Getting a mortgage isn't just a simple matter of signing some paperwork and calling it a day. A lot goes into not only applying for a mortgage, but getting approved at a decent rate. If you're new to the game, here are a few aspects of the process that might surprise you.
1. You need a decent credit score -- but you don't necessarily need a stellar one
You probably know that when it comes to getting approved for a mortgage, your credit score matters. But you don't necessarily need the best score out there to get a loan. FHA loans, for example, require a minimum credit score of just 500. Given that the average American's credit score is a good 200 points higher, that's a fairly reasonable ask. Furthermore, Fannie Mae and Freddie Mac impose a minimum credit score of just 620, which is still well below average. Of course, the higher your credit score, the more favorable an interest rate you'll snag, so it pays to work on improving your credit before applying for a home loan.
2. You'll need lots of supporting documentation
Even if you're the most qualified loan applicant in the country, your lender isn't going to just take your word for it. In fact, be ready to produce loads of documentation detailing your financial standing. You'll probably need several years' worth of tax returns, bank statements, pay stubs, and other such proof of income. You'll also need to supply a complete list of assets and debts, as well as information on where your down payment is coming from. Getting your paperwork in order before you apply for a loan can help make the process run more efficiently.
3. Not all lenders are created equal
Just as different banks offer varying interest rates for savings accounts and other products, so too can mortgage rates, terms, and requirements vary among lenders. That's why it pays to shop around and find the most favorable package. It could be that one lender offers a lower rate than another, but at the cost of upfront points on your mortgage. Another lender, meanwhile, might try to entice you with zero closing costs but impose a higher interest rate.
That's why it's important to explore your options and see which offering makes the most sense as a whole. Keep in mind, however, that credit inquiries that exceed a 14-day period could impact your score, so aim to do your rate shopping in two weeks or less.
4. A lower down payment will cost you over time
Though a 20% down payment or higher is most ideal in the eyes of lenders, you can probably get away with putting down much less. Many lenders, in fact, will accept a 10% down payment, and if you have a high enough credit score, you'll be eligible for just a 3.5% down payment on an FHA loan.
That said, the less you put down on your home, the higher your mortgage payment will be, and the more money you'll pay in interest over time. Furthermore, if you fail to come up with a 20% down payment, you could be hit with PMI, or private mortgage insurance, which can equal 1% of your loan's value.
Say you're looking at a $300,000 home, a 30-year fixed mortgage, and an interest rate of 4%. If you put down 20%, or $60,000, you'll have a monthly payment of $1,146, and your lifetime payments will total $412,560. But if you only manage to put 10% down, or $30,000, you'll increase your monthly payments to $1,289, and your lifetime payments will climb to $464,040. That's a difference of $51,480. Even when you factor in the $30,000 savings of putting less money down, you're still looking at spending over $21,000 more in total -- and that doesn't even factor in PMI premiums, which will only add to your cost. That's why in most cases, it pays to hold off on a mortgage and save as much as possible toward your down payment.
5. You'll need more than just a down payment to close on your home
Before officially becoming a homeowner, you'll need to pay closing costs, which could be anywhere from 2% to 5% of the price of your home. Though your lender is required to provide a good faith estimate of how much you'll be looking at, that estimate can fluctuate by up to 10% by the time you're ready to sign those papers, so set aside extra cash in case your number goes up.
Getting a mortgage can be stressful if you don't know what to expect. The more prepared you are going into the process, the smoother things are likely to go.
The Motley Fool has a disclosure policy.