How To Get A Mortgage Loan: 7 Steps To Get Approved for Home Loan First-Time Buyer

How to a get a Mortgage Loan and get approved as a first time buyer is a question asked by many people who lives as a resident in a city. Buying a home is an incredibly thrilling experience. It’s also a significant financial commitment. Unless you have a huge amount of money, you’ll need to get a mortgage loan to assist you in financing a home purchase.

Getting a mortgage loan can feel intimidating, particularly if it’s your first time. However, the great news is that you can increase your chances of success by following these seven steps outlined in this helpful guide. Now, let’s begin with How to Apply for a Mortgage Loan in Nigeria: A Complete Guide. If you read this post to the end, you will know how to get approved for a home loan first-time buyer.

What Do Mortgage Lenders Look For?

Mortgage lenders generally have certain common requirements they look for, although eligibility criteria may differ depending on the lender and loan type. Some of these requirements include::

Good Credit

The required credit score for your mortgage will depend on the specific type of mortgage you’re seeking. Generally, a minimum credit score of 620 is recommend for conventional loans. However, for other types of mortgages like those supported by the FHA, USDA, or VA, you may qualify with a lower credit score.

It’s important to note that having a higher credit score can lead to better interest rates for your mortgage. Therefore, maintaining a good credit score is beneficial in securing favorable interest rates.

Verifiable Income

Lenders require evidence that you have the ability to repay the loan, which means providing proof of stable income and employment. This is demonstrate through documents like tax returns, pay stubs, or 1099 forms.

Additionally, lenders will take into account any assets you possess that can serve as a safety net in case of financial difficulties. These assets may include money market accounts, stock portfolios, or other properties you own.

Debt-to-income (DTI) Ratio

Your DTI (Debt-to-Income) ratio is a measure of how much of your income is allocated to monthly debt payments. To be eligible for a mortgage loan, it’s generally recommends to have a DTI ratio of less than 43% and ideally not exceeding 50%.

Lenders will also assess whether your housing expenses, which include your mortgage, homeowners insurance, and property taxes, stay within 28% of your gross income per month. This ensures that your housing costs remain manageable in relation to your overall income.

Down Payment

The size of your down payment will vary depending on the lender and the type of mortgage you’re seeking. For a conventional mortgage, a minimum down payment of 3% of the home’s purchase price is typically required. However, it’s important to note that if you want to avoid private mortgage insurance (PMI), you’ll need to put down at least 20%.

For an FHA loan, the minimum down payment required is 3.5%, while USDA and VA loans do not require a down payment.

Keep in mind that a larger down payment reduces the risk for the lender. It also lowers your loan-to-value (LTV) ratio, which is beneficial when applying for a mortgage.

How to Get a Mortgage Loan Nigeria, USA, Canada, UK

If you’re ready to obtain a mortgage, here are the seven steps you should follows:

1. Check Your Credit Reports

Before diving deep into the mortgage application process, it’s important to take a step back and check your credit reports. The condition of your credit plays a significant role in securing a favorable home loan deal or even getting approved in the first place. It is important to know the 5 Factors That Affect Your Credit Score.

To begin, obtain your credit reports from the three major credit bureaus: Experian, Equifax, and TransUnion. Visit the website, which is authorized by federal law to provide free credit reports once a year.

Thoroughly review your reports to ensure there are no errors or unfamiliar accounts listed that could have negatively impacted your credit. It is very important to regularly Check your Credit Report to avoid errors. With that in mind, verify the accuracy of your personal details, such as name, address, and Social Security number. Furthermore, confirm that the credit accounts and loans in your report list accurate in the report, including balances and statuses. Pay attention to any unexplained accounts, as they could be a sign of potential identity theft.

If you discover any errors, you have the option to dispute them with the credit bureau responsible for reporting the incorrect information. Visit the bureau’s website to submit a dispute, and they are obligated to investigate and respond within 30 days.

It’s also important to identify any accurate negative items on your report that can adversely affect your credit score. These may include late payments, accounts in collections, bankruptcy, liens, or excessive credit inquiries. While you cannot dispute factual entries, you can take steps to address and rectify them before applying for your mortgage.

Home Mortgage Contract - Meaning, Types, Loans and How it Works
Home Mortgage Contract – Meaning, Types, Loans and How it Works

2. Improve Your Credit Score

Moving on to the next step, unless your credit is in excellent condition (in which case, congratulations), it’s important to dedicate some time to improving it. I have published a guide to help you Rebuild Your Credit Score after repossession for missing payments.

While your credit reports don’t include your credit scores, it’s relatively easy to obtain your credit score for free. Many major credit card issuers offer your FICO score at no cost. There are also other websites where you can access your VantageScore. However, it’s worth noting that lenders primarily rely on FICO scores, and VantageScore may differ from your FICO score by a significant margin.

Regarding the credit score required for a mortgage, most conventional lenders consider a minimum of 620 to 640. Some government-backed loans may permit borrowing with a credit score as low as 500, subject to meeting specific criteria. However, having a higher score will likely result in a more affordable loan. You can use these Best Strategies to Improve Your Credit Score from 500 to 800 to help improve your chances.

One of the most effective ways to boost your credit score is to ensure timely and full payment of all your debts. Payment history, which carries the most weight, accounts for 35% of your credit score. Another 30% is based on the ratio of debt you owe to the total credit available to you, so it’s advisable to keep your debt levels as low as possible.

Lastly, refrain from making significant credit purchases or opening new lines of credit for a few months before applying for a mortgage. These actions can negatively impact the average length of your credit history and the number of hard inquiries on your credit report.

3. Calculate How Much House You Can Afford

Before setting your sights on your dream home, it’s crucial to ensure that you can afford it. You can estimate the affordability of a house using the 28/36 rule. This rule refers to your DTI (Debt-to-Income) ratio, which represents the percentage of your monthly pre-tax income spent on debt repayment. How Much is Mortgage Payments? You can Calculate Mortgage Loan using Interest rate, Taxes and Insurance with an Online Calculator or Mortgage Formula.

Ideally, your “front-end” DTI, which includes only your mortgage-related expenses, should be below 28%. Your “back-end” ratio, which includes the mortgage and all other debt obligations, should be no more than 43%, although staying under 36% is considered ideal.

If your DTI is too high, you’ll need to focus on reducing or eliminating some existing debt before applying for a home loan. Keep in mind that your monthly loan payment is just one aspect to consider. You should also factor in the costs of interest, homeowners insurance, property taxes, and potentially homeowners association fees. Also, consider how much you can contribute as a down payment and whether you’ll be required to pay private mortgage insurance (PMI).

To help you calculate and determine how much house you can afford, you can utilize our home affordability calculator. It will assist you in evaluating the financial aspects and making an informed decision.

4. Choose Among the Types Of Mortgage Loan

To determine the most suitable type of mortgage loan for your needs, you’ll need to evaluate your options. Consider the factors we will discuss as be progress. There are two primary types of mortgage loans:

  • Conventional mortgages
  • Government-backed mortgages.

The first type is a conventional mortgage

This is offered by private banks, credit unions, or online lenders. These loans typically have strict eligibility requirements and require higher down payments.

If your credit is not in great shape and/or you haven’t saved up a significant down payment, you may still be eligible for a government-backed mortgage such as an FHA, USDA, or VA loan. These loans are obtain from individual lenders, but they are insured by the federal government. This insurance reduces the risk for lenders, resulting in more flexible loan terms for borrowers.

Another important factor to consider is deciding between a fixed interest rate that remains unchanged throughout the entire loan term or a variable interest rate that can fluctuate.

Opting for a fixed-rate loan provides stability

As your mortgage payment remains the same each month, allowing you to accurately plan your budget. On the other hand, variable rates tend to be more cost-effective during the initial years of the loan.

However, these rates can reset multiple times over the loan term based on current market conditions. This means that your interest rate could potentially increase in the future, leading to unaffordable mortgage payments.

Lastly, shorter loan term

It’s important to consider how the length of your loan will impact its overall cost. Choosing a shorter loan term of 15 or 20 years allows you to pay off the loan more quickly and save on interest charges. However, this also means higher monthly payments, which can limit your available cash flow. In such cases, you may need to borrow a smaller amount.

Alternatively, you can opt for a longer loan term of 30 years or more. This extends the repayment period and reduces the monthly payments, making them more affordable. It may even enable you to borrow a larger amount. However, keep in mind that prolonging the loan term increases the total interest paid over time.

Let’s consider an example: If you borrow $200,000 at a 4% interest rate over 15 years, the total cost would be $266,288. Extending the term to 30 years reduces the monthly payment by about a third but adds an extra $77,451 in interest over the loan’s lifespan.

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5. Gather the Documents Needed for Your Mortgage Loan Application

Once your finances are in order and you have determined your borrowing capacity, it’s time to tackle the necessary paperwork.

Lenders typically require a substantial amount of documentation during the mortgage approval process. To ensure a smooth application, it’s advisable to gather all the necessary documents beforehand. Here’s a list of what you’ll need:

To show that you can afford the mortgage payments, you must provide proof of your income. Lenders will ask for certain documents, such as:

  1. Tax returns: They will want to see your tax returns from the past two years to verify your income.
  2. W-2 forms or pay stubs: If you are employed, you should provide recent W-2 forms or pay stubs that show your earnings.
  3. 1099s or profit and loss statements: If you work for yourself or have freelance income, you will need to provide 1099 forms or profit and loss statements from the past few years to verify your income.

If you receive alimony or child support, you will also need to provide court orders, bank statements, and legal documents that prove you will continue to receive that income.

Proof of assets

Apart from income, having additional assets can strengthen your mortgage application. Be ready to present bank statements for your checking and savings accounts, as well as statements for retirement accounts and other brokerage accounts covering the last 60 days. These documents demonstrate your financial stability and potential sources of funds for the mortgage.

List of Liabilities

Lenders may require documentation regarding your outstanding debts, which could include credit card balances, student loans, or any existing home loans. This information allows them to assess your overall debt obligations and evaluate your ability to manage additional debt, such as a mortgage.

Depending on the lender’s requirements, there may be need for additional documentation. For instance, if you are currently renting, the lender might ask for canceled rent checks or a letter from your landlord confirming your timely payments.

If you plan to use gift funds for your down payment, it requires you to provide a gift letter and a clear record of where the money came from. In the case of selling an asset for cash, you may need to provide documentation, such as a copy of the title transfer if you sold a car, to verify the sale.

Remember, these additional documents are specific to certain situations and lender requirements, so it’s essential to check with your lender to determine the exact documentation they require.

6. Shop Around for the Best Mortgage Loan Rates

Before finalizing a loan, it’s important to carefully choose the right mortgage lender and loan offer. Rushing into a contract can result in missing out on better deals. One crucial factor to consider is the mortgage interest rate, as even a small difference can significantly impact the overall cost of the loan. For example, a 0.75% variance in the interest rate on a $200,000 loan over 30 years can lead to savings of $30,885 in interest payments.

Apart from the interest rate, it’s important to pay attention to additional expenses such as closing costs, origination fees, mortgage insurance, and discount points. These costs can add up and it mostly include in the loan balance, resulting in interest is paid on them in addition to the principal amount.

To accurately compare the true cost of different mortgage options, you can examine the annual percentage rate (APR). The APR reflects the total yearly cost of the loan, including all fees, expressed as a percentage of the total borrowed. However, it’s important to note that the APR assumes the loan will be kept for its entire term, so if you plan to move or refinance within a few years, the APR may not provide an accurate representation of the loan’s cost.

Taking the time to carefully consider these factors and compare loan offers will help you secure the best mortgage deal for your financial situation.

7. Consider Getting Preapproved

Obtaining preapproval for a mortgage can help alleviate the stress associated with buying a home. During the preapproval process, a lender will review factors such as your credit score, income, and assets to estimate the amount you can borrow. This gives you an advantage when making offers on homes, as sellers know you are likely to secure financing quickly. Moreover, instead of searching for a home without a clear budget, preapproval provides you with a specific borrowing limit to guide your house hunting.

It’s important to understand that preapproval does not guarantee that you have the funds on hand to purchase a home. You still need to complete an official mortgage application and undergo a comprehensive underwriting process before receiving final approval.

Bottom Line

Securing a mortgage is a crucial step in the homebuying process, and it requires careful consideration. Remember that the commitment lasts for many years, so it’s important to make informed decisions.

Once you have received loan approval, you are nearing the end of the process. The remaining tasks involve preparing for the closing day. This includes conducting a final walk-through of the property to ensure everything is in order, obtaining homeowners and title insurance for protection, obtaining a cashier’s check for the down payment, and being ready to sign the necessary contracts and documents.

Hope this guide has provided details on how to get a loan for a house with low income. In our next article, we will talk about list of banks that give mortgage loans in Nigeria so that you can apply for mortgage loan online.

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