How to Get a Mortgage

You may be just a loan away from your dream home. You just need to learn how to get a mortgage first.

There’s a little more to getting a mortgage than waltzing into your favorite bank and asking for one. After all, your financial life will be much of what helps lenders decide to offer you a loan, not your personality. And unless you have enough cash to buy a whole house, you’re going to need a home loan. Knowing how to get a mortgage long before you attempt to will help your odds of success.

What Is a Mortgage?

A mortgage is a loan from a bank or mortgage lender to help finance the purchase of a home without paying the entire value of the property up front. Given the high costs of buying a home, almost every home buyer requires long-term financing in order to purchase a house. The property itself serves as collateral, which offers security to the lender should the borrower fail to pay back the loan.

A mortgage payment is normally paid on a monthly basis and consists of the principal (the total amount of money borrowed), interest (the price that you pay to borrow money from your lender), taxes (the property taxes you pay as a homeowner), and insurance (which protects the lender if payments have defaulted).

Here’s How to Get a Mortgage

  1. Get your credit score where it needs to be.

Check your credit report to make sure all the information it contains is accurate. If not, contact the credit bureau to correct it. If the information is accurate, find out your credit score.

You can get your score from the credit bureaus (for a slight fee), for free from certain websites, or from your financial institution. Your score will be between 300 and 850, and the higher, the better. Your credit score needs to be at least 620 for a conventional loan and could be as low as 580 for an FHA loan.

If you need to raise your score, you can most likely ignore those companies that say they can clean up your credit. Here are some examples of what it actually takes:

  • Don’t use too much of your available credit—try to use around 30 percent or less.

  • Make sure to pay your bills on time.

  • Keep older accounts open, even if you don’t use them.

  • Don’t take out any new credit.

  1. Check your DTI.

Mortgage lenders are concerned with how much debt you have compared to your income. It’s called your debt-to-income (DTI) ratio, and you may want to take steps to improve it. Try paying off some debt or bringing in more income, perhaps by taking a second job or asking for a raise.

Lenders typically prefer DTI to be no more than 36 percent—although some lenders will allow a DTI of 43 percent—or even higher. “Some home loan programs allow 50 percent DTI,” says Sonny Pham, branch manager at Planet Home Lending in Santa Ana, California. “But you have to factor in what it takes for you to have a comfortable living after you pay your home loan. Make the decision on how much of your income to devote to housing based on what’s right and fits your life goals.”