Debt Free

For many people getting a home loan a step they took a long time ago, for others it's one they look forward to with either breathless anticipation or understandable trepidation. Whichever one of those groups you fall into, you feel a bit more comfortable if you have some idea about how the process works and the steps you need to take to get a home loan. For all but the lucky few, getting pre-approved for your mortgage is the first step on the road to home ownership. Being pre-approved for a mortgage means that you can actually shop for a house with the knowledge that, when you finally find your dream castle, you will be able to purchase it.

So, how the heck are you supposed to get to the point where you can drive around in your realtor's Lexus without wasting your time, theirs, or the sellers? Don't laugh, it happens. I have a friend who's selling their home and Realtors actually brought a few prospective buyers who were not pre-approved. Why? It's anyone's guess, but if you haven't reached that step in the process, your home may be out of reach. You won't really know (unless you can pay cash for the property or you're pretty damned confident in your financial wherewithal).

Step 1 in Getting a Home Loan -
Step 1 in getting a loan for your new home is to get all your financial information and supporting documentation in order. Key among this is a copy of your credit report, and documentation supporting your income. You need to do this well in advance of actually looking for your loan. Why?

Because, especially in the credit market in which we find ourselves, having a good credit score will enable you to get a favorable mortgage. The days of getting financed with a FICO score of 525, $25,000 in auto and credit card debt and a stated income of $40,000 are probably behind us for a while, as far as most lenders are concerned. You'll need to be able to actually verify your income by gathering 2 years worth of W-2's or tax returns, and proof of employment, such as recent paycheck stubs.

You should  get a copy of your credit report, not only to determine your credit rating, but to improve your score if at all possible. I've written several posts on the steps you can take to improve your credit score. Just increasing your score a few points could make the difference between getting a loan and sitting on the sidelines of home ownership. In addition, the better your credit score, the more favorable interest rate you'll be able to get, lowing you mortgage payment and saving you many thousands of dollars over the life of the loan.

Step 2 in Getting a Home Loan -
The second step in getting a home loan is to locate a lender. These days that may be a mite bit more difficult than it was only a few short months ago, but relax, there are still plenty of folks out there with money to lend. Your task is to find one. That's a process in itself. First, you should  call around to local mortgage companies and ask talk to them. Ask friends who they worked with when they bought their homes. A referral from a few satisfied friends, especially if they're financially savy, can be worth quite a bit here. Check your bank or credit union as well. If you've been a good, long term customer, you may do well, but don't just go to your bank and take whatever they give you (if they'll give you anything, the big banks are getting a bit gun shy lately).

Step 3 in Getting a Home Loan -
Your third step in obtaining a home loan is to evaluate the different lenders you met in step 2. Although requirements have been getting more stringent, many will still let your qualify for more house than your income can really support. In this situation you can end up being house poor. House poverty is a sad situation where too great of a percentage of your annual income goes into supporting your mortgage payments and home maintenance. Don't let it happen to you. Make a realistic budget to determine how much home you can afford, keeping in mind to have some income in reserve, and stick to it.

When evaluating loan offers, you'll want to consider the interest rate, fees, term of the loan, and how much total money you'll pay ever the life of the loan. Remember, you'll pay interest on all the fees and closing costs associated with the loan, so any costs outside the mortgage itself that gets rolled into your loan will cost far more than their initial dollar figure by the end of the loan. Look for the lowest total cost over the life of the loan. Total includes everything. The annual percentage rate (APR) stated in the good faith estimate you get from the lender will help here. Be advised however that APRs are kind of like a good guideline. There are no consistent standards that the APR value must stick to, so they may not be directly comparable between 2 different loans.

You want to then get pre-approved status from your lender of choice. Pre-approval should not be confused with pre-qualified, although it sometimes is. Pre-approval is a more thorough process and your credit will be checked so you’re ready for a real mortgage, hence the reason for step 1 above. Once you have your pre-approval, you can go find a Realtor. Good luck!