Whether you are buying a home or refinancing, obtaining a good mortgage is one of the most difficult things that you will do. Not only can be hard, it is also probably going to be the largest financial investment that you will make in your lifetime.

This is something that you should not take lightly. You will need to do your best to gain the knowledge that you will need to make sure everything goes smoothly as possible, and that you get the absolute best home loan possible.

For either a new home purchase or a refinance, you should have a basic understanding of the process, and you will also need to provide information about your annual earnings, current credit rating, and other monthly debts you have acquired. The best approach to obtaining a mortgage is to not stress yourself out too much and divide your process into easy tasks, including gathering your documents, determining the amount you want to borrow, and understanding various mortgage options.

The basic principles for obtaining a mortgage are to make sure your credit history is in good standing; have a sufficient amount for a down payment (generally at least 3.5-20 percent of the purchase price) and always work with your trusted loan officer. To top off the basics, stay on top of the origination process and always expect the unexpected until the very end.

Here are some basics tips to help you secure a mortgage in today’s market:

1. Check Your Credit Reports and Credit Scores

A good credit report and better score will mean that more lenders will be willing to give you a new mortgage. Most conventional lenders desire a credit score of at least 640. However, with a Federal Housing Administration (FHA) loan, credit requirements are generally more lenient and borrowers may qualify with a score as low as 580.

Long before you can apply for a mortgage, you should check your credit reports for any issues, errors and or mistakes. Your credit score might also have errors that may work against you. Inaccuracies are still rather common and reports have show that nearly 20 percent of all consumers have at least one error on their credit profile. If you find any problems, do what you can to fix them and or improve your credit scores in order to increase your chances in getting a home loan.

Having delinquent credit payments within the past 12 months can greatly hinder your chances when looking to get approved for a mortgage. If you have been late on any payments, try to reverse the trend 6, and even better, 12 months before applying for a mortgage in order to improve your credit score and increase your chances of getting a loan.

You do not need to pay for your credit report because the Fair Credit Reporting Act (FCRA)requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months, according to the FTC.

The three nationwide consumer reporting companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report. To order, visit http://www.annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Do not contact the three nationwide consumer reporting companies individually.

2. Check Your Income

After a lender checks your credit, the second thing they will look at is the total income of all borrowers applying for a the loan. Lenders need to know that the person they are giving a loan has the means to pay it back. This is why you need to show them proof how much you earn.

The lender will check your income, and debt qualifying ratio guidelines to see if you can afford the costs associated with a new home loan, and still provide for your family. The gross income of all the borrowers applying for a mortgage will be examined over the last two years. This income can come from a job, business, bonuses, commissions, overtime, stocks, pensions, social security, child support and other income sources before taxes have been taken out.

You will need to have all the documents that prove this income over the last 24 months by showing the lender two years of W2’s, pay stubs, bank statements and your tax returns. It is a good idea to gather all your income paperwork into a folder so you can easily access it when needed be.

3. Check to see how much of a monthly payment can you afford

Besides your credit scores, the amount of income you make monthly and your monthly payments for debts is a key factor that lenders will examine in order to determine what your current debt to income ratios are.

The lender is going to check your debt to income ratios by checking how much debt you have, the anticipated housing costs associated with the new mortgage and your current gross income to cover your monthly debt and mortgage. Your debt to income ratio shows the lender how much you can afford, and the maximum monthly mortgage payment you qualify for.

A mortgage lender will simply add up your current debts on your credit report and then subtract it from your monthly gross income in order to come up with a ratio. If your ratio is too high, then you will not be able to qualify. If your ratio is low, that is a good thing and means that you can afford a mortgage payment, real estate taxes and homeowners insurance.

Having a lot of debt will almost always work against you when applying for a new mortgage. The fewer the debts you already have, the better your chances to qualify for a loan.If you have multiple credit cards, try not using more than 30 percent of the available credit. If you can pay off any debts prior to applying for a home loan, please do. Also, try to avoid taking on new debt in the months leading up to the pre-approval as it may affect your debt-to-income ratio.

The standard debt to income ratio should be around 36% to as high as 43%. The Consumer Financial Protection Bureau says that 43% is generally the highest debt-to-income ratio a consumer can have while still being eligible for a Qualified Mortgage.

If you find that you have too many debts and your debt to income ratio is too high to qualify for a mortgage, then it may be a good idea to pay off some of these debts in order to bring your ratios down to an acceptable level. Consolidating some of your debt may also help your debt to income ratios.

4. How much downpayment can you afford?

This section applies mainly to homebuyers who will need some type of down payment in order to purchase a home. These down payments will range anywhere from 1-30% depending on your credit score, income and real estate ownership history.

Loans insured by the Federal Housing Administration (FHA), ie: FHA loan are always a viable option for low down payment buyers. Many homebuyers prefer a FHA loan because it allows as little as 3.5 percent down payment (in some cases only 0.5%) and lower credit requirements.

Zero money down program is for low-to-moderate income homebuyers that is through the United States Department of Agriculture (USDA), and is known as a Section 502 mortgage or Rural Housing Loan. These loan are not just for rural living, but also for regular less populated suburban neighborhoods as well.

With any loan that does not meet 80% loan-to-value (i.e. less than 20% down payment), the lender will require a mortgage insurance policy (MIP), or private mortgage insurance (PMI) for conventional financing.

There are a few programs out today that can help assist homeowners with down payment. For example, we have recently teamed up with a lender that only requires a 0.5% down payment for eligible borrowers. This program is one of a kind and you won’t find it by contacting your local mortgage broker or credit union.

5. Shop for a New Mortgage

Obtaining a mortgage quote is your first step to getting pre-approved for a mortgage.  Getting pre-approved for a mortgage will expedite the loan processing procedure and will give the lender a great estimate as to how much you are allowed to borrow. This will allow you to set a boundary as to how much you can afford, which in turn can benefit your search by eliminating homes that may be out of your “prequalified” price range.

Be prepared to take some time to cover your entire situation as accurately as possible. With various factors that can influence your interest rate, it makes it hard for any mortgage professional to do their job when you simply as for “today’s rates.” Once you have gone trough the information listed above and have asked all the proper questions, you will have a solid quote to help you compare offers.

It’s crucial that you have certain information on hand to ensure you get accurate results. In order to get receive an accurate mortgage quote, be prepared to answer specific questions about your situation. The information required may vary depending on the type of transaction or the loan type you are looking to attain.

Refinance:

  • Your loan amount and current market value
  • The length of the loan (10, 25, 20, 30 or 40-years
  • Type of loan, fixed-rate or adjustable-rate mortgage
  • Are you paying points?
  • The amount you pay in taxes (quarterly or annually)
  • Do you want escrow?
  • Are you locking in the rate?

Home Purchase

  • Price of home you want to buy
  • Down payment amount
  • The length of the loan (10, 25, 20, 30 or 40-years)
  • Type of loan, fixed-rate or adjustable-rate mortgage
  • Are you paying points?
  • Do you want escrow?
  • Are you locking in the rate?

One Last Tip!

In order to get pre-approved for the mortgage, you will need to fill out the application and provide the necessary information. Please remember that the quote you get on your mortgage is only as accurate as the information provided.

Adding to this, the rise in last-minute changes on your loan can delay or even derail the closing of your mortgage. Make sure the lender receives as soon as possible any requested documents, and also check-in often with your mortgage broker or lender. Basically, keep reminding yourself that everyone in the mortgage process can and will make mistakes and do you best to keep on top of everything during the whole process.

If you would like a live rate quote or to discuss other possible loan options, please call me, Erik Sandstrom, with Caliber Home Loans at 1-800-779-4547; or email me at Erik.Sandstrom@CaliberHomeLoans.com.

Erik Sandstrom
LoanSafe's Mortgage Expert
I'm a Senior Loan Officer and LoanSafe mortgage expert. If you need a live rate quote, or need help getting a new mortgage, please call me direct anytime at 619-379-8999.