Are you looking to take the first step up the property ladder but the complexity of getting a mortgage is stopping you? No, you are not alone - but keep in mind these two facts: nearly 45% of homeowners in the US have a mortgage, and the majority of homebuyers overestimate how difficult securing a home loan is. 

Yes, applying for a mortgage might feel overwhelming - and it can certainly be time-consuming. But it’s not the daunting, complex process you picture it to be. Here’s all you need to know to get started.

What Is a Mortgage? Let’s Cover the Basics

At its core, a mortgage is a loan specifically designed to help homebuyers afford a real estate property. A mortgage agreement, which can last for 15-30 years, defines the terms of the contract you have with your lender. 

Generally, your chosen lending institution will pledge to lend you the money necessary to buy a house while you’ll commit to repaying the loan through monthly installments. 

Mortgage vs Loans: Key Differences

Home loans are slightly different from other types of loans, like a student, personal, or auto loans. Firstly, some loans are available without a credit check. In the case of mortgages, you might be able to secure funds without a credit history or with a bad score, but the lending institution will always run a credit check. 

Additionally, mortgages are “secured” loans, meaning that your property will be used as collateral in case of missed payments or inability to repay the loan.

Types of Mortgages

Mortgages can vary in length (10, 15, 20, or 30-year loans) and in terms (fixed vs adjustable rates). But they also vary in nature. Some of the most common mortgage types to consider include:

  • Conventional home loans - conventional mortgages are the ones that comply with the loan limits and terms set by government-backed mortgage companies Fannie Mae and Freddie Mac. They usually require a 20% downpayment and allow you to borrow up to $647,200 (as of 2022).
  • USDA Loans - these mortgages are designed for those buyers looking to invest in rural areas. They are backed by the USDA and don’t require a down payment, but only homes in certain areas might be eligible.
  • VA Loans - these loans are catered to members of the US military and their families. They are backed by the Department of Veterans Affairs and don’t require a down payment or Private Mortgage Insurance (PMI).
  • FHA Loans - These are loans backed by the Federal Housing Administration and only require a minimum downpayment of 3.5 and a score of 580. 
  • Jumbo loans - these loans are for house buyers looking to borrow more than the limits set by Fannie Mae and Freddie Mac. They usually require a 10-20% down payment.

The Process of Getting a Mortgage: An Overview

The process of getting a mortgage should always start with finding the right lender. Top offers, such as SoFi home mortgage loans, will have low-interest rates and greater customization potential. 

For example, you’ll want to find a lender that offers at least 10-, 20-, and 30-year mortgages, as well as the option to choose between fixed or adjustable rates. Don’t forget to review the fees charged by the lender, which can include early repayments and origination costs. 

The Must-Haves You Need To Secure a Mortgage

In most cases, securing a mortgage is easier than you’d think, and, on average, only 8% of mortgage applications get denied. However, there are some boxes you need to tick before submitting your application - don’t forget that a mortgage denial can impact your chances of securing the best terms!

A Good Credit Score 

Some government-backed loans are accessible with a score of 580, while conventional loans require a minimum credit score of 620. But, even if you qualify for a mortgage with a low FICO score, you should consider spending time building up your credit before applying. 

Indeed, low scores can prevent you from accessing the best rates, which can impact how much interest you’ll repay over the course of the loan.

A Robust Down Payment

Thanks to today’s availability of different loan types, you no longer need to build that infamous 20% down payment, and you can access a loan with a 0-3% deposit. 

However, with a lower down payment, you might have to pay PMI (which is 0.5-1% of the total loan amount) until you owe at least 20% of your home’s equity.

A Debt-To-Income Ratio Below 36%

The debt-to-income (DTI) ratio measures how much of your income is used to repay outstanding debt. While some mortgages are accessible with a 46% DTI, this indicator offers lenders a snapshot of your financial health. So, to access the best rates, you should strive for a DTI below 36%.

Estimating Your Loan Amount, Closing Costs, and Monthly Repayments

Aside from the amount borrowed (the principal), your monthly payments will include interest, property taxes, homeowners coverage, and mortgage insurance. 

The sum of these costs should not be greater than 28% of your gross monthly income. Your lending institutions will review your financial situation and assess how long your mortgage should be and how much you can comfortably repay. 
Extra tip: Make sure to also budget for closing costs, which are usually 2-5% of the property value!