You probably don’t have to be told the benefits of homeownership. You can build equity, enjoy a sense of accomplishment, and most importantly, you can stop wasting money on rent. But a mortgage is a big responsibility, and for this reason, mortgage lenders don’t approve everyone for financing. The good news, however, is that there are lending options for all types of borrowers—whether you’re a first-time homebuyer, or someone with low income or less-than-ideal credit. So how to get a loan for a house? Here’s how to get the keys to your future.
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Before you move forward with a mortgage application, make sure your financial ducks are in a row.
- Save your money. Most mortgages require a minimum down payment between 3% and 5%. Determine how much you can realistically save each week, and then automatically transfer these funds into a savings account. Keep in mind that you’ll also need money for closing costs, which run about 2% to 5% of the sale price.
- Know your credit. Your credit decides whether you’re able to get a home loan. If you’re thinking about buying a house, get copies of your credit reports from AnnualCreditReport.com at least 12 months in advance. To improve your credit, pay your bills on time, pay off debt and dispute inaccuracies on your credit report. A credit score in the mid-700s and higher can help you score a favorable interest rate.
- Gather financial documents. The bank’s underwriter will evaluate the stability of your income and employment. Documents you’ll need when applying for a home loan include recent paycheck stubs, tax returns from the previous two years, a year-to-date Profit and Loss statement (if you’re self-employed), three months of bank statements, as well as statements for brokerage and retirement accounts.
A mortgage lender doesn’t pull your credit until you submit a request for a home loan. After reviewing your credit, income and assets, the bank determines the maximum you can borrow, and then issues a pre-approval letter. This letter gives you the green light to shop for a home.
Once you’ve found a property, your lender will prepare a Loan Estimate with the loan details. This includes estimates for the monthly payment, interest rate, down payment, closing costs, as well as how much you’ll pay annually for mortgage insurance.
Mortgage insurance is required on most loans without 20% down and protects the lender in case of default.
If you choose to proceed after reviewing your Loan Estimate, it’ll take about 30 to 45 days to close on the mortgage, sometimes sooner. The actual length depends on your lender’s workload, and how long it takes to complete pre-closing requirements like the home inspection, appraisal, title search, termite inspection, etc.
You’re cleared to close once underwriting completes your loan file, at which point you’ll receive a closing date. The lender sends you a Closing Disclosure form three days before closing. This form is essentially an updated Loan Estimate, but with your actual loan terms.
Getting approved for a mortgage is only half the battle. It’s also important to choose the right mortgage. Fortunately, mortgage lenders have products for just about every borrower, including first-timers who earn enough to qualify for a mortgage, but don’t have a down payment.
If you’re active-duty military, a veteran, a reservist or a member of the National Guard, you may qualify for a zero down VA home loan. Or, you may qualify for a USDA home loan. These are zero down mortgages available to those who purchase in eligible rural areas.
If you’re not eligible for either, another option is a zero down portfolio loan from a local or online lender. Instead of being sold on the secondary market, portfolio loans are serviced by the original lender, so there’s more flexibility in qualifying borrowers compared to a traditional mortgage.
The downside of a zero down portfolio loan is that you’ll pay a higher mortgage rate to compensate for purchasing with no money payment.
Currently, FHA home loans (insured by the Federal Housing Administration) are the only mortgage products available to people with a credit score under 620—more on this later.
The only exception is if you find a lender that offers portfolio loans to people who have low credit scores. But even if you’re successful and find a bank that works with bad credit borrowers, you may only qualify for this mortgage if you have compensating factors. This includes a high income, a large down payment (at least 10% to 20%), and an acceptable explanation for bad credit (job loss, illness or divorce) In addition, your recent credit history must be positive, meaning no late payments or negative reports in the last 12 months.
Don’t let low income stop you from getting a mortgage. Several programs are designed specifically for buyers with low-to-moderate income, and typically involve low or no down payment.
Many of these programs also allow borrowers to use grants or gift funds for all or most of their down payment and/or closing costs. The only catch is that some programs require attendance of a homebuyer education class. These classes discuss various aspects of ownership from getting approved to managing a mortgage payment.
Program requirements vary, but a few low income options include:
- Conventional 97 Home Loan
- USDA Home Loan
- HomeReady Home Loan
- ReadyBuyer HomePath Program
FHA home loans are an overall attractive choice because these loans are easier to get if you have bad credit, minimum funds for a down payment and low income.
These home loans only require 3.5% down if your credit score is between 580 and 620, and 10% down if your credit score is between 500 and 579. FHA loans typically have lower rates compared to conventional mortgages, about 15% lower.
Similar to other home loans, you’re also required to pay mortgage insurance if you purchase with less than 20% down. Mortgage insurance with an FHA home loan is often for life. The only exception is if you put down 10%. In this case, the lender removes mortgage insurance after 11 years. If you put down less than 10%, you must refinance the mortgage to get rid of mortgage insurance.