares. You want to have a minimum score somewhere in the 600s up to the mid-700s. Start building up your credit in as little as 30 days and do it as early as you can so you can maintain a comfortable credit score when the time comes for you to apply for a mortgage.

Good credit habits = a better mortgage financing option. You need to be a trustworthy individual who will repay the amount borrowed. Find out how you can build credit without the use of a credit card and learn how to keep a good credit score for all your financial needs.

4. How to Find a Mortgage

A free mortgage estimator calculator is available online, so take advantage of this tool to analyze your monthly income, debts, and expenses.

This fast calculation will give you a better look at where you stand financially speaking. If you have too many outstanding debts, you may not qualify for a mortgage at this point in time, but there are more ways to improve your possible affordability by tackling your debt before making the leap into home ownership.

Here’s how you can find a mortgage:

For example, if the mortgage amount is $100,000 and the interest rate is at 3% for 30 years, you will pay somewhere around $430.

The national average for a home loan according to LendingTree is set around $220,000, with a payment per month at around $1,060 at a 4% interest rate. Keep this information in mind when you are shopping around for a mortgage of your own.

5. Meet With Several Lenders

Your first mortgage option may not always turn out to be the best, so shop around. Talk to many qualified mortgage officers at the beginning of your mortgage journey to weigh your options on how to get a mortgage loan you can afford.

Meeting with mortgage lenders

In addition, Mortgage officers will bring lenders (banks) and borrowers (future homeowners) together to discuss the best option for your future mortgage plan. As a result, they can help you find the lowest rates based on your current financial information.

6. Keep All Important Documents

Lenders need to see it all out in the open when it comes to mortgages. As a result, your financial information will determine how much you can afford to pay per month.

Tax returns, bank statements, and outstanding debt bills all factor into determining what mortgage financing you will qualify for.

Some more documents to keep include the following to discover how to get a mortgage loan:

  • W-2s
  • Employer information
  • Proof of income
  • Social Security payments
  • Child support and/or alimony payments
  • Stocks and/or bonds
  • Life insurance information

7. Understand Loan Options

There are three different options to choose from when it comes to the length of a mortgage you can afford (meaning how long you have to repay the loan):

  • 30-year, 15-year, or other.
  • A longer term means lower monthly payments, however, it usually means a higher overall cost.
  • A shorter term means higher monthly payments, and will usually end in a lower overall cost.
  • The longer you have a mortgage, the more you will be paying in interest.

Choosing what option works best for you also takes into account your debt-to-income ratio, which your mortgage officer will discuss with you once you set up a meeting.

multiple doors to go through

There are also different types of loans to choose from:

  • Conventional Loan: These types of loans have fixed terms and interest rates over a period of time.
  • FHA Loan: You need to provide an upfront premium in addition to a monthly premium. You typically can qualify for these types of loans as a first-time homeowner. They require less strict credit standards and lower down payments.

8. Learn About Down Payment Assistance

Need some funds? how to get a mortgage loanHousing Financial Agencies exist to help you out.

Even if you are suffering from a bad credit history, there are ways to seek assistance. There are other government supported options available to you on how to get a mortgage loan:

Housing Bonds are used in creating low-cost mortgages for families with lower income levels. Essentially when you make a payment on your monthly mortgage, the interest collected goes toward paying off the mortgage bond.

Home Investment Partnerships are designed to increase home ownership in a community by providing low-income home buyers with government appointed grants.

Don’t be discouraged. There are people willing to help you find a home despite unfortunate setbacks to your financial history.

In conclusion

As a financial consumer, you need to be aware of the requires involved in purchasing a home for the first time. These steps are crucial on how to get a mortgage loan that you can afford.

By investing in a home you are taking on a financial liability, which means you need to be able to cover all costs associated with this purchase. Calculating your current income versus debt ratio will provide you will more insight into how much you can afford to borrow from a lender.

Here at Credit Squared, we want you to become more financially savvy, and by providing you with the best knowledge about the home owning process you can become a vigilant buyer.

If you have any questions please feel free to drop a comment below!

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10 Comments

  1. This is a good guide for my son to use that he can access on his mobile. This will get him ready before he makes an initial application for a mortgage.

    What debt to income ratio would be a concern for a potential lender or mortgage broker?

    Would it make a difference to a lender if my son has more than one job? 

    Should he and his wife apply as one or should the mortgage application go in just one name?

    • Hi Judith – You have a few questions in your comment, so let me take them one at a time.

      First, a debt to income ratio higher than 43% would be a red flag for a lender, but it isn’t the end of the world as some lenders can make an exception.

      If it’s higher than that, have him check with his lender to see if their lending policy can allow for something higher.

      Having more than one job shouldn’t be a problem, as all of his income will be counted when qualifying for a loan.

      If his spouse is working they should both apply, as both of their incomes will help get them qualified. If his spouse has no job or has bad credit, it makes more sense for him to apply on his own.

      Patrick

      Credit Squared

  2. Hi, Patrick! Thanks for the informative page on how to get a mortgage! 

    The way you clearly explained it in steps made a somewhat complicated process very understandable. 

    Is this information based on USA protocols?

    I used to work at a bank here in Canada so noticed that some of the terminology is a bit different.

    • Hi Angela – Thanks for your comment and question.  This post was definitely based on US mortgage banking rules.

      My experience is centered around US banking and mortgage banking loan guidelines.

      Having said that, many of the recommendations in the article would likely apply to many countries including Canada.

      Although slightly different, credit scores, debt to income ratios, working with lenders and managing your debt would apply in any real estate transaction, no matter what country you reside in.  

      Cheers

      Patrick

      Credit Squared

  3. This is an informative article about the steps to getting a mortgage. Yes, down payment assistance is an option that will help in your mortgage payment.

    The downside of it is that it applies to those earning less than $80,000 per year.

    One of the things that scare people away from committing to a mortgage is little or no down payment.

    Is there a way to get a mortgage with little of no down payment and still avoid the Private Mortgage Insurance (PMI)?

    • According to the U.S. Census bureau, the median household income was approximately $56K in 2015.  Which placed many American families well below the thresholds established by the bonding programs to qualify for DPA.

      So why aren’t more Americans taking advantage of down payment assistance?  At current interest rates it’s cheaper than renting.

      More than likely they have bad credit including bankruptcy and foreclosures.

      In addition, inconsistent wages and quite possibly living in an expensive zip code where competition for inventory is fierce, could represent a road block.

      Loans can be structured to avoid PMI by creating an 80% first lien with an additional second or piggyback loan. The interest rate on the second will be higher, but you can avoid PMI.

      Talk to lender you trust in your area that can explain the pros and cons of this type of structured loan transaction.

      Patrick

      Credit Squared

       

  4. Patrick,
    Thanks for writing a well thought out article for a less-than-financially-savvy individual. I was wondering about the credit score piece. If I were having trouble getting approved for a credit card, would you recommend a secured credit card? As I understand, you put say $500 down on the card, and then borrow up to that limit. It seems silly because the money was yours and now you’re paying to use it. Is it worth it to build a credit score this way?

    • Neil – It could be a small piece of the puzzle when you are starting out and trying to get your credit score established.

      If you’re lucky enough finding a cosigner on a credit card account in your name or asking a trusted family member to add you to their account is a good way to start building a credit history.

      You will need to make sure that you make the payments on time, as you don’t want to put off those that have helped you.  And yes the payments you make on the card count towards you credit history.

      The secured account does seem redundant, however it proves to creditors that you can make your payments on time. It is also helpful if you make payments twice a month

      Once you have established yourself you can move to a non secured card with a low credit limit.

      Over time you will develop a great score, which will then open doors to other kinds of credit like a mortgage loan.

      Patrick

      Credit Squared   

      • Patrick,
        Thank you for the reply. It’s great that you stay so responsive to your readers. I will take action on your advice. Keep up the great work!

        • Thanks Neil. Glad to hear you are enjoying the site. Let me know if you need anything. I have great sources in the industry.

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