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Not sure how to get a loan to invest in real estate? Here’s a step-by-step guide.
Getting a mortgage is no easy task. Indeed, one might think that this is just one detail among the many efforts you’ll be making to own your first property. But it’s a little more complicated than you might think. Don’t be afraid, nothing is impossible, far from it. But if you don’t know much about it, you’ll probably need to do a bit of research and take certain steps. But you probably already know that.
If you’re here, you’ve completed the first step.
Ready to learn what you need to know? Here’s how to get a mortgage, step by step.
You need to draw up a financial balance sheet
Before getting a mortgage, make sure you’re financially ready to become a homeowner. Do you have a lot of debt? Do you have enough savings for a down payment? What about closing costs?
A home is a major purchase, perhaps the biggest you’ll ever make, so it’s not surprising that lenders take a serious look at borrowers’ finances before granting home loans. If you’re carrying a lot of debt or don’t have much of a credit history, you may need to improve your financial health before applying for a mortgage.
A thorough understanding of your income and debts will help you know exactly what kind of home you can afford.
In addition, lenders carefully examine your credit score to determine your eligibility for a mortgage.
The interest rate you’ll be offered depends heavily on your credit score.
Check your credit score, and if it needs improvement, increase your credit before you start applying for a home loan. This can include repaying outstanding debt, disputing errors on your credit reports and not opening new accounts.
Find the mortgage that best suits your situation
There are many different types of home loan available. Which one is right for you will depend on your financial situation and home ownership priorities.
Here are some of the loan options you can consider:
Choosing between fixed and flexible rates
Fixed-rate mortgages are popular because the mortgage interest rate does not change during the term of the loan. The rate you initially accept will be the rate you maintain until you sell the house or refinance it.
Variable-rate mortgages have low introductory rates that start out fixed, but then fluctuate upwards. If you don’t plan to stay in the house long, a variable-rate mortgage could save you money.
How long do I have to commit to?
A 30-year mortgage is the most common term. Monthly payments are generally lower, but you’ll pay more interest over the life of the loan.
Short-term home loans, such as 10- or 15-year mortgages, are also available. You pay less interest, but monthly payments can be high. Lenders may offer other options, such as 20-year mortgages, which fall somewhere in between.
Is a deposit required?
Some conventional loans may allow a down payment as low as 3%, but if your down payment is less than 20%, you’ll probably also have to pay for private mortgage insurance. This monthly expense is typical of low-down-payment mortgages, to protect lenders in case the borrower defaults on the loan. There are also solutions offered by surety companies to underwrite a bond for the down payment.
Once you get up to 20% equity in the home, you can take steps to cancel your PMI.
Some government-backed mortgages require no down payment, while others allow you to make smaller down payments. Depending on the type of loan and the amount of your downpayment, you will have different mortgage insurance requirements.
Find out more about mortgage lenders
Take a look at several banks to find the one that’s right for you. There is a wide range of lenders to consider.
If you’re looking for a particular type of mortgage, you may want to focus on specialized lenders. For example, if you know you want a loan, a lender who focuses on working with military borrowers may better suit your needs.
Whatever type of loan you’re looking for, you may want to consider:
- How you prefer to communicate with the lender. Do you want a face-to-face meeting, or are you comfortable with phone calls, e-mails or even text messages?
- What are the minimum qualifications? For example, knowing a lender’s minimum credit score or down payment can help you determine whether you’re ready to apply.
- Does the lender offer unique programs to meet your needs (for example, down payment assistance for first-time homebuyers)?
How do I get pre-approval for my mortgage?
There are a few major advantages to obtaining mortgage pre-approval. Firstly, it shows sellers that you can make a solid offer up to a specific price. Secondly, it helps you determine what your mortgage will really cost, since you’ll get details on the rate, fees and expenses required to close the purchase.
It’s a good idea to get pre-approval from at least three lenders.You’ve already gone to the trouble of digging out all those pre-approval documents. Comparing rates could potentially save thousands of euros over the life of the loan. What’s more, if you get all the pre-approvals in a short period of time (30 days, for sure), it only counts as one serious application on your credit report.
Submit your most recent financial information
Even if you’ve been pre-approved, you’ll still need to submit your most recent financial information when you officially apply for a home loan.
If you’re self-employed, you may need to provide additional proof of your financial stability, including a higher credit score or significant cash reserves, and possibly tax returns.
Within three days of receiving your application, your lender will provide you with an initial loan estimate, which includes:
- How much will the loan cost?
- Associated costs and closing costs, including information on costs you can purchase.
- Interest rates
How do I start taking out a mortgage?
Underwriting can be the most nerve-wracking part of getting a mortgage, even if you’ve been pre-approved. This time, we had to wait longer for official loan approval. You may also find yourself working with an underwriter rather than the loan officer who has helped you so far.
During the underwriting process, the lender determines whether you are eligible for the loan.
Factors evaluated include:
- Credits and work history.
- Debt-to-income ratio.
- Current liabilities.
The lender will review your credit report and request a home appraisal. An appraisal tells the lender the market value of the house, because he won’t lend you more than the house is really worth.
During this time, you’ll schedule a home inspection, which will look for any defects in the house. Depending on how it goes, you may want to negotiate with the seller for repairs or a lower price before closing.
During the underwriting process, you’ll want to avoid making any changes to your finances, such as changing jobs or taking out another line of credit. The same goes for large purchases that increase your debt. Increasing your debt can lower your credit score, which could make the loan more expensive or even jeopardize your qualification.
Can I reverse my decision?
You’re almost done, if you start to have serious doubts at this point, you can always walk away. You could lose your deposit, also known as serious money, if you decide not to close.
Don’t be afraid to ask questions. Getting a mortgage comes with a lot of paperwork. Take the time to understand everything. Know what you’re signing and what you’re paying for.
The laws of your country determine who will be present at the closing.
These people may include:
- Your mortgage broker.
- Your real estate agent.
- Your lawyer.
- The seller’s lawyer.
- A company representative
- The seller and the seller’s agent.
Due to the COVID-19 pandemic, your fence may look a little different. Electronic closing, where at least one document is signed electronically, has become commonplace. In many cases, electronic locking also means that not everyone is physically present at the fence.
And that’s it – you’ve reached the top, and the loan is yours. It’s finally time to move into your new home!