Person counting the bank notes

Are you looking to purchase a home and want to understand how the loan process works? When you are unfamiliar with the process of home buying, it can be very intimidating. There are different aspects to a home purchase, and there are various professionals involved and decisions to make.

Deciding how to secure the funding and choosing the right lender is critical to the purchase process. Here, you will learn how to take out a mortgage loan for your home purchase.

Credit Score

One of the most important factors in determining what kind of loan you will get approved for is your credit score. You have three credit scores provided by the three major credit bureaus (Equifax, TransUnion, .and Experian). Mortgage loans are based on the middle score.

Conventional loans require a minimum score of 620, and FHA loans are available for scores as low as 500. If your score is currently too low to get approved, take the steps required to improve your score.

Debt-to-Income Ratio

The debt-to-income ratio (DTI) is the equation used by mortgage lenders to determine the loan amount you qualify for. This equation compares your gross monthly income to the amount of your monthly debt. If your monthly bills amount to half of what you make, your DTI is fifty percent. If you pay down your debt, you can lower your DTI.

Consider Down Payment

The average minimum down payment is ten percent. If you are a first-time homebuyer, you can pay less than ten percent down at closing. If you qualify for the Federal Housing Administration (FHA) program, you can get a down payment as low as three percent.

Private mortgage insurance (PMI) is required for down payments for less than twenty percent. If you are able to pay twenty percent, you can lower your monthly payments and avoid the PMI payment.

Mortgage Type

There are several loan types that you have to choose from. Among these loan types are conventional (standard) loans, FHA loans, and Veteran Affairs (VA) loans. The main differences between each type are the interest rate available and down payment requirements.

Securing the Property

A loan originator will help you get pre-approved after you answer income-related questions. You can use a house payment calculator to figure out your approximate payments. A pre-approval letter will be issued based on your income and DTI. This letter is presented to your real estate agent and used to get a property under contract.

Once you have signed the purchase agreement, the title search and appraisal process follow to assure that the property is free of encumbrances and worth the asking price. After the property value has been assessed and the title search has been completed, the closing is scheduled by the title company or closing attorney. After the closing documents are signed, the deed changes hands, and the purchase is complete.


By following the steps outlined here, you should be able to proceed with your home purchase with confidence. You now understand the various phases involved in securing the funding to close on your deal. You also learned how to make an informed decision as to who will be the best lender and what program options are available.