Getting a Home Loan Isn’t Exactly Fun, But It’s a Necessity for Most People.
Here Are the Steps Needed to Secure a Mortgage.
1. Where to Shop for a Mortgage
It’s important to shop around when looking for a mortgage. While interest rates are set by credit scores, credit history, and income, not every lender will end up with the same results. There can be variations in interest rates, origination fees, and how long it takes a lender to approve the loan.
The best way to do it is ask friends, family, or a realtor for references before you’re ready to apply. It’s true that running your credit over and over again can eventually affect your score, but it’s worth applying at more than one place before making a commitment.
If you have a credit union you use, that’s a great place to start. They don’t issue as many mortgages as larger banks, but they usually can match the interest rates and provide a more personal experience.
Mortgage banks specialize in finding the best rates and give better service than large banks. They’re able to close quickly and don’t generally have the large structures that produce red tape.
Large banks usually have programs for their customers that can offer a discount on lending. But they generally aren’t less expensive than mortgage banks and their inflexibility makes closings take longer.
2. Find Out How Much You Qualify to Purchase.
The traditional measure for a conventional loan is that the monthly payments should be no more than 28% of your monthly income. In addition, mortgagers want the monthly payment to be no more than 36% of your total debt.
Other debt, such as student loans, credit cards, etc., are added together and compared to your income as well. The benchmark for conventional loans is that the total mortgage payment + other debt payments should be no more than 43-50% of your monthly income.
Government loans often have a little leeway on those numbers, and most conventional loan providers have programs that allow some wiggle room as well, but those are a good benchmark for how much you can afford. Though it’s difficult with prices being so high, you don’t want to ever be “house poor” by having too much of your income dedicated to your home.
3. Credit Scores Needed For a Mortgage
Usually, conventional loans will want a credit score no less than 620. Government loans can be a bit lower, usually around 580. The better your credit, the more it’s reflected in your interest rates and fees, as both are determined by how much risk there is to the bank.
4. Determine what type of loan works best for you.
Conventional Loans– Underwritten by a private bank, the conventional loan is the most common mortgage. The required down payment is usually 5-20%, and the interest rate is largely determined by your credit rating, income, and financial history.
The two types of conventional loans are conforming and non-conforming. Conforming loans meet the lending standards set by the Federal Housing Finance Agency (FHFA). In 2022, the loan limit for a conforming loan is $647,200 in Texas. A conforming loan might only require as little as 3% down in some circumstances.
A non-conforming loan doesn’t meet the FHFA standards, either due to the purchaser’s credit, condition of the house, or the loan amount being too high. The interest rates are a bit higher for non-conforming loans, though that doesn’t necessarily mean it’s a subprime loan. As an example, if the loan is above $647,200 in Texas, it will normally require a “jumbo loan” even if the purchaser’s credit is good. That usually requires at least 10% down, and a FICO score of 700 or more to qualify.
If you’re putting down less than 20%, a conventional loan also charges for Private Mortgage Insurance (PMI). The PMI payment ranges from 0.58% to 1.86% of the loan amount per year. Once you’ve reached 20% equity, the PMI payment will be removed from your bill.
FHA Loans– If your purchase price is under the FHA limit, you can get a loan subsidized through Federal Housing Assistance. These loans require 3.5% down and usually have an interest rate that’s 25 basis points (0.25%) above a conventional loan. The FHA requires a home to be in better condition to qualify than a conventional loan.
For a government loan, no private mortgage insurance is needed. The mortgage insurance is subsidized by the Housing and Urban Development department of the federal government.
Click Here to See The Maximum Prices FHA Will Cover In Texas Counties
VA Loans– If you are a veteran, you qualify for a Veteran’s Assistance Loan. The down payment is as low as 0%, and VA loans are typically at a lower interest rate than conventional or FHA loans. In addition, if rates drop after you buy, refinancing with a VA Interest Rate Reduction Loan (IRRRL) can be easier than with a conventional loan.
USDA Loans– The United States Division of Agriculture offers loans for low-to-moderate income earners in rural areas. USDA loans can be secured with a down payment as low as 0%, but there is a 1% origination fee (that can be rolled into the loan), and an annual fee. USDA loans have become more difficult to secure in recent years, and they take a bit longer to close than most loans due to having an additional level of underwriting from the USDA to go through.
Other types of loans that can be obtained are construction loans, adjustable-rate mortgages, interest only loans, interest-only loans, piggyback loans, and balloon mortgages. These are usually either difficult to obtain or more expensive in the long run than the aforementioned loans.
Click here to see the areas of the country that qualify for USDA loans. (Click on “Property Eligibility after accepting the terms)
5. Get a Pre-Qualification Letter
Generally, it’s best to apply for a loan before you start looking at houses in person. Most sellers in the Austin area require a pre-qualification letter before they’ll consider an offer. Often buyers who are already looking for homes before obtaining a prequal letter will miss out on bidding on a property they while waiting for a lender to run their credit and verify the amount they’re likely to approve. The prequalification letter is not binding and does not lock in your interest rate.
6. Obtain a Pre-Approval letter
Once you’ve formally applied for a mortgage, the lender will issue a pre-approval letter. The pre-approval letter is stronger than a pre-qualification letter, and it locks in the interest rate you’ll pay for a pre-determined amount of days. Usually, the interest is locked for 90 days, though it’s best to verify that with the lender.
Once you’ve gone through the lending process, the loan underwriting and final approval are a significant part of the closing process. Make sure you discuss with potential lenders how long it usually takes them to close a loan.
The rest of the steps to getting your loan approved are contained in our section on closings.