There are seven critical steps in the process of obtaining a mortgage to fund a home purchase or refinance. Depending on which of these goals you're aiming to accomplish, the process will look different. We're assuming that many readers are first time home buyers or, at least, home buyers without the wealth of knowledge that comes from years of experience with real estate. If you are, you probably don't need to keep reading.
For this reason, we'll outline the steps in getting a mortgage to allow you to purchase a home. As mentioned above, there are seven such steps. Ignore any one of them and you may find yourself stuck in a mortgage or a financial situation that doesn't suit you or that may, in fact, hurt you.
Yes, this is a step in the process. Though many homebuyers don't even consider entering the market until they've built up cash reserves, the act of building up the substantial savings you'll need if you want to purchase a home today begins months or even years before you decide to buy. Lending standards have never been tighter, and many economists recommend you contribute at least 20% of the total purchase price of the home as a down payment. Depending on how the housing sector fares in the coming years and what lender you work with, you may be required to do this whether you want to or not. Start saving immediately.
What we mean is, assess your income and be prepared to work more hours or switch to a higher paying career to support your goal of home ownership. If you don't have a steady stream of income, you probably shouldn't take on a mortgage. You likely won't qualify, anyway. Make sure your current and expected future income level will be sufficient to sustain your home purchase.
This is another preparatory step, something you should do before you fully settle on buying a home. If you don't have a good credit score, it's probably financially unwise for you to purchase that home right now. It doesn't take long to repair your credit. Get started building your score back up to at least the high 600s or low 700s, and you'll be good to go. The higher, the better.
There are many different mortgage options available in the financial marketplace. Each one offers its own unique advantages, disadvantages, and terms. Your needs, goals, and financial situation will dictate which mortgage type is the best fir you. If you're risk averse, a fixed rate mortgage is probably preferable to an adjustable rate mortgage. Read up on the various mortgage types before you contact a lender.
All lenders are different. Large banks operate under entirely different principles and with different regulations and skill sets than independent mortgage brokers. Contact at least five lenders or loan officers and ask them for interest rate quotes on loan terms similar to those you're looking to receive. The rates they give you may not be the rates you qualify for. Don't be afraid to be tough. Make sure you find out what you need to know before you get off the phone, and don't agree to anything yet. You're still doing research. Once you've identified the lender who can best meet your needs, move forward to the next step.
Closing costs can differ dramatically depending on the nature of the transaction. Ask your lender to give you a good faith estimate (GFE) outlining the closing costs you'll need to pay. Lenders are required by law to provide you with this document. Look over the fees listed and ask your lender to define any item you don't understand.
Don't wait to apply for the loan you need until you've picked a home. You may not get the necessary financing in time to close the deal. Instead, get prequalified before you even start looking for a home. Ask your lender about the steps involved. Prequalification gives you a certificate that guarantees you the money you need. Do this, and you'll be able to effectively negotiate with sellers and shop around with confidence.
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