So you’ve decided to put down some roots and buy a home. It’s a daunting prospect, and your experience is unlikely to resemble what goes on in those homebuying television shows, in which your choices are narrowed down for you and people show up to help you fix up the new place so it’s camera ready.
One thing they don’t show you on TV is the mortgage process, but it is a key factor in determining your ability to make your dreams a reality. It is important for you to have a basic understanding of how the process works and your various options so you can find a mortgage that best fits your needs.
How to begin
Especially if this is your first home purchase, you probably feel overwhelmed by the rules and requirements to obtain a mortgage. It’s best to start with the basics, which include doing your research (Freddie Mac, for example, offers a Step-by-Step Mortgage Guide). You can talk to friends, family and colleagues who have gone through the experience to get their insights and recommendations. Also check out websites such as Realtor.com, Zillow and Trulia for advice and specifics about how much homes cost in your area.
You will need to be able to answer the following questions before seeking a mortgage:
What is your credit like?
Your FICO score (Fair Isaac Corp.) is a credit rating up to 850. It is based on your creditworthiness – how much you have borrowed and how well you have repaid your debts. The higher the number, the better your credit, and the lower your mortgage interest rate will be.
How much house can you afford?
Lenders base their decision of how much you can afford based on how much you can repay each month. How much you can repay is determined by reviewing your current income, current debt, available cash and credit history.
Do you qualify for any special loan programs, such as FHA or VA?
There are several types of mortgage loans, including those backed by the federal government such as FHA (Federal Housing Administration) and VA (Veterans Administration). It is always wise to ask your lender about the type of loans for which you might qualify.
How much have you saved for a down payment and is it enough?
This will depend on the type of loan you secure. A standard down payment for non-government-backed loans is usually 20% of the purchase price. However, newer lenders, as well as federal programs such as FHA loans and VA loans, are letting borrowers pay anywhere from 0% to 10% down. Sofi is one bank that specializes in lower down payment loans. You may also want to consider what is known as a piggyback loan. This is where you take out two loans: one for 80% of the value of the home, and another loan to cover the cash needed to reach a 20% down payment and avoid private mortgage insurance (PMI).
What can expect to pay in fees and other costs associated with my home loan?
Home loans have many fees, including loan origination and underwriting fees as well as transaction, settlement and other closing costs. Typically, homebuyers will pay 2% to 5% of the purchase price of their home in closing fees. Lenders should be able to give you an estimate of the cost. Some fees are negotiable.
The mortgage process
All home mortgage loans follow a similar timeline. The steps are:
Prequalification and preapproval
You can get prequalified for a mortgage loan by talking with a lender about your credit history, income and assets. Preapproval takes it much further, as lenders actually run your credit and verify income and assets. When you are prequalified for a mortgage, it doesn’t necessarily mean you will get one. But when you are preapproved, real estate agents and sellers see it much more favorably as proof you will be able to secure a mortgage.
You can apply online or in person, depending on your lender. A standardized application form collects all the information required to determine your qualifications in securing a loan. Once the application is completed, the next step is verification of income and assets.
Processing your loan application requires you to submit documentation to substantiate the information provided on the application. This includes items that verify your current income, such as W2s or other tax documents and paystubs, and your current level of debt, typically obtained by the lender in the form of a credit report.
Once all the information on your application is verified, the entire loan package will be submitted to an underwriter. Underwriters determine whether you are an acceptable risk based on the loan amount you want to borrow and your current debt-to-income ratio. A lot of times you will have to supply additional paperwork during this part of the process, such as your most recent income documents or, if you currently own a home, proof of its current value via an appraisal.
Once all of the underwriting conditions are met, your loan is approved.
Closing is the final step in the process. You will be presented with numerous documents to sign that cover the mortgage terms, disclosure documents, list of fees, title transfers, insurance verifications and more. Some of these documents will need to be notarized. Once everything is signed and notarized, money exchanges hands and you receive the key to your new home.
How to proceed
Homebuying takes a lot of research, and that includes getting your financing in order. When you’re ready to start looking at mortgage lenders, you can head over to SuperMoney’s home loan reviews page for rate and service comparisons.