Many would-be homebuyers begin by applying for pre-approval with one or more mortgage lenders. The process generally requires financial documentation and a credit check.
Most experts continue to encourage buyers to save for a big down payment, which lowers the loan amount and cuts the interest costs over time. You can get a mortgage from banks, online lenders and specialized mortgage brokers.
Buying a Home
Buying a home is probably the largest financial commitment most people will ever take, so it’s important to understand how mortgage loans work. Understanding the different types of mortgage loans, monthly mortgage payments and how to apply for a loan can help make the process smoother.
When you buy a house, you will usually need to sign a mortgage, which pledges your home as security for the debt you have borrowed. If you fail to make your payments, the lender can repossess the property and sell it to recoup the debt. You should also be sure to save enough money for closing costs and a down payment, and have cash reserves equal to at least two months of mortgage payments.
A qualified mortgage lender can help you determine whether buying a house is right for you. They will review your finances, including income and expenses, and analyze market conditions to make an informed decision. Then, they will help you find the best loan program for your needs and budget. A good mortgage lender will provide a preapproval letter that lets you know how much you can afford to pay. This will save you time and energy by allowing you to focus on houses within your price range. It can also give you an edge in bidding wars by showing sellers that you are a serious buyer.
Once you submit your mortgage application, the lender will begin to underwrite your loan. They will review the application, your credit report and property appraisal to ensure that the loan meets their guidelines. This may include requiring additional documentation such as bank statements, investment account documents and employment verification. If there are any issues, the underwriter will notify you and request additional documentation.
Once your mortgage is approved, you will be ready to close on your new home. Be prepared to pay the lender’s closing costs, which include a title fee, homeowner’s insurance and recording fees. Closing typically takes place about 30 to 45 days after your mortgage application is submitted. During this time, you should do a walk-through of your new home at least 24 hours before closing to make sure it is in good condition.
Getting Pre-Approved
Getting pre-approved before you start shopping is an important step in the home buying process. It helps you know how much you can afford and shows sellers that you’re serious about your purchase. It also helps save time by reducing the number of homes you’ll need to look at. However, getting pre-approved doesn’t commit you to any specific lender or loan program. You can still shop for the best terms and interest rates.
Generally, mortgage lenders base preapprovals on an analysis of your credit record and financial situation – including income, assets and debts. They may verify this information by requiring documentation like paystubs, W-2 forms and bank statements. They also pull your credit report, which may result in a temporary hit to your credit score. To get full approval for a mortgage, you’ll need to fill out an official application with supporting documentation and go through the underwriting process.
A mortgage’s underwriting process involves evaluating your ability to repay the loan based on your debt-to-income ratio (DTI). Lenders typically cap DTI at around 50 percent, so your other monthly payments (e.g., car loans and student debt) shouldn’t exceed this limit. If your DTI changes significantly before closing on a new home, it can raise red flags and cause delays. Therefore, it’s a good idea to avoid applying for additional credit or increasing balances before purchasing your new home.
Mortgage lenders also consider your employment stability. They’ll call your employer to verify your job and salary, as well as ask questions about the type of business you own and how stable it is. They’ll also take into account any money you might have in savings or investments, which could be used to cover a down payment or closing costs.
Some lenders allow you to use gift funds from relatives toward your down payment and closing costs. If so, they’ll request standard gift letter documents from you and your gift donor that state the amount gifted and a promise not to repay it. Changing jobs before you close on your home can also affect your DTI and make it harder to qualify for a loan.
Finding a Lender
Most first-time home buyers are surprised to find out just how much buying a house really costs. The purchase price of the property is just one part of the equation; there are also mortgage interest rates, application fees, title searches, homeowner’s insurance and other “closing” costs that can add up to a substantial sum. Finding the right lender can make all the difference in how affordable a home will be to you.
There are a variety of different lenders that offer mortgage loans and each has its own set of rules and procedures. Before choosing a lender, it is a good idea to research the lender and learn as much as you can about their policies and procedures. You will be entrusting a great deal of personal information to the lender, and it is important to choose someone who you are comfortable with and who will communicate well.
Many borrowers begin their search for a mortgage by calling lenders and asking about interest rates. Interest rates vary widely and depend on a number of factors including the type of loan you are interested in, your financial status (including credit score) and the cost of the property that you wish to buy.
Before contacting lenders, it is a good idea to strengthen your financial profile by checking and improving your credit score if necessary, maintaining employment and saving for a down payment. The stronger your financial position is, the more options you will have for different types of mortgages and loan terms.
Once you have a list of potential lenders, you can start to compare them and look for a competitive interest rate. In addition to the actual interest rate, it is important to understand all of the fees associated with the loan and how they are calculated. You should ask the lender to break down the various fees so that you can fully understand them. You should also ask the lender if they require an escrow account and, if so, what their process is for paying the property taxes and homeowners insurance.
You may find it helpful to work with a mortgage broker during your search for a lender. Mortgage brokers have access to a wide range of lenders and can often get you better terms than you would be able to obtain on your own. However, it is important to understand that a mortgage broker will be paid a fee for their services which is generally added to your loan or paid upfront.
Closing
Closing occurs after the lender has reviewed your mortgage documents, inspected and appraised the property, and received all necessary documentation. Unless you are paying cash, you will need to bring a check for the balance of your purchase price, plus the closing costs – including your down payment – to the closing meeting. In addition, you will need to show a state-issued photo ID, payroll vouchers or W-2 forms, investment and bank statements, proof of homeowners insurance and copies of the purchase contract and home appraisal.
During the closing process, you should carefully review your final loan terms and fees with your lender, comparing them to the initial loan estimate. If there is any discrepancy, you should contact your loan officer as soon as possible for clarification. You will also sign the mortgage, which pledges your home as security for the debt. In addition, you will typically pay for title insurance that protects you against problems with the home’s title that could be caused by the actions of a previous owner (tax liens, judgments and lawsuits).
Prior to closing, your real estate agent should schedule a walk-through of the property to ensure that any repairs or alterations negotiated in your contract have been completed. This is also an opportunity to look for any scuffs or dings on the walls and floors that might not have been addressed in the negotiations – and which you will want to have fixed before you move in.
The day of closing, you will meet at the office of the escrow company with your mortgage lender, your real estate agent, and your co-borrower(s). You will need to bring a state-issued photo ID and all documents related to the transaction. Your mortgage lender will provide you with a Closing Disclosure at least three days prior to your closing date that summarizes all of the loan details.
Beware of wire fraud. This crime has cost homebuyers billions of dollars in recent years, and the criminals are clever – impersonating your real estate agent, your loan officer or even the escrow officer. To avoid this problem, always confirm any change in wire instructions in person, preferably with your loan officer or the escrow office.