It’s time to put down roots. You’ve been longing for a permanent address for a while now and you have finally made up your mind. The right home is going to be yours—you’re ready to sign on any and all dotted lines!
With hope in your heart, you turn to savings to support your purchase. You definitely have enough for a down payment. But it’s probably not going to finance an entire property. What do you do?
Like the majority of Americans, you take amortgage. Are you familiar with the step-by-step process of securing a mortgage to finance your homebuying endeavor? If not, you’re in good company, believe it or not. A 2019 Fannie Mae survey showed that most folks’ mortgage approval knowledge is fairly limited.
Where do people usually go wrong? They end up overestimating or underestimating their eligibility for different loan types. If that sounds like it could be you, read on. This all-inclusive guide on getting a mortgage will help you ease into the process.
Understanding the mortgage process
Many say taking out a mortgage is a challenge. But it doesn’t have to be if you know the steps involved ahead of time. Spare yourself the headaches and get familiar with what you’ll need to do.
1. Getting a pre-approval
Nothing says “I’m good for it” like a mortgage pre-approval. As you begin the homebuying journey, you need to know how much loan you can get to finance your purchase. To know that, you need to apply for a pre-approval. Doing so benefits you in other ways, including:
- Eliminating issues early in your homebuying journey: Pre-approval and pre-qualification (see the section below on that) will eliminate surprises after making an offer. Why? Because you’re able to identify key issues such as a low credit score or a low debt-to-income ratio beforehand.
- Showing that you’re a credible buyer: Home sellers only accept offers when they know that a buyer is serious. A mortgagepre-approval shows that you’re financially prepared for the purchase. Moreover, a pre-approval gives you that extra legroom needed to negotiate a better price with the seller.
- Giving you an accurate price range: Analyzing how much you can afford will help you to determine the ideal price range for your budget, and therefore, narrow down your search during house hunting.
- Speeding up the closing process: As the lender has already collected most of your information via the pre-approval process, the actual closing can happen fairly quickly.
When you approach lenders for a pre-approval, they’ll pull your credit history to look at two things: your credit score and information listed on your credit report. For most types of mortgages, a minimum credit score of 620 and above is essential.
à Is your score on the low side? There are ways you can boost your credit score.
You can be approved with a score of 580, however, if you’re applying for a Federal Housing Administration (FHA) loan. After looking at your credit data, lenders tell you the maximum amount you can borrow. Woohoo! Keep in mind, though, that your pre-approval letter will only be valid for 30-90 days. You’ll need to act fast.
Pre-qualification vs pre-approval conundrum
Note: Homebuyers often confuse pre-qualification with pre-approval.
Pre-qualification eases you into the mortgage process. Lenders obtain basic financial details such as your income, assets, and debt to provide an approximate loan amount you can qualify for. It’s an ‘at-a-glance’ look into your credit information before giving an estimate. But it only shows your eligibility for a mortgage and the rough amount you can take as a loan, unlike pre-approval, which gives you the full rundown and actual figures. Nevertheless, having this knowledge can help you to assess your home affordability and calculate desired future monthly payments.
2. Setting a budget
Once you’ve got the exact amount on paper, then you can set a realistic budget for buying a property. In order to get a realistic idea about monthly payments, use an online mortgage calculator.
While setting your budget, consider leaving yourself some breathing room in your finances. Cars break down, homes need repairs, and vacations definitely need to be taken. All of that requires the green stuff. You’ll also want to have available cash for savings, any emergency funds, and other investments (such as stocks or another property).
3. Going house hunting and making an offer
Finally, we’re onto the fun part! With a price range in mind and a wish list of features for your next place, you can begin house hunting by hiring a professional real estate agent.
You’ve zeroed in on a home. Now it’s time to make an offer and potentially start negotiating. (Facing a bidding war? You should still ditch the buyer love letter.) If the seller accepts, however, that’s your green light to move ahead. Your agent will help you to write up a purchase agreement.
The purchase agreement typically includes:
- Buyer and seller information
- Pricing details
- Closing costs
4. Applying for a mortgage
Hey, we’re past the halfway point! Although it’s not time to celebrate just yet, but you are so close. Once you’ve finalized the purchase agreement, approach your lender to obtain a mortgage. This is a major step, and one that will require a lot of paperwork.
The lender will likely request additional documents for their underwriting team, including:
- Income-related documents: two years of W-2s, pension, social security, public assistance, etc.
- Assets: bank accounts and investments
- Debts: any liens, alimony, child support, and credit card balances
- Types of mortgages: fixed or adjustable, conventional, government loans
What happens next? After evaluating these documents, lenders then provide you with a loan estimate describing the terms and probable costs involved. The law states that you must receive a loan estimate within three days of application submission.
5. Waiting for loan processing and underwriting to complete
Consider your loan officer to be like a friendly librarian-turned-taskmaster. It’s their job to be exceedingly thorough, checking off and organizing all the documents you’ve provided for the underwriters to process. Note: Underwriters are the key decision makers. They’re the ones who ultimately decide if your application should go through.
As such, they scrutinize every detail provided by the loan officer and flag any information that may fall into a fiscal gray area or even subtly hint at fraud.
6. Preparing to close
Somewhere between applying for pre-approval and closing on your new place, you and your lender will agree on locking an interest rate for your loan. This rate stay the same through closing, or for between 30-60 days after the rate lock goes into effect.
Why is this important? Various factors such as inflation, market conditions, and economic growth in general all influence mortgage interest rates, and they fluctuate every single day. You don’t want to have to shell out extra cash just because interest rates happened to rise on mortgage approval day.
So here we are: the underwriting process is complete. The stage is set for closing. You’ll bring the Closing Disclosure document, which includes all the necessary information about your loan amount, disbursement, and closing costs, among other details. Then you’ll sign a lot of papers. (You may want to stretch beforehand! It’s a workout.)
Once you and the lender sign all the documents, the mortgage is closed. Fin.
Don’t fly solo: the mortgage broker is your expert advisor
With all the paperwork, analysis, and communication involved, the mortgage approval process may seem daunting (which it is if you attempt to navigate it on your own). But if you hire a mortgage brokerinstead, the entire process goes from hassle to hustle.
A mortgage broker’s job is to:
- connect you with the lenders
- forward your financial information on to the lenders
- assess the qualifications you personally need to secure and repay the loan
- determine the loan amount and the type of loan that best suits you
- serve as a mediator who simplifies communication between you and the lender
Questions to ask a mortgage broker
One of the advantages of hiring a mortgage broker? They have access to the best interest rates. Some lenders work exclusively with mortgage brokersto get suitable clients, and therefore offer low-interest rates. That’s great news for you as a buyer.
But before you hire any broker who shows up at the top of your Google results, you’ll want to know what to ask them first. Pose these four key questions during the interview.
1. What is your experience?
A broker’s credentials are everything. A licensed and experienced mortgage broker can get you the right loan, help steer you away from hidden payment terms in the lender’s mortgage contract, and enable you to secure better rates. (Kind of heroic, we know. It’s a little surprising they don’t wear capes.)
2. What’s the best mortgage for financing my home?
Before you ask this question, the broker might initiate a conversation where they inquire about your requirements. A good broker will ask about your short-term and long-term goals, take your financial situation into account, and provide the best loan options that fit your needs.
3. What fees will I incur with a mortgage?
According to the Consumer Financial Protection Bureau rules, mortgage brokers must provide you with a loan estimate that includes any and all fees charged by lenders. The broker must explain the lender’s insurance fees, application fees, closing costs, interest rates, and monthly payments.
4. How many lenders are there in your panel?
A mortgage broker who works with a sizable number of lenders can often provide the most competitive mortgage options. Also, a competent broker will be up to speed on the latest features, terms, and benefits of numeroustypes of mortgages.
What type of mortgage is best for me?
Even though your broker will suggest the mortgage types available, knowing what options are available firsthand is essential. After all, it’s who you will make the final choice. And that requires some basic knowledge on your part.
You’ll also want to know that any mortgages suggested by the broker are truly relevant for you, which will require a bit of basic knowledge in order to vet them properly. (Buckle up, friend: you’re about to get schooled on loan types.)
1. Fixed and adjustable-rate mortgages
A fixed-rate mortgage maintains the same interest rate throughout the mortgage term.
But the interest rate varies in an adjustable-rate mortgage. The mortgage usually starts with a lower initial rate, but is fixed for a short period of time. And then it may reset annually or monthly. But the interest rates don’t rise uncontrollably; there’s a cap placed by lenders that don’t allow it to exceed a certain limit during a financial year or over the course of the loan’s lifetime.
2. Conventional loans
If you have a stable job, good credit history, and can afford at least a 3% down payment, then a conventional loan is for you. Backed by the guidelines laid out by Fannie Mae and Freddie Mac, conventional loans are approved by private banks and credit unions.
3. Government-insured FHA, VA, and USDA loans
FHA, VA, and USDA loans make home financing less burdensome, but you need to meet specific criteria in order to qualify for these loans. For example, VA loans are available only for military service veterans and their spouses. Similarly, the USDA loans are for buyers in low-income brackets. Both of these don’t require a downpayment, however.
FHA loans, however, do require a 3.5% downpayment and a credit score of at least 500. This option is suitable for buyers with lower low credit scores (a 10% downpayment is incurred for someone with a 500-credit score) as well as for first-time homebuyers.
4. Non-conforming loans
These loans don’t conform with the guidelines set by Fannie Mae and Freddie Mac and are used to finance expensive properties. Jumbo loans, for example, fall into this category, and they have stricter qualification rules.
As these loans are riskier to lenders, they usually require a down payment of 10% or 20%, and the borrower must have a strong credit history (FICO score of 700 and above). Also, if you have ample cash reserves, the chances of approval increase manifold.
Get the best mortgage you deserve
Understanding the mortgage process is the first big step in the homebuying adventure. Once you know it, you’ll stop waffling. There will be no underestimating or overestimating of your potential loan amount. Instead, you’ll be cruising through the steps toward home ownership!
If you follow the steps above and make note of our advice, you’ll also breathe a sigh of relief when looking at that monthly mortgage statement, knowing you landed the very best loan you could.