Your First Mortgage: How to Apply and Get Approved
July 7th, 2008 by David Weliver
Mortgage crises or not, it’s still a great time to buy your first home. Be smart, however, and have a pre-approved mortgage in hand before going house hunting. Applying for (and getting approved for) a mortgage before you shop could save you time, money, and heartbreak. Here’s how.
Photo by lumaxart.
Buying your first home might just be one of the most exhausting experiences of your life, but the dividends—like the pride and financial security of home ownership—are worth it. You can, however, take some of the sting out of your first home-buying process by readying yourself for the mortgage application and approval process.
Understanding the mortgage market
Not long ago, anybody with a job could get a mortgage. Banks hawked poor credit loans and adjustable rate mortgages like crack—tricking borrowers into thinking they could afford egregiously expensive loans. Unfortunately for the banks—and the home buyers they duped—these lending habits were unsustainable; banks made loans borrowers simply could not repay.
Starting in late 2006, homeowners began defaulting on mortgages at record pace, and the rash of delinquencies and foreclosures devastated banks’ mortgage investment portfolios. Since then, banks have tightened their purse strings. Today, it takes good credit and the right income and references to get a mortgage. But it can be done—even in your twenties.
What it takes to get approved for your first mortgage
Before completing a mortgage application or even strolling through an open house, make sure that you are prepared for the mortgage application process. You’ll need to know these three things:
- Your credit health
- Your monthly budget (income and expenses)
- Your mortgage budget (home price and available down payment)
Your credit health
Before applying for a mortgage, obtain your credit history report and check it for errors. Since you may shop for homes over the course of several months, consider subscribing to a service that provides regular credit report updates for around $12-20 a month. Your estimated FICO credit score should be least 675 and preferably above 700. Anything less and you will need to find a highly-qualified cosigner or take time to improve your credit before getting a first mortgage approval.
Your monthly budget
The next step in preparing to apply for your first mortgage is to document your monthly income and expenses. Gather paystubs and up to three years of tax returns. Mortgage underwriters may also ask to see your monthly expenses. If you need help organizing them, try these budgeting tools. Also, any large recurring monthly expenses (like an auto loan) will hurt your chances of getting approved for a mortgage. If possible, pay these loans off or, at the very least, avoid taking any new loan payments on prior to applying for a first mortgage.
Your mortgage budget
Before ever speaking with a mortgage officer, determine how much house you can afford. A good rule is that your total housing payment (including fees, taxes, and insurance) should be between 28 and 35% of your gross (pre-tax) income. For example, if together you and a co-buyer earn $80,000 a year, your combined maximum housing payment would be between $1,866 and $2,333 a month.
It can be difficult to equate this monthly payment to a fixed home price, as your monthly housing payment is subject to variables like mortgage interest rate, property taxes, the cost of home insurance and private mortgage insurance (PMI), and any condo or association fees. In some cases, taxes, insurances, and fees may be equal to or greater than your actual mortgage payment.
Next, determine how much you can save for a down payment to put towards your first home. In today’s market, expect your mortgage lender to require at least a 10% down payment. If you have it, consider putting 20% down to avoid PMI—costly insurance that protects your mortgage lender should you foreclose prior to building sufficient equity in the property.
Understand what you can afford before beginning the mortgage. Real estate agents, your own desires, and some unscrupulous mortgage lenders may try to tempt you into buying a more expensive home than you can afford, perhaps rationalizing the decision by reminding you that real estate is a great investment. That’s true, but a smaller investment you can afford to keep in good times and bad is worth far more than a larger investment you lose to foreclosure.
When and where to apply
Speak with your local bank (or even better, a credit union)—or get pre-approved for an online loan like our favorite, the ING Orange Mortgage—before house hunting. You’ll know where your approval chances stand and roughly how much house you can afford. Shop around for the best rates, but beware pushy lenders. Mortgage officers should want to help you get approved, but good ones should be honest if your credit, income, or budget doesn’t stack up.
Are you a home owner in your twenties? What was getting your first mortgage like?
