Are you looking to apply for mortgage loan but unable to understand from where to start. This the very common issue if you are looking to apply for mortgage loan for the very first time. With some basic knowledge and proper guidance any one can apply. Here is the step by step details you should know before applying.
What is a Mortgage Loan?
Mortgage loan is the money you borrow from bank or lender for buying home. In return, You have to fix a monthly payment known as installments or EMIs over a set period of time. This could be any timeline between 15 years to 30 years. Your house itself servs as the collateral and your lender can take it back if you fail to repay.
How Does a Mortgage Loan Work?
Mortgage loan is usually an amount of money that your lender gives you over and above to your down payment. So it helps you to buy home without having thousands of dollars in your account. You only arrange a small amount know as “down payment” from your own pocket and rest amount will be covered by your lender. Your repay the amount on monthly installments which includes principal (the loan amount) and interest (cost of borrowing) along with taxes and insurance cover to protect lender’s amount in case of any mishappening during the loan tenure.
Types of Mortgage Loans
As you are planning to apply for mortgage loan, you should know that there are many types of mortgage loans are available. Some of the are explained below
Fixed-Rate Mortgages
With fixed-rate mortgages, your interest rate remains the same for the entire loan tenure. This option offers stability and fixed monthly payments.
Adjustable-Rate Mortgages (ARMs)
ARMs have floating interest rates that can change after an initial fixed period. Such type of mortgage loans usually start with lower rates but can rise later.
FHA Loans
FHA loans are backed by the Federal Housing Administration. They’re great for first-time home buyers with lower credit scores or small down payments.
VA Loans
If you’re a veteran or active-duty service member, VA loans offer excellent benefits like no down payment and lower interest rates.
USDA Loans
USDA loans are for buyers in rural areas and offer no-down-payment options for qualified applicants.
Preparing to Apply for Mortgage Loan
Below are the basic hygiene checks you have to do if you are preparing to apply for mortgage loan
Credit Score Check
Credit scores are the first checkpoint if you are planning to apply for mortgage loan or apply for home loan. They are the key indicators of your financial health. It keeps a track about how you have managed your previous loans. By just checking the credit score lender will be aware of your financial management and knows if you can repay the money or not. If your score is more than 620, the chances of loan approvals are high. Some lenders also consider lower credit scores but they will charge higher interest amount with you.
Down Payment
Down payment usually lies around 3%-20% of the over all cost. It is advised to go for higher down payment so that you settle for a lesser mortgage amount.
Debt-to-Income Ratio
This is a very important point you have to look into if you are planning to apply for mortgage loan. This key indicator also known as DTI educate lenders if you can afford a loan or not. It is advised to keep it below 43% for better loan approval chances.
Documents You Need
To apply for mortgage loan or apply for house loan, you’ll need these key documents:
- Proof of Income: Pay stubs, W-2 forms, or proof of self-employment income.
- Bank Statements: To show your financial stability.
- Tax Returns: Typically for the past two years.
- Identification Documents: Such as a driver’s license or passport.
Steps to Apply for Mortgage Loan
Research Your Lender
If you are planning to apply for mortgage loan, it is very important you to know to whom you are going to business with. Proper research can give you best fit as well as tells you about your lender who could be banks, credit unions or online lenders and their respective mortgage schemes.
Getting Pre-approval
Pre-approval will give you an idea about how much you can borrow. It will also show the sellers that you’re a serious buyer.
Compare Loan Options
There are various points you need to give attention to while applying. You should properly check offered interest rates, loan terms and fees and always negotiate for lower interest rates. You should also check for any hidden fee which may come later once you took the loan.
Submit the Application
Once you get through all the above points and have finalized the lender, you just complete the application form and provide all the necessary documents and submit. You may have to wait for couple of days before getting the approvals.
Official Process Before Loan Approval
Once you submit the application, the lender will evaluate your application by carrying out the below steps.
The Underwriting Process
Underwriting is the first step lender took at its end. They review your financial details which you have provided and can raise some queries or ask for additional documents. You should be ready to answer some additional queries they asked and provide extra documents if needed. This step decides if you qualify for loan or not.
Home Audit
The lander will arrange a home audit to ensure the value matches the mortgage loan amount.
Processing Fee/Cost
These are the mandatory fee you have to bear at the end of the loan process. They usually lies between 2%-5% on overall loan amount.
Tips to Improve Your Chances
- Pay Off Outstanding Debt: Lower debt improves your DTI and credit score.
- Avoid New Debt: Don’t take out new loans or credit cards while applying.
- Consistent Employment History: Lenders prefer stable income over the past two years.
Common Mistakes to Avoid
- Skipping Pre-Approval: It’s a crucial step to understand your budget.
- Not Comparing Lenders: Different lenders offer different rates and terms.
- Ignoring Loan Terms: Make sure you understand the fine print before signing.
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