How to Get a Home Loan
In Financing Your Home Purchase, by Anthony Bayardelle
Getting financing for your home purchase is one of the most nerve-wracking parts of the home-buying process. However, with a little bit of information, the process of getting a home loan can be simple, straight-forward, and relatively easy.
This article will take you through the basics of how you get a home loan, show you what the process looks like, and answer some basic questions many homebuyers have about how to secure a mortgage.
How Do I Get My First Home Loan?
If you're currently looking at the loan process with a wide-eyed look of terror, there are a few simple steps you can take to make it far less confusing or scary.
Know Your Financial Details
The first and most important step towards getting your first home loan his knowing your financial information.
This can start with knowing your credit score, but it includes far more than that alone. Overall, you want to have a big-picture knowledge of what your total net income is every month, what major bills are going to need to be paid each month, and what this means about how much house you can afford.
If you read ‘how much house you can afford’ and thought ‘how am I supposed to know that?’, don’t worry. We cover it below.
Save Your Money
It’s important to start saving your money.
Ideally, you should have some Money saved us to use as a down payment for your house by the time you start looking at potential candidates but even if you don't currently have savings it's never too late to start.
The importance of having savings for a down payment is twofold. First, the more money you can put down when you purchased the house, the less interest you will pay over time. If you can get your down payment amount at or above 20% of the total home value, you avoid paying PMI (private mortgage insurance), which can lower your monthly payments as well.
If you do not currently have money saved up, this doesn't mean you can't still get a great loan or a fantastic house, it just means you might have a slightly higher monthly payment than if you would be able to make a full 20% down payment.
Either way, if you're considering buying a house, start saving money now. Even if you don't end up using it for a downpayment, it is nice to have a few months' worth of income saved up as an emergency fund in case something happens once you are already locked into a mortgage.
Demonstrate a Solid History
Even if you don't have a huge amount of savings or a perfect credit score, there are still things you can do to demonstrate to lenders that you are a good Financial bit.
Actions like consistently making rent payments on time and in full, demonstrating a solid work history, or even regularly paying your utility bills or other types of debt (such a or car payments) can show lenders that you are a reliable person with a stable income and the ability to handle a mortgage.
Be Smart About Debt
The price of house you can afford shouldn't be calculated by the total home price you see on Zillow, but by the relationship between what your monthly payment would be and what you can reasonably afford based on your current income.
This is called your debt to income ratio. Ideally, you want your total amount of debt payments each month to be less than 36% of your total take-home income.
Unfortunately, this doesn't just mean your mortgage payment but includes other forms of debt like student loans or car payments.
This is why it's so important to speak to a knowledgeable lown officer and get pre-approved for a loan (more on this below) before you even start looking at houses because the type of loan you are qualified to get will determine what your monthly payments will be. If you end up qualifying for a great loan with a low interest rate, you might be able to afford a more expensive house, whereas if you have a harder time getting approved for a loan, the same monthly payment might translate into a smaller total home price.
Whatever situation, getting pre-approved is an essential first step in the home buying process because it will allow you to refine the ballpark of homes you should let yourself look at.
Getting pre-approved simply means that a lender looks at your financial information and gives you an official letter stating how much money you are approved to borrow. You can then present this letter to the seller to prove that you can afford the house, which can give you more power when it comes to negotiating.
To get a pre-approval, you will need to provide your lender with documents like:
W2 forms for the last two years
Credit report (the lender can pull this themselves, with your authorization)
Tax returns for the last two years
Paystubs for the last 3 months
Bank account statements
Information about any other major debts
While a pre-approval is an official letter from a lender who has reviewed your official information, you might also hear about a pre-qualification. This is just a preliminary statement that a lender believes you might fit the requirements for a specific loan.
A pre-qualification is nowhere near as powerful as a pre-approval, so it’s a good idea to speak to a lender and get an official pre-approval letter before you start looking at houses.
Which Loan is Best for First Time Home Buyers?
Not all mortgages are created equal.
There are a staggering number of different loans for different types of people in different situations. The section will both start and end with a solid recommendation that you talk to a human loan advisor and have them give you a free report of the options available to you and your specific situation, as this is the only way to really know what you are qualified for on the loan front.
However, there are some loans that are far more common among first-time home buyers.
Over 70% of home loans are traditional or conventional mortgages.
This is what most people think of when you say mortgage, and entails a fixed rate, 30-year loan typically provided by a large financial institution (rather than the government, as is the case with an FHA loan.
Buyers who aspire to get a traditional mortgage should have some money saved up for a down payment, ideally, the 20% needed to avoid PMI, and should have an average credit score in the mid-to-high six hundred at least.
Usually, a traditional mortgage can be easier, faster, or less of a hassle than some of the government-sponsored loan choices, but that doesn't necessarily make it better. Again, talk to a qualified loan specialist to see which options will actually create the lowest monthly payments in your specific situation.
FHA loans are backed by the Federal Housing Administration rather than a traditional lender.
Salons are incredibly popular, especially amongst first-time home buyers. In fact, around 1 and 5 new home buyers end up selecting an FHA loan for their first mortgage. One of the reasons FHA loans are so popular is because they offer a minimum down payment of 3.5% rather than the traditional 20%. This is enticing to new or first time home buyers who might not have had as much time to save.
Those hoping to qualify for an FHA loan should at least be able to demonstrate that in the last year they haven’t:
Been delinquent on their rent
Had more than one 30-day delinquency on any other payment (like car payments, student loans, utilities, etc.)
Had any collection accounts (on anything other than medical issues)
Similarly, FHA lenders want to see that you are getting a loan you can afford. This means that:
Including your proposed mortgage payments, your total debt payments shouldn’t be more than 50% of your total monthly paycheck.
You have at least one month’s worth of payments saved in advance, after you pay your closing costs and downpayment.
What Credit Score Do I Need to Buy a House?
This is a really common first question for potential buyers to ask, especially if you’re trying to get a home loan for the first time.
In fact, we have an entire article that goes over all the individual factors that help determine what credit score you need to buy a house, as well as the range of various recommendations from different lenders as to what specific credit scores you need to get various types of home loans.
Unfortunately, there is no exact “magic” number that you have to achieve in order to get a loan. It depends on many factors, including how much savings you have amassed, what other debt you have, and what type of loan you are looking to get.
However, to give a ballpark figure, most traditional mortgages use a minimum of 620 with an “optimal” credit score above 740. If you opt for a different mortgage type, these numbers will vary. For example, an FHA loan has a minimum credit score of 580.
Overall, aim to have a credit score of at least 620 for the best chances of getting a home loan, but there are many other factors that can influence a lender’s decisions. If you want to see your situation-specific options, use the link below to get a free, no-commitment consultation with a loan expert.
How Do I Get a Home Loan with No Credit Score?
Especially if you are a first-time homebuyer, it is highly possible that you could have no credit score whatsoever.
Unlike a low credit score, having no credit score doesn't mean that you have a history of financial difficulty, it just means you haven't established a financial history in either direction yet.
While having a good credit score can definitely help the loan process, having no credit score doesn't necessarily me and you won't be able to get a loan. Here's what you need to do in order to get a loan with no credit score.
Demonstrate a Good Payment History
As was mentioned in the above section, there are other factors that lenders look at aside from your credit score. Demonstrating a consistent history of paying your rent on time, good history of pain down other types of death like student loans, and even paying your utility bills on time each month can prove to lenders that you are very safe financial bet.
As a side note, these actions will also help you build your credit score. While some features of your credit score take a while to build, there are other actions you can take to improve your credit score that will have an immediate effect.
Start Building a Credit Score (One Pizza at a Time)
One of the best things you can do if you have no credit score is to start building one.
Even if you are highly suspicious of credit cards, and rightfully so, showing potential lenders that you are fully capable of managing a reasonable amount of debt and paying it off on time will show that you are a safe bet to land a larger sum of money to in the form of a mortgage.
If you have no credit score to speak of, the best way to build one is to get a credit card, make one or two small purchases each month (such as ordering delivery pizza once a month), and paying your credit card bill on time.
If you have no credit score whatsoever, this will help you build it the fastest. It will show lenders that you have the ability to regularly pay your bills, but won’t require you to put too much of your financial life on to the dreaded plastic.
Look at Smaller Lenders
While you might not have as much luck with the larger banks if you have low or no credit, there are many other lending options that might be more flexible about those with “non-traditional” credit.
This includes places like smaller banks, certain online lenders, independent mortgage brokers, or credit unions. If you don’t seem to be getting the loan you want with a larger financial institution, make sure you speak with a loan officer who can present you with options from across the lending spectrum, not just the larger financial institutions.
How Do I Get a Loan for a House with Low Income?
Hopefully, you have already realized that there are many different factors that go into your ability to get a loan.
Yes, having a demonstrated, regular, and sufficient source of monthly income is one of the main factors lenders look at, but it is by no means the only factor they look at.
If you currently have a low income, things like having a larger amount of money saved up for a down payment, a high credit score, or other factors that prove your stability and consistency in paying off your debts can go a great way towards commentating for a lower income.
Similarly, there might be certain loans that are more beneficial for your specific situation. Talk to a qualified lending experts and get a range of the options available for your exact income level.
How Much Can I Borrow?
A major question many buyers have is “how much house” they can afford or what their “buying power” is. These are different ways of asking what the highest price of home they could safely afford or could get a loan to buy.
First, it should always be said that it is rarely a good idea to buy the most expensive home for which you could get a loan. Lenders are there to provide funding for your home purchase, but they are still profit-seeking businesses, not financial advisors.
You should keep in mind that what you can get a loan for and what you could comfortably pay are often two very different numbers.
That said, there are a number of factors which go into how much banks will be willing to lend you. These factors include (but are not limited to) things like:
The term of your mortgage (e.g. 30 years, 15 years, etc.)
However, to figure out what loan payment you could actually pay (without putting yourself into debt or a financially uncomfortable position), you should also consider other factors:
The interest rate of your loan
Your future property tax (either annually or monthly)
Homeowners’ insurance fees
Homeowners’ association fees
Estimated monthly utility bill
Other major expenses (i.e. other debt payments, student loans, tuition, etc.)
If you want an estimated figure for what you could plausibly get a loan for, there are a multitude of online mortgage calculators to give you a range of what you will most likely qualify for.
However, no online calculator can give you a completely precise answer, because there are so many factors that go into the process. There’s no substitute for talking to an actual, human loan expert.
So where do you go from here?
Here are some simple next steps that will take you from wherever you currently are to being pre-approved for a loan and ready to start the home search process with your financial situation already sorted out.
Gather your Information
Obviously, the first step is to gather the appropriate documents and know the basics about your financial situation. This includes your net monthly income, credit score, and the amount of any other debts you have to pay.
These are the first questions any potential lender will ask you, so you want to make sure you have all of the answers on hand when you go to talk to an expert.
You will need the following documents:
W2 forms for the past two years
Current bank statements
Any other relevant information about assets (the more documentation, the easier the process)
Information to access your credit score
These documents will be asked for almost regardless of what loan you end up pursuing, so if you have them scanned into one file and ready to send to a potential lender, it will save to your future self a great deal of household.
Get a Report of Your Situation-Specific Options
What do you want to gather all the pertinent information, you want to talk to a qualified loan expert.
Try to get someone who knows all of the different loan options, not someone who works for a specific company adjust pedals that one company's products. Anyone that is properly qualified should be able to give you a full report of all the different options you have and to explain to you exactly what each one would translate to in terms of a monthly payment.
If you want to get a free report of your options, use the form below to schedule a free 15-minute, no-commitment consultation call to go over your financial specifics and your options.