How to get a mortgage?

A mortgage is a loan you take out from a bank or another to buy a house. Lenders generally look at factors like your credit score, income and employment history, debt-to-income ratio (DTI), other assets, and how much down payment you can afford. 

Your credit score and debt-to-income ratio are the two most important factors to get a good deal on a home loan. 

Credit score: Credit scores lenders look for to approve a mortgage depend on the type of loan and the lender you are considering. Experts typically advise having a good FICO and/or VantageScore to get the best interest rates (a FICO^®  Score between 670-739 and a VantageScore^®  between 661-780 is considered good, so any score above 700 would be ideal for a low interest rate loan). Lenders offer loans for lower credit scores too, but they typically have higher interest rates. 

Debt-to-income ratio: Your DTI is the proportion of debt you owe to income you earn. The lower your DTI, the better your chances of a home loan approval. That is, you need to have more income to spare than debts to pay off. 36% is generally considered a good DTI ratio. The highest DTI ratio you can have to get a mortgage approval is usually 50%.

Down payment: Review your finances to calculate how much home loan you can afford. This includes your monthly household expenses, credit card and other debt, and your savings and investments. You’ll need to put down a percentage of the home value as a down payment before taking out a loan. The percentage of down payment can range from anywhere between 3% to 20% depending on the type of loan approved.

Type of mortgage: You can either get conventional loans or government-backed loans. Conventional loans are not backed by the government and are more difficult to get because they require higher credit scores down payments and lower DTIs. 

• Federal Housing Administration (FHA) loans: Mortgages backed by the FHA need a down payment of 3.5%, a credit score above 580, and a DTI below 40%. There is also a closing and annual mortgage insurance with these loans.
• Veteran Affairs (VA) loans: Backed by the U.S. Department of Veteran Affairs, these loans are only available to people in active military members, veterans, or some qualifying spouses of deceased veterans. These loans don’t require mortgage insurance or a down payment.
• United States Department of Agriculture (USDA) loans: These are loans backed by the USDA for low- to moderate-income borrowers buying homes in certain eligible rural and suburban areas. They don’t require a down payment and have low-interest rates as well.

It is always a good idea to thoroughly research and shortlist lenders offering the best terms in interest rates and down payments. If you opt for a 15-year mortgage, you pay off your loan sooner with a lower interest rate, but you also make a higher monthly payment.

Getting a preapproval before getting a loan can help you get a sense of the mortgage amount you are likely to qualify for. Though a preapproval does not guarantee mortgage approval, you can negotiate better with lenders.