:: Steps in Taking a Mortgage

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Summary
To many of us the "American Dream" still involves owning property and land...

Steps in Taking a Mortgage
1) Review Your Overall Credit History.
Your credit report is used by lenders to determine your creditworthiness and can be a factor in a lending institution's decision to approve or decline your mortgage application. Applicants with a good credit report will thus be in a stronger position to negotiate better rate and loan terms. You should review your credit report for any errors before submitting your home loan/mortgage application.

2) Determine What You Can Afford.
Try to do some research and figure out the home loan range you can reasonably afford, so you'll know what to look for in a house price. Here is a sample spreadsheet to help calculate a target Home Loan range.

3) Understand the True Cost of a Mortgage.
There are additional monthly costs such as real estate taxes, hazardous insurance, closing costs (associated fees with your loan) and other home ownership related fees can add to your total home loan cost. These factor into your monthly payment and reduce the amount of a home you can afford. Quite often many buyers ignore these costs when figuring how much of a home they can afford. These costs are considered in your capacity ratios that lenders use to approve your mortgage application.

4) Estimate Your Down Payment and Closing.
It can be helpful to determine how much of a down payment and closing costs you can afford with your loan. Most lenders require at least 5% of the home purchase price (unless you qualify for government sponsored programs). There are some lenders that will let you have a 0% down payment. Essentially the more you place towards a down payment the lower your interest rate, same with the opposite (if you put no down payment your interest rate will likely be higher to justify the increased "risk").

Additionally there is something called "Private Mortgage Insurance" (PMI). This is a mandatory insurance that lenders are required to add to your loan if you give less than a 20% downpayment, which can add to your total monthly cost. You are still allowed to give less than 20%, but you pay for it in the long term. Your down payment can be in the form of cash or the resale equity value of a prior home.

Also consider your available funds for closing and settlement. Closing costs can average about 3-7% of the purchase price.

5) Pre-Qualifiy for a Home Loan.
Ask at least one lender to pre-qualify you for a home loan. With Loan Pre-Qualifications there is no obligation for you to obtain a loan from that lender, and along the same lines it does not obligate that lender to provide you a mortgage loan. The lender will analyze your credit position, current income, and outstanding debts to give you a reasonable estimate of your borrowing amount. You can visit the Mortgage Lenders Listing page for a lender to get a Pre-Qualification from.

6) Shop Around and Do Your Research.
This is probably one of the biggest purchases you'll ever make, so approach it cautiously. Once you select a house and find the amount that works for you, try a few Mortgage Lenders and compare their rates and products. There are several different types of loans to work with your Lender on: Fixed Rates (steady interest rate), Adjustable Rate Mortgages (interest starts lower and then tends to increase), and many more.

Remember like most business you do have some room to negotiate. Feel free to inform your lenders that you are shopping around, and use the quoted rates to potentially help work some of your offers lower.

7) Close the Deal and Go Through with Closing.
Once your submit your loan applications, compare the offers and terms from muliple lenders, you will ideally have a selection of home loan offers to choose from. Select 2-3 lenders of your and continue to negotiate the offered rate, points, and closing costs. As mentioned above, try to use the terms of one lender to negotiate with the another lender.

Depending on your credit strength, you can negotiate a reduction in rate or points, closing costs, term, penalty clauses, etc. If you have a strong credit rating, lenders will work hard to keep your business. After you select and sign the lending agreement with your lender of choice, you will arrange closing where the title ownership of the home transfers to you.