Best Mortgage Lenders Of November 2024
Purchasing a house is a thrilling experience, but it’s also likely to be the biggest financial investment you’ll make. Unless you’re wealthy enough to pay for a home outright, you’ll need to get a mortgage loan to help cover the costs. The process of applying for a mortgage can be intimidating, especially if it’s your first time. However, you can increase your chances of approval by following these seven steps.
What Do Mortgage Lenders Look For?
Mortgage lenders typically consider certain factors when evaluating a loan application, although the specific requirements may vary depending on the lender and the type of loan. Some common requirements that lenders may consider include:
Good Credit
The credit score needed for a mortgage depends on the type of loan you’re seeking. A conventional mortgage typically requires a score of 620 or higher, but other types of mortgages, such as those offered by the FHA, USDA, or VA, may have lower credit score requirements. It’s important to note that a higher credit score can often lead to a lower interest rate on your mortgage.
Verifiable Income
Lenders want to ensure that borrowers are able to repay their loans, so they will typically ask for documentation of income and employment, such as tax returns, pay stubs, or 1099 forms. They may also consider any assets a borrower has, such as money market accounts, stocks, or other properties, which could be used to cover any financial emergencies that may arise.
Debt-to-income (DTI) Ratio
The debt-to-income (DTI) ratio compares a borrower’s monthly debt payments to their income. To be approved for a mortgage, a borrower’s DTI ratio should usually be below 43%, though some lenders may allow a ratio of up to 50%. Lenders may also ensure that a borrower’s housing expenses, including their mortgage, homeowners insurance, and property taxes, do not exceed 28% of their gross monthly income.
Down Payment
The size of the down payment required for a mortgage may vary based on the lender and the type of loan. For a conventional mortgage, a down payment of at least 3% of the home’s purchase price is generally needed, though a larger down payment of at least 20% is typically required to avoid private mortgage insurance (PMI). An FHA loan requires a down payment of at least 3.5%, while USDA and VA loans do not require a down payment. Keep in mind that a larger down payment may be seen as less risky to the lender and can also lower the loan-to-value (LTV) ratio.
How to Get a Mortgage
If you’re ready to get a mortgage, follow these seven steps:
1. Check Your Credit Reports
Before beginning the mortgage application process, it’s a good idea to check your credit reports. Credit plays a significant role in the mortgage approval process and can impact the terms of your home loan. You can request your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) by visiting annualcreditreport.com, which is the only website authorized by federal law to provide free credit reports once per year.
Once you have your reports, review them for errors, such as incorrect personal information or inaccurately reported credit accounts or loans. If you find any errors, you can dispute them with the bureau that’s reporting the incorrect information by visiting their website. The bureau is required to investigate and respond to the dispute within 30 days.
You should also look for negative items on your report that are accurate but can harm your credit score, such as late payments, accounts in collections, bankruptcy, liens, and excessive credit inquiries. While you can’t dispute factual entries, you can work on addressing them before applying for a mortgage.
If your credit isn’t in excellent shape, you may want to take steps to improve it. Your credit reports don’t include your credit scores, but you can often obtain your credit score for free from credit card issuers or online. FICO scores are widely used by lenders, while VantageScores are less common and may differ from your FICO score.
For most conventional mortgages, a credit score of 620 to 640 is generally considered the minimum, though some government-backed loans may accept a score as low as 500 with certain other qualifications. However, a higher credit score can often lead to more affordable loan terms.
To improve your credit score, it’s important to make all debt payments on time and in full, as payment history is the most heavily weighted factor, accounting for 35% of your credit score. The amount of debt you owe in relation to your available credit also plays a role, comprising 30% of your score, so it’s advisable to keep your debt levels as low as possible. Additionally, you should avoid making any major credit purchases or opening new lines of credit for a few months before applying for a mortgage, as this can negatively impact your credit history and the number of hard inquiries on your report.
3. Calculate How Much House You Can Afford
Before you start looking at homes, make sure you can afford the mortgage payments. You can estimate how much you can borrow using the 28/36 rule, which refers to your debt-to-income (DTI) ratio.
For example, a DTI ratio of 50% means that you spend half of your pre-tax monthly income on debt repayment. Ideally, your “front-end” DTI, which includes only mortgage-related expenses, should be below 28%, and your “back-end” ratio, which includes all debts, should be no more than 43%, though under 36% is optimal.
If your DTI ratio is too high, you may need to work on paying off or reducing some of your existing debts before applying for a home loan. Remember that your monthly mortgage payment is only part of the cost of owning a home. You’ll also need to consider interest, homeowners insurance, property taxes, and potentially homeowners association fees. Additionally, you should think about how much of a down payment you can make and whether you’ll need to pay private mortgage insurance (PMI).
4. Choose Among the Types Of Mortgages
There are several factors to consider when choosing a mortgage loan that best meets your needs. These include whether to choose a conventional or government-backed loan, a fixed or variable interest rate, and a shorter or longer loan term.
Conventional mortgages are provided by private banks, credit unions, or online lenders and tend to have stricter eligibility requirements and higher down payments. Government-backed loans, such as those offered by the FHA, USDA, or VA, are backed by the federal government and may have more flexible terms, though they are still obtained through individual lenders.
When it comes to interest rates, fixed-rate loans offer a predictable monthly payment, while variable rates may be lower in the initial years but can fluctuate over the loan term.
The length of the loan can also impact the overall cost. A shorter loan term of 15 or 20 years allows you to pay off your loan faster and can save you money on interest charges, but it also means higher monthly payments. On the other hand, a longer loan term of 30 years or more can make monthly payments more affordable and allow you to borrow more, but it also increases the amount of interest paid over the life of the loan. For example, a $200,000 loan at 4% interest over 15 years would cost a total of $266,288, while extending the term to 30 years would reduce the monthly payment by about a third but also add an additional $77,451 in interest.
5. Gather the Documents Needed for Your Mortgage Application
Before you apply for a mortgage, you’ll need to gather a variety of financial documents to provide to the lender. These include documents that verify your income, such as tax returns for the past two years, W-2 forms, or pay stubs, or 1099s or profit and loss statements if you’re self-employed.
You may also need to provide documentation of additional income sources, such as alimony or child support, and proof of assets, such as bank statements for savings and checking accounts and retirement accounts.
The lender may also ask for information about your outstanding debts, including credit card balances and student loans. Depending on the lender, you may need to provide additional documentation, such as proof of rental payments, documentation of gifted funds for a down payment, or documentation of the sale of an asset.
6. Shop Around for the Best Mortgage Rates
When it’s time to choose a mortgage lender, it’s important to carefully consider the loan offer and do some research to ensure you get the best deal. Pay attention to the mortgage interest rate, as even a small difference in percentage points can add up to a significant amount of money over the life of the loan.
Don’t forget to also consider closing costs, origination fees, mortgage insurance, and other expenses that can add to the total cost of the loan. The annual percentage rate (APR), which represents the total yearly cost of the loan including fees as a percentage of the total borrowed, can be a helpful tool for comparing the true cost of different mortgage offers.
However, keep in mind that the APR assumes you will keep the loan for the full term, so it may not be an accurate representation if you plan to refinance or move within a few years.
7. Consider Getting Preapproved
Obtaining preapproval for a mortgage can help you in the homebuying process by giving you a rough idea of how much you can borrow, based on a lender’s review of your credit score, income, and assets. Having preapproval can also help you stand out to sellers, as it shows that you are likely to be able to secure financing. It is important to note that preapproval is not the same as final approval, and you will still need to complete a formal mortgage application and go through the underwriting process before getting final approval for a loan.
Bottom Line
Buying a home is a major milestone and the mortgage process can be intimidating. However, being prepared and taking the time to research your options can make the process go more smoothly. It’s important to evaluate your finances and credit, decide on the type of mortgage that works best for you, and compare offers from different lenders to get the best deal. Once you have a mortgage approval, you’ll just need to finalize the details before closing on your new home.
Private mortgage insurance, or PMI, is a type of insurance that protects the lender in the event that you default on your mortgage. It is usually required if you make a down payment of less than 20% of the home’s purchase price. The amount you’ll pay for PMI can vary based on factors such as your down payment and credit score.
Mortgage interest rates are what you pay to borrow money for a home loan. These rates are expressed as a percentage of the total loan amount and are usually calculated on an annual basis. The current 30-year fixed-rate mortgage has an interest rate of 7.28%. The annual percentage rate (APR) is a more comprehensive measure of the total cost of your loan, as it includes not just the interest rate, but also other finance charges such as fees.
To be preapproved for a mortgage, you will need to provide a lender with some financial information and documents. This includes your Social Security card, pay stubs, W-2 forms, bank statements, and tax returns. The lender will then review this information and determine how much they are willing to lend you and under what terms. Keep in mind that the preapproval process may vary from lender to lender.
To get the best mortgage rate, you should focus on improving your credit score, paying off debt, saving for a down payment, and avoiding major life changes. Additionally, you should compare rates from multiple lenders and consider your personal financial situation before making a decision.