Your 5-Step Guide for Getting a Home Loan
Allow me to present two things that are true:
1. Debt is bad
2. You need a place to live
While student debt and bad car loans drain your pockets and leave a lasting mark on your financial outlook, a mortgage doesn’t fall in the same category. The alternative to a home loan, for most people, is monthly rent to a landlord, which acts as its own form of indebtedness.
Even the most debt-averse people end up at least considering a home loan at some point in their lives. The investment mixed with the pride of having a place to call your own makes homebuying a top goal for people across all classes and generations.
This widespread demand allows real estate lending to be pervasive, complex and daunting. Prospective buyers don’t just need to get a loan - they need to get a big loan with great terms that will cover costs and appeal to sellers. If you want to have an offer accepted, you need to look really, really good on paper.
You’ll hear all sorts of reasons as to why your application might get rejected, but a competitive lending market means there are lots of options for you to explore. Having a strategy in place will help you move past rejection without taking on the first bad mortgage presented to you. If you stick to some version of this five-point plan, you’ll at least be a few steps ahead of the other shoppers.
1. Learn the Rules
2018 was different than 2017, and things will change again for this year and the next. Since interest rates look more likely to rise than fall in the immediate future, getting your ducks in a row and understanding the minimum mortgage requirements is an essential first step.
For starters, make sure you’re clear on conventional loans vs. Federal Housing Administration loans. Standards for different loans change at their own pace, so you need to know the minimum requirements for each option.
Since the FHA has federal backing, interest rates and credit requirements trend lower than with other loans. Some of the 2019 numbers for FHA include:
● Down payment as low as 3.5%
● Front-end debt ratio of 31%, back end 43%
● Mortgage insurance premium is 1.75% of the balance owed
● Approved on credit as low as 580, lower with larger down payment
These are pretty good minimums if you fit the bill, and fitting the bill might be the trickiest part. For a conventional loan, there’s more flexibility in some arenas and higher costs in others:
● Down payment as low as 3%
● Mortgage insurance waived with a 20% down payment
● Minimum credit score of 620
The debt-to-income ratio has more wiggle room with a conventional loan, though you need a credit score upwards of 700 if you want lenders to overlook debt in excess of 45%.
For FHA and conventional loans, you’ll need proof of income for the past two years. If you’ve just changed jobs or have a gap in recent earnings, expect to have a harder time getting financing.
2. Make Yourself Pretty
Once you know what it takes to get a mortgage in 2019, it’s time to make yourself look like someone who deserves a mortgage in 2019. As many a homeowner will tell you, the process of buying a house starts many months, perhaps years, before you sign paperwork and receive keys.
Shoring up your credit takes time and effort, but the effects become visible as soon as you start. With creditors typically reporting updated scores every 30 days, one month of actively paying down debt should make at least a small dent. It’s definitely easier said than done, but you have the power to improve your score.
Clear numeric thresholds tell you all you need to know about credit scoring. The difference between a 619 and a 621 is monumental, giving you every reason to know your score, know what the numbers mean, and do what you can to make everything line up.
You also have that pesky DTI ratio to think about. If you have a good amount of debt but still live comfortably enough, making a real push to pay off just one credit card or one student loan will make a big difference. If it makes sense for the current stage of your career, consider asking for a raise to push that ratio in the right direction.
Lastly, don’t rush this process. If you get a wild hair and decide it’s definitely time to own a home, you’re only going to set yourself back by chasing a mortgage without working on your finances first. You can influence your borrowing appeal so much over the course of a year, and while that seems like a lot of time, it’s a drop in the bucket when it comes to what you’re paying on a 30-year mortgage.
If you have a good job and just got hired, see if you can be patient and wait a year or so. A salary of $200,000/year looks good, but it looks a lot better when you’ve been earning that salary for 18 months or two years. And it looks really, really good when it gets bumped up to $220,000 after you hit that two-year mark.
A tiny fraction of a percentage makes such a big difference on a home loan. It might all feel like fake money when you’re talking about a monthly payment you’ll be making for the next three decades, but that’s exactly why you should aim to get the rate as low as possible and save a few thousand dollars each year.
Applying for a loan is a lot like asking someone out on a date. Get yourself cleaned up, put your best foot forward and you’ll have a much better chance of hearing the response you want.
3. Figure Out Your Down Payment
Once you know the type of loan you’re targeting and what the minimum down payment percentage could be, you get to start looking at local listings and thinking about how much you have to save. This part usually proves to be fun and terrifying: it’s fun to look at houses and think about owning them, and it’s scary to think about how much money you’ll have to pay in order to make that dream a reality.
If you’re a first-time buyer looking at an FHA loan, that 3.5% down will certainly tempt you. Paying $7,000 on a $200,000 house feels a lot more comfortable than paying $20,000. Unfortunately, time will change how you feel about that down payment and the monthly bills you end up committing to.
Aside from the hit you take on monthly interest charged on a bigger balance, you also have to deal with mortgage insurance. The less money you put down, the more you pay as a monthly premium. Doing some really quick, somewhat questionable math, putting down 3.5% instead of 20% on a $200,000 home will cost you an extra $140ish each month, plus an up-front premium of $3400ish. In a handful of years, the combination of insurance and interest will surpass the money saved on your down payment, and you still have to pay the same total for the house.
If you can bump the money down on a traditional mortgage to 20%, you don’t have to pay the private mortgage insurance. In short, you get handsomely rewarded for ponying up more money. Again, easier said than done, but always worth the effort.
You can’t quickly or easily change the amount of money in your bank account, but you can allow these numbers to inform how exuberantly you start the process of looking for a house to buy. Knowing that an extra year of saving could allow you to put more in your retirement account each year while allowing you to pay off your mortgage more quickly, you might feel comfortable holding off for a bit.
You should also look beyond the immediate down payment to consider the months and years upcoming. Are you on track to get bigger raises and bonuses each year? Are you buying a house because you just had an unexpected windfall and it feels like the right thing to do? Buying property is one of the main reasons lottery winners and professional athletes face bankruptcy a few years after a big payout. Once you own your home, even if you waltzed into the bank with a 30% down payment, you still sign yourself up for years of property taxes, mortgage payments, home repairs and insurance premiums. As you save up for that first big expense, don’t lose sight of the ongoing fees you’ll have on your plate.
A down payment isn’t just a goal number you’re looking to hit so you can own a home; it’s the first domino from which so many other dominoes will fall, and you should know where the other rows of dominoes lead before you knock anything over.
4. Pick Your Poison
Eventually, you have to stop researching and fill out an application. The lender you choose will have a significant impact on the terms you get, but you won’t know exactly what that impact will be until you’ve bellied up to the desk - either a desk in a bank or the desk where you keep your computer - and started the process.
As we discussed in the first section, you need to know what type of loan you’re going after, whether its FHA or traditional or VA or some other program you qualify for. Some lenders are better for low-income and FHA loans than others (New American Funding gets great reviews in these categories), while others offer better customer service, faster processing, larger amounts, etc.
Since there are no fewer than a trillion lenders looking to give you money, I’m not going to go too deep into the weeds on this one. Instead, I’ll throw out three options that have a strong track record for helping homebuyers.
If you don’t know about Quicken, you’ve never watched TV, listened to the radio or seen a billboard. This company is truly massive, which is usually a big plus when it comes to borrowing money. The largest FHA lender on the planet and owner of Rocket Mortgage, Quicken processes something like 500,000 loans a year, which is a truly astounding number.
Because of the giant network and infrastructure, you can find competitive rates and approval that other lenders might not offer. There’s a good chance you won’t get the same personal touch from Quicken Loans as you would a credit union, but when you have a credit score of 600, you’ll trade a friendly smile for good terms any day of the week.
Massive for a reason, Quicken Loans is as good a place as any to start your mortgage search.
SoFi is short for Social Finance, a title indicating of the company’s goals. After starting out in student loans, the lender expanded to other areas of finance in which statistics are important but don’t tell the whole story.
SoFi doesn’t have the reach of some of the bigger lenders, but there’s a little more nuance in their application process that leaves the borrowing door open for people who might otherwise get turned away by traditional mortgage providers. The preapproval process is relatively straightforward and the website relatively user-friendly. SoFi also doesn’t do much in the way of financing investment properties, focusing on smaller amounts for people with greater needs.
I understand the appeal of walking into a bank and sitting down with someone who can talk to you about mortgages. I think credit unions are great for this, and I also think there’s nothing wrong with choosing a juggernaut with bottomless pockets.
An ever-growing number of Chase banks make finding a location easy enough, and you can count on the rates being competitive, even if they aren’t the absolute best available. Sometimes you need to play it safe, and Chase serves as one of the safer bets when it comes to mortgage lending.
Even though you’re at the finish line, they are still a thousand things to do. Review your purchase offer and make necessary changes, hire the inspection team, negotiate after you find problems, do a final walk through, review the closing disclosure, etc.
Show diligence during this final stage to ensure all your hard work doesn’t get undone by a typo or an innocent oversight. It will take a massive amount of patience to keep your nose to the grindstone when you’ve already come so far, but that effort can make all the difference. Because, when you’ve actually closed and made sure everything was handled properly, you’ll own a home.
Securing a mortgage isn’t the most exciting part of buying a house, but it might be the aspect that deserves the most attention. You should dutifully appraise and make sure you’re getting fair market value, but if you focus all your attention on negotiating the cost of the house and then carelessly sign off on a bad loan, you’ll end up losing the money you fought to save.
We all have different paths to homeownership, and virtually all of those paths involve a hefty loan. Sit down with a realtor, lawyer or smart friend and crunch some numbers to figure out what approach you should take to this kind of borrowing. By reviewing the items on this list and starting to formulate a strategy, you’ll take a big step toward getting that house.