In truth, planning to buy and finance a house should start at least a couple of years in advance. If you just wake up one bright sunny morning and say, "I think I want to go get a mortgage loan today," you will likely discover some obstacles achieving that goal. You need time to prepare your financial situation. Well, the good news is that you're doing some research now on what's needed to get a mortgage loan. Once you finish gathering your research, you can start getting your ducks in a row to increase the chance of approval and a smooth process.
One of the first details a potential lender will want to know when you apply for a mortgage is your credit score. The average credit score to get a loan backed by the Federal Housing Administration (FHA) loan is 690, but you need a score of at least 730 to get the best interest rates available, especially if it's not backed by the FHA. Order your credit scores as well as a copy of your credit report, which you can request for free once a year from all three major credit reporting agencies in the U.S. -- Equifax, Experian and TransUnion. Use them to resolve any issues with your credit history before you apply for a loan and to see if you meet those requirements.
Save for a Down Payment
Generally, you need a down payment of at least 3.5 percent in order to get a FHA loan, but for a standard loan, you need a down payment of 20 percent in order to get a favorable loan package. So once you determine how much you want to spend on your new home, multiply that by either 20 percent for a standard loan or 3.5 percent if you plan to apply for an FHA loan to establish your savings goal.
You Need to Prove Income
For a mortgage loan, you must state your income. In the past, stated income loans, which allowed a borrower to simply state his income without providing proof, were popular. This was common for small business owners who did not receive paychecks. But these types of loans aren't as available to borrowers anymore. So if you're in a situation where it is hard to prove your income, be prepared to go through an extensive process of gathering paperwork to show that you earn exactly what you state on your loan forms. You may want to ask clients to pay you in checks instead of cash so that you can keep the stubs.
When you start calling around for quotes to potential lenders, don't commit to the first lender that extends you a pre-approval offer. Keep shopping around to get a thorough view of the interest rates you're eligible for. And don't let a lender pressure you to give your social security number off the bat—just inform him of your credit score and income to get a quote. Once you decide to commit to one lender you can then provide your social security number and more detailed information to get an official quote.
When you close a mortgage loan, the lender requires you to pay closing costs. These costs may include title search, appraisal, and application fees. The lender may also charge an origination fee, which is paid to the person who helps you apply for and close the loan. Points are another possible closing cost. A point represents 1 percent of the mortgage balance — you may choose to pay this in exchange for a lower interest rate. Get what's referred to as a "good faith" estimate from your lender for how much these closing costs will be and start saving up to pay these fees in addition to your down payment.