Step-By-Step Guide to Getting a Mortgage

Applying for a mortgage can be confusing. Even the most highly educated and professional segment of the population can make mistakes, what with the piles of paperwork, numerous fees and multiple terms involved.
Here are some steps you simply must take before involving yourself in the potentially biggest debt of your life:

1. Fix Your Credit

Don’t just submit your loan application with your fingers crossed behind your back, hoping your credit report is clean. About six months before you even start looking for a house, you must obtain copies of your credit report and your FICO credit score. Your FICO score is the three-digit number that’s used in 75% of mortgage-lending decisions. Here is your chance to correct any mistakes on your report (such as a long overdue bill or huge credit card debt) so that you won’t be sucker-punched at the time of your loan qualification. The biggest mistake you can make is to wait to clear your credit until the moment you need it. Do it in advance and go to the bank or mortgage company with a light heart.

2. Take advantage of first time home buyer’s programs

There are many advantages to using one of the multitude of first time home buyers program out there, whether they are sponsored by your state, county or city government, because they often offer better interest rates and terms than you’ll find among private lenders. Some are tailored for people with damaged credit, while most can help people with little saved for a down payment. It is definitely worth taking the time to research that a little (by contacting the housing agencies in your jurisdiction) to compare what they offer to the private lenders.

3. Get Pre-Approved
Many first-time borrowers confuse being “pre-qualified” with being “pre-approved.” Pre-qualification is a pretty casual process, involving filling out a simple form (you can even do it yourself if you are good at math) to see how much money you “probably” can borrow based on your assets vs your liabilities.

Getting pre-approval, by contrast, is a much more formal process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If all goes well, the lender agrees in writing to make the loan.

In a hot or even warm real estate market, the house hunter who is only pre-qualified is a cooked goose. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up.

4. Don’t borrow too much
Although it is relatively easy to take out a huge sum of money after being qualified, don’t get caught up into borrowing more than you can afford to pay back. Relying on contingencies such as hoping that your salary will increase as time goes by to cover the payments often results in a slap on the face. Don’t put yourself into a position where you have to cut back on groceries and your kids’ clothes in order to cover the mortgage payments. Remember that home buying involves not only mortgage payments but usually huge amounts of property taxes, homeowner insurance as well as higher bills for utilities. Instead of going to the edge of affordability, consider limiting your housing costs -- mortgage payments, property taxes and homeowners insurance -- to 25% or so of your gross income. That’s a much more sustainable level for most people, financial planners say, than the 33% lenders are typically willing to give you.

5. Shop around
This is America, land of capitalism. It is not only your option but your duty to shop around for the best rates and terms around. Don’t let yourself be pressured by the first lender you see. Too many naïve first-time borrowers with decent credit get stuck with loans meant for people with poor credit. So-called “subprime” loans are often more profitable, so less ethical mortgage brokers may push them.

6. Negotiate down your junk fees
Lenders may bury you with a host of fees. Some may be legitimate, some may be inflated and others may be pure fluff. Lenders may charge for “document preparation,” for example, when all that involves typically is having a computer spit out a form. Or they may charge $150 for a credit check that cost them $15. The time to challenge junk fees is not when you’re about to sign the loan papers. Use a mortgage broker or call a number of lenders to compare their loans. Ask about the interest rate, the “points” charged to get that rate (each point is 1% of the total loan amount) and any other fees the lender charges. Then you can compare terms. Once you’ve selected a lender, you’ll be given a good-faith estimate of closing costs, which should include any fees being charged. Ask about each fee, and don’t be afraid of negotiating down the ones that seem excessive.

7. Plan for Closing Costs
Speaking of unforeseen costs, know that the day you’re scheduled to get your loan, known as closing, you’ll also be expected to write a check for a number of expenses, which typically include attorney’s fees, taxes, title insurance, prepaid homeowners insurance, points and other lenders’ fees. Together, these are known as closing costs, and the total can be eye-popping: somewhere between 2% to 7% of the selling price of the house. Plan for closing costs by getting a good-faith estimate from your lender as early in the loan process as possible. Make sure you have the cash on hand (or rather, in your checking account) and that it doesn’t “disappear” before closing because of sloppy bookkeeping or a last-minute emergency.

8. Maintain a cash reserve
Don’t be left out eating macaroni and cheese after closing. After borrowing too much, and scraping together every last dime for closing costs, many home buyers have nothing left in the bank to pay for anything unforeseen happening --and something unforeseen always happens. In the worst case scenario, people are so tapped out by the process that they’re not able to make their first mortgage payment on time. That’s why more and more lenders are requiring [borrowers have] three months’ reserves after closing. But that works to the advantage of the borrower too. Having a cash reserve worth three months of expenses will help you handle the added costs of homeownership with much less stress.