Learn how to get not only the best mortgage but the right mortgage to finance your home. In this article we explore the fundamentals every mortgage shopper should know along with 10 things you can do to avoid common pitfalls in the mortgage process. Did you think about running your credit report and planning your debt-to-income ratio? You should! Learning how to get a mortgage is all about knowing the 4 basic steps involved when applying for a preapproval, and spotting a prequalification versus a preapproval, and what to expect from your mortgage lender and loan officer. We also cover the top 5 things to consider about mortgage products and whether conventional, FHA, Veterans Administration (VA) or USDA loans should be something you have on the table. It’s all about timing and doing the right things in the right order - everything you’ll need to begin the rewards of homeownership.

Preparation Is Key

If you are searching the internet for a home to buy, you are most likely asking yourself ‘how much can I afford’. Making a personal budget is the only way to answer this question accurately and is step one in preparing to buy a home. What you consider a comfortable house payment may be very different from what a mortgage lender considers to be a reasonable Debt To Income ratio (DTI). The mortgage lender calculates the debt- to-income ratio by adding up the monthly payments of the debts listed on your credit report and then dividing this by your monthly income. (Total monthly debts / gross monthly income). The mortgage lender isn’t going to include day care, car insurance, utilities and other bills not listed on the credit report.

Mortgage lenders’ products will accept debt to income ratios as high as 49% of a borrower’s gross monthly income and sometimes even higher! Debt to income ratios this high can make sense for people with a lot of savings to draw from and with excellent credit. For many people who don’t want to use their savings or don’t have a lot of savings, a debt-to-income ratio of 30-35% is much more comfortable and allows room for unexpected expenses.

To ensure you are shopping for homes you can afford, prepare a budget that considers all your monthly expenses and determine the total house payment you are comfortable paying.

Steps to Get a Mortgage

There are 4 key steps in the mortgage process from a customer’s perspective

• The Application (meet with a loan officer and receive a loan estimate),
• Processing (collecting all the documents),
• Underwriting (the loan decision),
• Closing (where all the money is paid, and the house becomes yours).

The Application

To begin, you’ll meet with a licensed loan officer and fill out the Uniform Residential Loan Application (URLA). The mortgage lender will determine the purchase price range you can afford based on the funds you have for a down payment, your debt-to-income ratio, information on the credit report and other factors.

Your credit report will be run to see your debts and credit score. A good loan officer has you bring copies of your paystubs, bank statements and W-2s. You will also get a Loan Estimate that details all the closing costs. This might be surprising, so ensure the mortgage lender talks to you about the various methods of reducing the closing costs you need to pay, such as:

• Seller paid closing costs,
• Lender paid closing costs,
• If you have 20% down, consider paying your own taxes. Waiving an escrow account for taxes can save thousands at closing.

Processing

This is when all the required documentation is ordered and collected to submit the loan to the underwriter. The appraisal and a title check will be ordered along with other documents related to income, employment history, debts and assets. Many companies have moved to direct verification of income with employers and directly obtain bank statements through electronic services. They will need your written approval to go this route. It can save time is an easy and safe process.

Underwriting

This is when your loan is reviewed for approval by an underwriter, based on the product type shown on the application. There are different underwriting requirements for each product. Below are just a few of the many products available:

• Conventional
• Fixed Rate
• Veterans Administration (VA)
• Federal Housing Administration (FHA)
• USDA
• Housing Finance Agency (HFA)
• Bond

Look for a mortgage lender that offers as many options as possible to ensure you’re getting the right financing based on your needs.

Closing

Closing is when all the funds have been paid to cover the purchase price plus all closing costs shown on the final Closing Disclosure, and the deed has been transferred to you.

Preapproval vs Prequalification

Tell your mortgage lender up front that you want a full pre-approval. This means the underwriter has actually reviewed your loan documents. Read the fine print on your pre-approval letter to look for any disclaimer that indicates ‘pending underwriting review or approval’. If you see a disclaimer, it means you only have a pre-qualification.

Important Note: Most mortgage lenders use automated underwriting systems (AUS) to analyze whether the loan meets the guidelines specific to the product you have applied for. An AUS approval will be used to issue prequalification letters. An AUS approval is not a full underwriting approval.

Products and Interest Rates

You will want a quality mortgage lender who works with many loan products to help you navigate the best option for your situation. There are several factors to consider when determining what product is right. Here are the big ones:

• Fixed rate vs adjustable-rate mortgage: Fixed rate loans have the same rate and monthly principal and interest payment over the life of the loan. Adjustable-rate mortgages (ARM) will have a change in the interest rate at different points in the loan and typically start at a lower rate than a fixed rate loan. Compare the monthly payments over the first years of the loan and over the life of the loan to identify if the savings in the first years are worth the risk of potentially having a higher rate in the future. ARM loans are not a common choice today other than for jumbo loan amounts and people who will only be in the home for a few years.
• Compare terms: look at monthly payments for a 30-year, term, 20-year term, and 15-year term. The slightly higher payment brings big savings over the life of the loan.
• Compare the monthly payments of a conventional loan with an FHA loan if you have less than 20% down and aren’t eligible for a Veteran’s Administration You can buy a home with as little as a 3% down payment but will need mortgage insurance. The interest rates between conventional and FHA will vary and so will the mortgage insurance costs. Be sure to ask for a comparison between the two when you have a lower down payment.
• If you are eligible for a Veterans Administration backed home loan, be sure to consider using this benefit. The VA loan allows 100% financing and lower closing costs. The VA Funding Fee is reasonable for a first-time user of the benefit and can be rolled into the loan amount to save out of pocket costs. Don’t save this benefit for another time. Always have the VA interest rate and monthly payment compared with an FHA to find the best deal.
• USDA loans are zero down payment and not just for rural areas. Check out the USDA Eligibility map to show eligible properties and income limits. A great option to consider if you meet the income limit.

Avoid Common Pitfalls When Preparing to Apply For a Mortgage

Applying for a mortgage can seem overwhelming so here are the top 10 things you can do to avoid common pitfalls:

1. Run one free credit report from Annual Credit Report.com before you start making offers on a house. You are entitled to 1 from each of the three bureaus (Experian, TransUnion, Equifax) every year. Know where you stand with your credit score and the debts that will be included in your debt-to-income ratio.
2. Resolve any errors on your credit report in advance! It’s best to have these cleared up before you make an offer. If you saved one of your free credit reports checks, use one to confirm the error is corrected.
3. Don’t be caught short cash to close and reserves. Create a budget, and stick to it, to save for the down payment plus at least two monthly house payments as a cushion. Search the internet for a good app or template that fits your income and expenses. Pick a form that keeps you motivated to follow a budget to save for a home, and practice that new monthly house payment.
4. Get a full pre-approval (not just a pre-qualification!) to avoid having your offer rejected or worse overlooked when trying to buy your home.
5. Have a two-year employment history. It is tough to get a loan with less than a two-year employment history unless you are a recent school graduate who has a job in a similar area or field you studied. It’s OK to meet with a loan officer if you are close to having two years.
6. Research the property taxes in the markets where you are considering buying. The annual property tax bill(s) will be divided by 12 and included in your monthly payment for qualifying – even if you pay the taxes on your own!
7. Know if there are Homeowners Associate Dues (HOA dues). These must be included in your monthly mortgage payment for qualifying. The amount of the HOA dues can really change how much of a mortgage loan you can qualify for.
8. Shop early for homeowner’s insurance and know if flood insurance will be required. One twelfth of these costs are also added to your mortgage payment for qualifying and can be very high in some areas. Don’t underestimate these costs at the time of your loan application.
9. Select a loan officer based on referrals from people you know and validate their credentials through internet resources such as the mortgage lender’s website and LinkedIn. Develop a circle of trusted advisors who have your best interests in mind.
10. Expect constant communication from your mortgage lender. A good lender keeps you updated throughout the entire process. You should know the important milestones, when the appraisal has come in, when all the conditions for closing are cleared and that you will close on time.

Rewards When You Get It Right

To get the best mortgage you will need to do some legwork to reap the highest reward. Take time to research mortgage lenders while you are saving for the down payment and fixing any errors on your credit report. You don’t need to have all that done before you meet with a loan officer. A seasoned mortgage loan officer can help you design a plan for homeownership that achieves your financial goals. They will also explain the loan terms, provide an estimate of closing costs and identify a purchase price range you qualify for. Getting all this done before you sign up with a Realtor puts you in the bargaining seat when making your home buying offer.

Homeownership has many rewards. Begin your journey of building equity and establishing roots in a community by contacting a Union Home Mortgage loan officer today.

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above. A conditional pre-approval letter is not an offer to lend, a commitment to make a loan, or a guarantee of specific rates or terms. It is not a formal written commitment to issue a loan. A formal loan commitment may only be issued once a property is identified, a formal application is submitted, and the loan has gone through underwriting and has been evaluated. At the time of final approval, your application must meet UHM’s lending standards, such as receipt of an acceptable appraisal and validation of credit, including information received from independent third parties regarding your credit history, and underwriting information. Your information has not been submitted to underwriting for evaluation and has not yet been approved.