The mortgage process can seem opaque, especially if it’s your first time buying a home. But the loan officer you work with will guide you through the steps, and lenders usually let you track your progress online so you always know where you stand.
“It’s almost a completely electronic process, and it can be very painless and very easy,” says Matthew Locke, national mortgage sales manager at UMB Bank.
[Read: Best Mortgage Lenders]
How Can You Qualify for a Mortgage?
Requirements vary depending on the lender and the type of loan, but lenders generally consider the following factors:
— Income. Documentation confirming sufficient income shows lenders that you can afford to pay back a home loan. “We want to make sure that there’s consistent and historical evidence of receiving income and ensure that there’s enough income to not only cover the mortgage, but someone’s entire expenses,” says Jason Lerner, area development manager at George Mason Mortgage.
— Assets. Lenders need to check that you have enough money in the bank to pay closing costs. They also want to see that you have cash reserves you can use for the home’s upkeep, or to make your mortgage payments for a short time if you lose your regular income.
— Credit score. Lenders check your credit score to determine whether you’re eligible for a mortgage and to set your interest rate. “It’s very important because it’s an indication of how they’ve paid other obligations in the past,” says Locke.
— Debt-to-income ratio. Your debt-to-income ratio is your total monthly debt obligation expressed as a percentage of your monthly income before taxes. Lenders look at this ratio to make sure you have room in your budget to make payments on a mortgage. The Consumer Financial Protection Bureau recommends keeping your debt-to-income ratio at 36% or below.
— Down payment size. Being prepared to make a larger down payment can often boost your chances of getting a loan. Your down payment size may not matter as much if the rest of your application is strong, but a big down payment can help if other aspects of your application are weaker. “If someone has a lower credit score or higher debt-to-income ratio, sometimes the down payment can be a compensating factor to overcome some of those challenges,” Lerner says.
[Read: Best Mortgage Refinance Lenders.]
What Documents Do You Need for a Mortgage?
Your lender will review these documents with your mortgage application:
— Recent pay stubs going back 30 days
— W-2 forms from the last two years
— Federal tax returns from the last two years
— Records of other regular income sources, such as alimony or child support
— Bank statements from the last few months
— Recent investment account statements
— Statements for your current debts
— A gift letter if you’re using gift funds for your down payment
If you’re self-employed or if you’re paid on commission, you’ll likely be asked for additional documents to help the lender understand the full picture of your income.
Steps to Getting a Mortgage
Most lenders have fairly similar mortgage processes that take you through the following steps.
1. Apply for Preapproval
First, you need to get preapproved. At this stage, you share information about your finances with a lender, and the lender gives you a letter with an estimate of how much you might be able to borrow.
Real estate agents often ask to see a preapproval letter before they’ll work with you because it tells them how much home you can buy. Getting preapproved can also alert you to any potential problems in your application, such as a low credit score, so you can work to resolve them in time.
Applying for preapproval is also an opportunity for you to start shopping for lenders.
The documentation you need to provide may vary between lenders, but at a minimum you’ll typically have to share information about your income, assets and debts. You’ll also need to allow the lender to check your credit score.
The preapproval application may be a lot like the mortgage application you fill out later on.
“Sometimes, the only difference between preapproval and approval is that we’re preapproving in general for an estimated purchase price and an estimated scenario without having an actual property in mind that someone’s purchasing,” Lerner says.
2. Shop for a Home
Once you’re preapproved, you work with a real estate agent to look at homes within your budget.
After you find a home you want to buy, you make an offer on it. Your real estate agent gives the seller a document stating how much you are offering to pay and when you want to close on the sale. It also lists any contingencies you set, or conditions that allow you to back out of the agreement if specific things go wrong. For example, you might include a home inspection contingency in your offer so you can walk away if the inspection reveals significant flaws in the house.
The seller may want to negotiate your offer, and you might go back and forth proposing different conditions or adjusting the price. If you and the seller reach an agreement, you sign a contract to buy the home.
3. Complete a Mortgage Application
Now, you need to choose a mortgage lender. Talk to at least three lenders and ask for loan estimates, which are standardized documents showing the interest rate, monthly payment and closing costs of loans you’re interested in. You apply for loan estimates by sharing information about your income, the address of the home you want to buy, the sale price and the amount you want to borrow.
It’s best to ask for loan estimates on similar types of loans, with the same repayment terms, down payments and other features, so you can easily compare them.
Each loan estimate is valid for 10 business days, so you’ll need to choose a loan within that time frame or ask for updated estimates after the period is over.
Once you decide on the lender you want to work with, you can tell the loan officer that you intend to proceed with the loan application. At that point you’ll provide all the required documents for the complete application, and you may be charged an application fee.
4. Go Through Underwriting
Your submitted application goes to the lender’s underwriting department, which reviews all your documents and makes sure you’re eligible for the loan.
Your loan officer will tell you if you need to answer additional questions or provide more documentation during this stage.
“They’ll work with you to make it as easy as possible and be that ambassador between the underwriter and the client,” Lerner says.
5. Arrange for Third-Party Services
There are a few more tasks that need to get done before you can sign your loan agreement.
One is a home inspection, in which a licensed professional looks at the property you’re buying and provides a detailed report on its condition. The inspection can alert you to any repairs the home needs or any systems that aren’t working well.
If the home inspector uncovers any surprises, you might ask the seller to correct these issues before you close. And if your offer includes a home inspection contingency, you might be able to back out of the purchase if it turns out that the property isn’t in good shape.
The Consumer Financial Protection Bureau recommends choosing your own home inspector and paying for their work. That way, the inspector isn’t relying on any other party to the sale who could influence their assessment.
Your lender will also typically require an appraisal, or a professional assessment of the home’s value, to confirm that it isn’t lending you more than the home is worth. The appraiser looks at the home’s characteristics and compares it to other nearby properties that have sold recently to determine its value. You’re often charged a fee for this service at closing.
Additionally, a title company or attorney will conduct a title search, which involves checking public records to make sure that the seller owns the home and that no one else has a legal claim to the property. You may need to buy lender’s title insurance to protect your lender in case there are future disputes about the title. You also can choose to buy owner’s title insurance to protect yourself in case of title disputes. Fees for these services are included in your closing costs.
6. Close on the Home
Three days before closing, you’ll receive a closing disclosure that lays out the details of your loan and closing costs. You should compare it to your loan estimate and check that all the information matches up.
“We certainly encourage our clients, when they get that closing disclosure, to go over it very closely to make sure that all the charges and the amount they want to bring to closing is accurate,” Locke says.
You usually attend closing in person at a title company office. You’ll need to bring photo ID and a cashier’s check or wire transfer to cover your down payment and closing costs. Once you sign the mortgage note and other papers, the home is yours.
“Settlement is the easy part. Typically, it’s just making sure your hand is well-rested to sign all of the documents that come with it,” Lerner says.
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How to Get a Mortgage originally appeared on usnews.com
