How to Get a Mortgage Loan
What You Need to Do to Get a Loan
Mortgage rates have reached historic lows in the past couple of years. However, interest rates are beginning to creep up and housing prices are starting to rise as well. These increases have been widely attributed to the slow strengthening of the economy. As a result, now is an excellent time to buy a home.
Determining What You Can Afford
Before you begin searching for a home, you will want to consider how much home you can afford. You can generally get a rough estimate of how much home you can afford by multiplying your annual gross income by 2.5. For example, if your annual gross income is $40,000, you should be able to afford a home worth $100,000.
But, that’s not the only way to calculate home affordability. Lenders often use two other formulas: the “housing expense ratio” and the “debt-to-income ratio.” Under the housing expense ratio, lenders recommend that your mortgage payment – principal, interest, taxes and mortgage insurance – be less than 28 percent of your monthly gross income. Under the debt-to-income ratio, lenders look to see that all your other debts – credit cards, student loans, alimony, child support, car loans and housing expenses – are less than 30 to 40 percent of your monthly gross income.
What You Will Need to Obtain a Mortgage Loan
After you have found a home you wish to purchase, the next step is applying for a mortgage loan.
In order to qualify for a loan in today’s market you will need:
- A Stable Income
A stable income is important to demonstrating that you have the income to make regular and timely payments. Self-employment is allowed as long as you can document two years of income.
- A Good Credit Score
Your credit score plays an important role in obtaining a mortgage. It helps lenders decide how likely you are to repay your debts, including the mortgage you are hoping to obtain. Your credit score is based on a number of factors, including your payment history, the amount of total debt that you owe and how long you have had your credit cards. Late payments decrease your credit score. Reaching your credit card limits can also lower your credit score, even if the amount you owe is not large.
Credit scores range from 300 – 850 points. These days, conventional lenders want to see a credit score above 700. Check with the annual credit agency for your free annual credit report and free credit score. Government lenders such as FHA are more forgiving and will allow many buyers to purchase a home with a credit score of 620 or above. However, if you have a score below 700, you might be asked to explain in a short letter any recent incidences of bad credit. FHA is a forgiving lender and a reasonable explanation is sufficient.
Those with credit scores below the mid-600s might need to find a sub prime lender – a lender that specializes in giving mortgage loans to those with blemished credit. Using the resources available through the Internet can make it easy for borrowers to find such lenders.
- A Down Payment
Most lenders require a down payment of between five and 20 percent of the purchase price of the home. Conventional lenders require a 20 percent down payment while FHA, often used by first-time home buyers, requires a 3.5 percent down payment.
Lenders today will ask for a number of documents as part of your loan application. These documents include W-2 forms, tax returns, a letter of employment and bank statements.
Lenders will also require an appraisal of the home that you want to purchase. Since the property will serve as collateral for the loan, an appraisal helps determine the market value of the house and is a tool to help the lender determine how much money to lend to the buyer.
Securing a home loan is not always easy in today’s market. However, understanding the steps to obtaining a loan can help you be more prepared to meet the lenders requirements. Here are some guidelines from HomeGuides for securing a home loan.