For many people, the hardest part of the home-buying process isn’t finding the perfect home. It’s the process of knowing how to shop for a mortgage. If you’re unsure where to start or have no idea how to get one, we’re here to help!
Our homebuyer’s guide will take you through every step so you’ll know exactly what to expect from the moment you start house-hunting through closing day.
Prepare First
During the application process, our Mortgage Lending Team will review your financial history. Get a head start by eliminating as much debt as you can before you apply. Plan to pay off any loans of high amounts such as car loans, student loans, and high-interest credit cards because carrying a lower debt can make a big difference in the application process!
Your approval amount will be based on your debt-to-income (DTI) ratio. That’s how much debt you have compared with how much income you’re bringing in. Paying off a credit card or eliminating another term loan will improve your ratio. A better DTI ratio could increase how much you can borrow as well as improve your chances of getting approved.
Set Your Budget
Budgeting helps put your current financial situation into perspective. Keep in mind your mortgage payment shouldn’t exceed more than a quarter of your total monthly income. This gives you the financial flexibility to cover other expenses like utilities, transportation, and food without straining your bank account.
Your DTI ratio should be considered within your budget too. Try to keep your total ratio to 43% or less of your gross monthly income.
Your Credit Checkup
Your credit score is another significant part of the approval process. Scores, which range from 300 to 850, are determined by how you use credit and how responsible you are with paying your bills. The three major credit bureaus—Equifax, Experian, and TransUnion—each use slightly different criteria, so your numbers won’t be exactly the same across the board.
You can review your credit reports for free at AnnualCreditReport.com. Be sure to check for errors and contact the reporting bureau immediately if you spot any. Keep in mind that paying your bills on time will raise your credit score. So even if you can’t pay off a credit card balance in full during a particular month, at least pay the minimum amount required by the due date.
Also, if you have any accounts with past due amounts, bring them current.
Choosing Your Loan Type
There are many types of mortgage loans available, so take the time to research the options. Some of our most popular options at Belco include:
Conventional
These loans are your match if you have a strong credit history, stable employment history, minimal debt, and enough funds to put down at least 3%. They’re used to finance most properties including primary residences, vacation homes, or investment properties.
Due to being well-qualified, your overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher.
Government-Backed Loans
The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. Government-backed loans are protected by mortgage insurance, so they are easier to qualify for.
Some examples of government-backed loans include the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans), and the U.S. Department of Veterans Affairs (VA loans). These loans typically have lower down payments and more flexibility in the qualification process. We offer all of these loan types with fixed-term mortgages.
Interest Rates
Think of interest as the price you pay for using someone else’s money until you pay it back. In terms of mortgages, your mortgage interest rate is what it costs each year to borrow the money to buy your home.
Your total loan amount is known as the principal. Added to that sum is your mortgage interest rate. This interest rate can be fixed, meaning the amount stays the same every month for the entire length of the loan. But it can also be variable, meaning it will fluctuate according to the markets.
A fixed-interest rate is very predictable and therefore makes budgeting easy, whereas a variable rate can change a lot. It’s important to determine which type is best for you based on your financial circumstances but obviously, you also want to help secure the most competitively low-interest rate because that will make your overall costs lower.
Down Payment
A down payment is the cash you contribute to the purchase of your home. You can use money from savings, investments, or other sources to make up your down payment. The amount that you can’t cover is what you’ll be taking out a loan for.
If you can put down a sizable amount of money, you might be able to buy a more expensive home or get a lower interest rate. However, depending on your circumstances, you might not want to give up a ton of your cash in a down payment. One of our mortgage lenders can help you figure out this piece of the puzzle.
Get Paperwork Ready
One of the most important steps in shopping for a mortgage is being able to document your current finances. Our Lending Team will want to see your most recent pay stubs, two years of taxes, and at least 90 days of bank account statements for any people listed on the mortgage.
In many cases, they will also want to see documentation of any investments and retirement accounts. Put this package together before you start applying and update it as you go. You should also remember that your lender may ask for bank statements and pay stubs after approval has been granted, but before the loan has closed.
Apply Today!
Whether this is your first or fourth time buying a home, we hope this guide will help you understand how to shop for a mortgage! Check out our mortgage loan offers below to decide which loan type is best for you.