Borrowing a mortgage to finance your home purchase can be complex and confusing, especially if you’re a first-time homebuyer. Thankfully, having the right professionals in your corner can make the mortgage process easier to understand, so you can focus on finding a home you’ll be happy living in for years to come.
Here’s what the mortgage timeline usually involves, keeping in mind that delays can arise from factors outside of your control:
Securing a Mortgage Preapproval: Up to 45 Days
When you’re in the planning stage of getting a mortgage, it’s a good idea to check your finances and set a budget. Then, get preapproved to see how much you can borrow. Here’s what to expect during each step of this part:
Review your finances. Your financial standing influences whether you qualify for a mortgage, how much you can borrow and your lending terms. Lenders usually give the best loan terms to borrowers with credit scores in the mid-700s or above and debt-to-income ratios of around 45% or less.
Before applying for a mortgage, consider checking your credit report for errors.
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“People are often surprised by their credit score because it’s being dragged down by something on their credit reports they had no idea about,” says Lindsay Barton Barrett, a licensed associate real estate broker with Douglas Elliman in New York. “That’s something you want to dig into.”
You may decide to dispute errors on your credit report, work on raising your credit score or pay down your debts to qualify for favorable loan terms. This part of the mortgage timeline may take a few weeks or longer if you need to improve your finances.
Create a budget. Setting a budget upfront is a good idea to avoid falling in love with a home you can’t afford. One rule of thumb says to spend 28% or less of your monthly income on your total housing payment.
If you bring home $7,000 a month before taxes, then you can spend up to $1,960 on your monthly mortgage payment. That amount should cover your principal, interest, taxes, mortgage insurance and homeowners insurance, plus any HOA fees.
“The biggest mistake is spending what you’re fully qualified for instead of what your budget allows,” says Nicole Rueth, senior vice president of The Rueth Team Powered by Movement Mortgage. “I’ve seen a lot of first-time homebuyers overspend.”
A mortgage calculator can help you figure out which homes you can buy, based on your estimated monthly budget and how much you’ll put down at closing. A lender may say you can borrow more based on your financial situation, but only you know what you’re comfortable paying every month while still meeting your other obligations.
Get preapproved. Once you have a budget in mind, contact a lender and ask for a preapproval in that amount. You’ll save time if you have the necessary documents handy:
— W-2 forms from the last two years.
— Most recent pay stubs.
— Copies of tax returns for the last two years.
— Personal bank statements for the last two to three months.
— Identification, such as a driver’s license.
The lender reviews these documents and pulls your credit report to determine whether you qualify for a home loan. It’s a good idea to keep your mortgage shopping within a 45-day window to reduce the impact to your credit score.
If everything checks out, the lender gives you a letter saying how much you can borrow. Most preapproval letters are valid for 60 to 90 days.
This letter not only helps you define your budget but also shows sellers you’re a serious buyer who has lined up financing. “In some markets, there are properties you can’t even see if you don’t have a preapproval letter,” Barton Barrett says.
Finding a Property and Making an Offer: 10 Weeks
Homebuyers typically view homes for 10 weeks before finding a property to buy, according to Freddie Mac.
The timeline for finding a property and making an offer vary with each homebuyer, but a real estate agent can help speed things along. The right agent will be familiar with homes in your market that are within your budget and guide you through the whole process.
“If you see a property and it’s not quite right, you can communicate what you liked and didn’t like to your agent, which will help guide your search,” Barton Barrett says. When that property closes, “Take note of what it listed for and what it closed for. That can help you set expectations.”
Once you find your dream home, you will work with your real estate agent to create an offer. This document includes a price, a suggested closing time frame — typically 30 to 90 days from the accepted offer — and conditions that allow you to cancel or renegotiate the contract. For example, you might make the offer contingent on mortgage financing and a satisfactory home inspection.
When you and the seller agree on price and terms, you will both sign a purchase agreement.
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Applying for a Mortgage: One Week
Once you’ve had your purchase offer accepted and you’re under contract for the property you want, you can get official loan estimates from the lenders you got preapproved with. Compare their closing costs and interest rates, using the best offer to try to negotiate your loan terms because some lenders will match interest rates or offer discounts.
You could save thousands of dollars just by doing this. For instance, if you buy a $400,000 home and put down 10%, you save $117 a month with a 6% interest rate compared with 6.5%. This adds up to over $9,000 in interest savings over the first five years of the loan.
Once you’ve found the right lender, tell the loan officer that you’d like to move forward with the mortgage application. This is called your “intent to proceed.” At this point, you’ll be able to lock in your interest rate and purchase mortgage discount points to buy down your rate.
[READ: 2024 Mortgage Rates Forecast: When Will Rates Go Down?]
Underwriting and Loan Processing: Three to Four Weeks
The underwriting phase starts as soon as you’ve signed a purchase agreement and applied for a mortgage. This part varies from a few days to a couple of weeks, according to loan software firm ICE Mortgage Technology. The timeline depends on how busy the underwriters are and how quickly you answer questions and submit documents.
Here’s what to expect during loan processing:
Review documents. Your lender will send your mortgage application to the underwriting department to review all of your supporting documents. Underwriters confirm that you meet eligibility requirements for the mortgage, make sure your income and employment are stable, and check that you have money for closing costs and a down payment. Respond quickly to questions and requests for additional documents, such as a letter that explains the source of a large bank deposit, to keep your closing date on track.
Order a home inspection. If your purchase offer includes a home inspection contingency, you will hire a professional to check the home’s physical attributes, mechanical systems and major appliances.
“A home inspection is so critical to understanding what you’re buying,” Rueth says. “They are getting in the crawl spaces and up in the attic and the roof, and looking at the electrical panels. They are really looking at the bones of that home.”
Based on the walk-through, the inspector creates a report that lists any problems. Depending on the terms of your contract, you may be able to walk away from the purchase if the report reveals significant damage you don’t want to deal with.
Get a home appraisal. Your lender will order an appraisal to verify the home’s value, which is based on its condition and selling prices of similar homes in the area. Lenders do this to ensure they can sell the home and recoup their investment if you default on the loan.
If the appraised value of the home is higher than the selling price, then that means you’ve found a good deal. But the reverse could create problems because the bank won’t lend more than the appraised value of a property. In that case, you have a few options, including:
— Pay the difference in price yourself, although it may be risky if the home isn’t worth the selling price.
— Negotiate with the seller to lower the home price.
— Walk away from the deal, depending on the terms of your contract.
Complete a title search. During the title search, a title company or attorney researches public records to confirm the property’s legal owner and ensure it has no pending claims or liens. Title insurance is a policy you can buy to protect against future claims on the property. You’ll be required to buy lender’s title insurance, but an owner’s policy is optional.
Closing on the Property: One Week
If your finances and the property you’re buying meet the lender’s underwriting requirements, you will be “cleared to close” on the mortgage. You have only a few days to go until you sign the mortgage agreement and get the keys to the home.
Your lender should send you a closing disclosure, which is a five-page document that sums up the terms of your loan and what you will pay at closing. You’ll have at least three days to review this document and compare the numbers to the loan estimate. You shouldn’t find significant changes between these two documents unless there’s a legitimate reason or you’ve agreed to certain changes.
You’ll be responsible for choosing a closing agent to gather the legal documents for your loan and handle the money for the purchase. Once you schedule the closing, ask your closing agent what to bring. This usually includes a valid ID and your cash to close payment, typically a cashier’s check.
On closing day, you will go for a final walk-through of the house with your real estate agent to make sure the seller addressed repairs and to check for new damage. Then, you’ll sign the final sales contract at closing.
After Closing on the Mortgage
Now that you’ve settled into your home, you’re on a new timeline: making mortgage payments for the life of the loan. To protect against future financial problems, work on stashing away about six months’ worth of mortgage payments in a savings account, Rueth says.
“When you’re late on your mortgage, it can really affect your credit score for a long time,” Rueth says.
Your lender or loan servicer can declare your loan in default, the first step in the foreclosure process, if you’re behind.
Your savings can help you through financial emergencies, but you will also need it to maintain and repair your home.
More from U.S. News
How to Financially Prepare for Buying a House
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Complete Timeline of the Mortgage Process originally appeared on usnews.com
Update 08/30/24: This story was previously published at an earlier date and has been updated with new information.
