Buying a home can be daunting. So can getting a home mortgage. The process can seem lengthy and confusing, especially if it’s your first time for both. This post is part one in a series that will guide you through the entire system from start to finish. When you’re done, you’ll know exactly what to expect and just how far along you are at a given step.
How to Get a Home Mortgage
What is a mortgage pre-approval?
Pre-approvals and pre-qualifications sound similar, but they are very different concepts.
Pre-qualifications simply look at general criteria that you yourself report to see if you’re a likely candidate for a mortgage. You’ll have a conversation with your loan officer, who will decide based on the information you share—without digging deep to verify that your information is correct. There could be a credit report involved at this stage, but not always.
In contrast, pre-approval is based on verified data and involves a much more thorough evaluation of your financial status. In this process you’ll need to provide documentation that confirms details about your income and assets (including W2s and paystubs), and you should expect a credit report to be pulled.
Here’s an example of what a pre-approval letter looks like.
Do I Have to Have a Pre-Approval?
Technically, no: Having a pre-approval letter is not a requirement for making an offer on a house (or for buying one). But having that pre-approval can make you look more attractive to sellers. Most sellers prefer buyers who already have a mortgage pre-approval letter in hand because it indicates the buyer’s likely ability to secure a mortgage and purchase the home and suggests the buyer has a healthy housing budget.
To pre-approve you for a mortgage, your lender will take a deep dive into your finances, including a credit check, to make sure any loans they offer you make sense.
While the steps may vary slightly depending on the financial institution you’re working with, these four steps outline what you can expect when working with MTC Federal.
Also, note that if you’re applying with a cosigner, they may be required to provide much of this same information.
Step 1: Tell Us Who You Are
You’ll need to collect your typical ID paperwork, including your driver’s license or other government-issued ID, and your Social Security number (SSN). If you are unsure about whether a given form of ID qualifies for your application, just ask your Mortgage Specialist.
Mortgages are major life events, so we will need more than just your ID and SSN. To be sure we’re evaluating a loan for you and not someone else, your Mortgage Specialist will also want two years of address history. We know this can seem like a hassle, but by asking for additional documentation, we’re being thorough, not nosy.
Step 2: Tell Us Where You Work
Once your identification paperwork is squared away, the first thing you should do is begin gathering your financial information. MTC Federal Credit Union’s underwriters will want two years of W2s showing your last two years of employment history.
Keep in mind that if you’ve recently changed jobs, those two years need to be in the same industry as your old job. Mortgages typically come in 15- and 30-year terms, so your long-term financial outlook is what the underwriters are most concerned with. A career change to a completely new field can make evaluating long-term trends difficult.
Step 3: Tell Us Your Financial Background
Next, you’ll need to gather pay stubs that cover a full 30-day period. These will provide a baseline for your income, proving your ability to make payments on your mortgage. Paystubs demonstrate your gross income, so be sure to include anything that counts as income, including tips or other forms of payment.
Letting us understand information like this protects you from being offered loans that are too big or too expensive for you to afford.
Your lenders also need you to provide two months of bank statements. Bank statements will show if you’re currently making payments on any other loans (and how many other loans you have). These will be used, in part, to evaluate something called your debt-to-income ratio, or DTI.
Your DTI looks at your total monthly debt payments (including the mortgage payments you’ll be adding if approved for the loan) and compares it to your gross monthly income. If you’re unsure of whether something will be included in your DTI, ask your Mortgage Specialist.
Examples of things our underwriters might include:
- Mortgage or rent payments
- Monthly real estate tax payments
- Homeowners insurance payments
- Monthly car payments
- Student loan payments
- Credit card payments
- Child support or alimony payments
When evaluating DTI, most lenders used to follow something called the 28/36 rule. This “rule” was always more of a guideline, and the numbers have shifted: these days, 33/45 is the typical max ratio.
So what do these numbers mean? Lenders use them to compare your housing expenses and your total debt expenses. The goal is to keep housing expenses below 33% of your monthly gross income and your total debt expenses below 45%. Still, this isn’t a hard-and-fast rule: these percentages can sometimes be stretched with the right compensating factors.
As you evaluate whether you can afford a home (and how much home you can afford), budgeting according to the 33/45 rule will put you ahead of the curve, making you more attractive as a potential buyer.
Finally, if you have any real estate, bring the following documentation on it:
- How much you’re paying and earning each month (including HOA fees and property taxes)
- The property’s current market value
- How much rent (if any) you collect
Now you have your paperwork in order—congratulations; we know it’s a lot of work! Next, you’ll need to make sure you’ve got a good credit score. Lenders require a score of at least 620 for most loans. Many credit card companies will display a credit score estimate that won’t affect your score. But know that pre-approval applications must perform a hard credit check, which does have an impact on that number.
Step 4: Obtain Your Pre-Approval Letter
Once you’re ready to apply for a mortgage pre-approval, bring your documents to your local MTC Federal Credit Union location or begin the process online. Our experts will help you get everything submitted properly so you can begin looking for your new home.
When we’ve evaluated your pre-approval application and the underwriters have determined that you meet all the requirements, we will send you a pre-approval letter. The letter will list what type of loan you’re pre-approved for, the term of the loan, and an expiration date for the pre-approval letter.
And that’s it! With that pre-approval letter in hand, you can move on toward the next step in your journey to being a homeowner: finding your dream home and making an offer!
If you have questions on anything we’ve covered here, give us a call at (800) 442-7792 or come see us in person in any one of our branches.