Buying a new home is one of the biggest expenses an individual will incur in their lifetime. This is a big decision and one that you want to get right the first time around. Shopping for a home can be exciting, but it’s important to keep your budget in mind and clearly understand how much you have to spend.
Then, when you know how much money you have to work with, you can ensure that you spend time looking at properties that you can afford instead of looking at homes that are outside your financial limits.
Very few people in the world can buy a home outright. Instead, most home buyers will need to get a mortgage to be able to buy a property. Before starting your home-buying journey, it’s wise to familiarise yourself with the application process for securing a mortgage so you know what lies ahead on this exciting journey.
Familiarising yourself with the right information will allow you to shop confidently for a mortgage and set yourself up for success. From the lenders’ criteria to using a home loan borrowing calculator, gathering the required paperwork, and much more, there is a lot to get to grips with as a first-time buyer.
Let’s take a closer look at some of those essential steps you will need to complete the mortgage process.
Mortgage Lenders’ Expectations
When applying for a mortgage, lenders will look at your income first. After all, they want to ensure you have a steady source of cash flow to repay the loan. There’s no specific amount you need to earn annually to qualify for a home loan. Still, your lender will review your employment history, monthly household income, and other sources of income you may have before making a decision.
Your current credit score also significantly affects your ability to get a mortgage. When your credit score is high, it tells lenders you’re responsible and timely with your payments and don’t have a history of borrowing too much money. On the other hand, a low credit score may make you appear as a riskier borrower.
Calculate Your DTI
Your debt-to-income ratio (DTI) is an essential factor that lenders consider when determining if you’re eligible for a mortgage. DTI is calculated by adding your minimum monthly debt and dividing it by your gross monthly income. This will include recurring debts like credit card bills, student loans, and auto loans. The acceptable DTI threshold varies depending on the type of mortgage. Generally, a DTI of 50% or lower for a conventional mortgage is considered a benchmark, but government-backed loans may have higher allowable thresholds.
When applying for a mortgage, lenders must ensure you have sufficient funds in the bank. The lender will ask to review your assets, including any account from which you can withdraw cash. Assets that lenders may consider include savings accounts, retirement accounts, or taxable investments, amongst others. These assets provide a financial cushion and demonstrate to the lender that you have the means to handle payments and other expenses. Be transparent about your assets and provide accurate information to the lender during the loan application process.
Your lender will typically request an in-depth review of specific documents to verify your assets during the mortgage application process. For example, they may ask for sixty days’ worth of account statements from your checking and savings accounts to confirm your assets. In addition, they may want to see the most recent statement from your retirement or investment account or view documentation related to the sale of any assets you recently sold, such as a copy of the title transfer for a car.
In addition, your lender may also ask for supplementary information on debts owed, including student or auto loans. Collect as much of this information as possible to expedite the process before meeting with a lender representative.
The first step in obtaining a mortgage is to apply for pre-approval. Getting pre-approved gives you an estimate of the loan amount you may qualify for, making it easier to search for homes that fit your budget. Using a home loan calculator is wise, and plugging in just a few simple inputs provides you with formulas for assessing how much you can afford to allocate toward your mortgage repayment. It’s a great resource to help you plan your budget and ensure you’re comfortable with your interest rate, initial down payment, closing costs, and ongoing monthly payments.
Once you receive pre-approval, you can start viewing homes and even enlist the assistance of a real estate agent. Having a real estate agent can be beneficial as they can help you make an offer on the right home when you find it. If the property seller accepts your bid, you will need to obtain full approval from your lender, which involves underwriting and an appraisal.
As soon as you receive full approval, you will attend a closing meeting with the lender, your attorney, and the seller’s representatives, where you will sign the closing documents and pay your down payment and closing costs.
Preparation Is Key
Applying for a home loan can seem complex, but with the proper knowledge and preparation, you can confidently navigate it and secure your dream home. By understanding the steps outlined above and being proactive in providing the necessary documentation, you can save time and increase your chances of obtaining the mortgage that fits your needs and budget.