How to Get a Mortgage
Buying a home usually happens in steps or stages and each part is important to the whole process. This article will explain how to get a loan from pre-approval to closing so that you have the correct information when it comes time to buy your next home.
There was a time in the not-so-distant past that a person could call a real estate agent and get an appointment to see a home, with no indication of the ability to actually purchase the home.
However, the mortgage crisis that occurred from the year 2007 to 2010 greatly changed the way lenders and real estate agents operate. Now it is important for a prospective home buyer to first speak to a mortgage lender and get pre-approved for a home loan.
Basically, you and your mortgage lender will have a brief discussion. The lender will find out where you work, the amount of time you have been at that job and your annual income. If you have a co-signer or a non-occupying co-borrower (FHA and Freddie Mac Loans), the same information will be needed for that person as well.
Also, the lender will generate a credit report from the major credit agencies. This will show your current credit scores, the debts that you currently owe, as well as your payment history. The income information along with the credit report will allow the lender to provide you with preliminary approval to purchase a home and indicate which loans are a potential fit for your situation.
The most important part of pre-approval is the price range. This will allow you to know what you can afford per the lender’s guidelines. It also proves to the real estate agent and any potential seller that you truly intend to purchase a home in the immediate future.
It is a great idea to spend some time getting your financial documents in order. Anything related to your income, bank accounts, and investments will be helpful to your lender when it comes time to process the mortgage.
Finding a Home
After you have received a pre-approval letter from your lender, you may contact a real estate agent. Take time to speak to the agent about everything surrounding your home purchase.
You will need to discuss how big the home will need to be in terms of bedrooms, bathrooms, square footage, and yard size. But there are more things to consider.
The following topics or questions will help you focus on a property that best fits your situation.
- How far are you willing to commute one way to work each day?
- Do you currently interact regularly with friends or family due to your current location?
- Do you now or will you have children? If so, are you comfortable with the prospective school zone?
- What places do you like to shop or dine in? How far away will your new home be to these locations?
- Do you or anyone in your household have any special medical needs that require frequent visits to a doctor? If so, how far away is the doctor from your potential home? How far is the nearest medical facility?
- Does your current location lend itself to certain hobbies and activities like visiting a park, a zoo, nightlife, or other pursuits? Is the prospective home close to these same activities or other similar activities?
Once you have decided on the right home, inform your agent that you would like to place an offer on the property. The real estate agent will prepare a contract for your signature.
This is where the agent’s expertise and overall knowledge plays a vital role. The agent will discuss with you your plans to buy the home and put the necessary contingencies in place. The contingencies will typically cover the following items:
- The appraised value of the home will be at least the same, or higher, than the sales price
- Any structural problems revealed by the home inspection will void the contract
- The buyer will be able to take possession of the home immediately after closing
There may be other contingencies in place for you as well as the seller, depending on the situation. For example, the seller may ask to stay in the home for a week to 10 days if they are buying a different home and need to arrange a mover. Or, if you are looking at buying a home with some age on it, there may be necessary repairs. The repairs could be completed by the seller, or the sales price could be lowered, or some other arrangement could be made.
When you make an offer and sign a contract, you will be asked to pay earnest money. This is normally 1% or maybe 2% of the home’s asking price. When you reach the closing, the money paid in earnest will be applied to the down payment of the home.
Complete the Application
The next step is to formally complete a loan application. Your lender will most likely fill out the necessary forms on your behalf and ask that you sign the documents.
In addition to several forms, you will be asked to provide copies of documents, as mentioned earlier in this article. The documents will pertain to the following categories.
Proof of Employment
- The lender will need the name and address of your employment and a telephone number
- You will provide your job title with the company
- You need to provide the start date of employment
- You will need to explain how you are paid: hourly, salary, commission, bonuses, etc.
Proof of Income
- Most recent paycheck stubs covering the last 60 calendar days
- W-2 forms from the past 2 calendar years
- If you are self-employed, you must provide the previous 2 calendar years’ personal and business tax returns
- Copies of child support decree and payments
- Social security benefits statement
- Pension or other retirement income
Financial Resources (also called assets)
- A recent statement from all checking and savings accounts
- A recent statement from any certificate of deposit
- Investment portfolio balance (bonds, stocks, 401k, Roth IRA)
- Any gift funds that have been provided by a family member
- Deed to any property
List of Debts
The vast majority of your debts should come from the credit report. It will include things such as
- Automobile loans
- Credit card balances
- Student loan debt
- Any existing mortgage on other property
Things that may not appear on the credit report but should be relayed to your lender are items like
- Monthly alimony payment and expected duration
- Child support payments
- Any outstanding lien
Details of the Prospective Home
Your real estate agent should be able to provide the following items to the lender
- The physical address of the home
- Contract sales price
- Annual property taxes for the home
- Square footage of the home and size of the lot
- Any presence of a Homeowner’s Association and the yearly expected fee
- Property type (i.e. condo, duplex, single-family, etc.)
You should understand that the lender will ask about any type of blemish that appears on the credit report. You may need to explain why a blemish occurred and the steps that have been taken to prevent such a problem in the future. Some examples are
- Collection accounts
- Delinquent payments on debt
According to federal law, your lender must present you with a loan estimate no later than 3 business days after you provide the above financial information. The loan estimate will spell out the specific terms for your anticipated mortgage along with an estimate of the closing costs.
This document will show you the proposed interest rate for your loan, the specific term for the loan (expressed in years), the type of loan (fixed or adjustable), and the calculated principal and interest payment. If you are receiving an adjustable-rate loan, this document will explain how and when the rate may change during the life of the loan.
Processing the Loan Application
It is at this point that all of the information for your loan will be handed off to a processor. Their job is to verify the employment and asset data independently and to order an appraisal and title search of the home.
The processor will also contact a local insurance agent to request a new home insurance policy. You are free to choose your own agent or the lender may offer some suggestions for local agents. The processor will check that the address of the property is correct, check that the lender is named as the payee, and determine that the coverage amount is correct for the loan.
After the info is verified and the home appraisal, along with the title search, is complete, all the data is sent to the underwriter.
Underwriting the Loan
The underwriter is similar to an inspector and judge, rolled into one job. This person will verify the provided information meets the guidelines and rules of the particular loan product.
The underwriter will also determine if the borrower(s) has the ability and inclination to pay back the mortgage loan. These decisions are based on the income & asset information along with the credit report.
The underwriter will issue one of three decisions on the loan
- Approved – this is what borrowers and loan officers all hope for! The loan meets the proper criteria and is considered a healthy risk for the lender
- Denied – this means the loan is turned down. It could be turned down based on credit history, income, down payment funds, a problem with the home, or a problem with the home’s title
- Suspended – this is quite common. The underwriter needs more documentation or clarification on a particular subject.
In the case of a suspended decision, either the processor or loan officer will get in touch with the borrower. The borrower may be asked to provide a more recent paystub, explain a large bank deposit, or get a written explanation of their commission structure. Regardless of the reason, the borrower will need to be prepared to answer the questions and provide the documents needed by the lender.
The underwriter also determines if the home is valued correctly. The title search is reviewed to make sure that the current owner of the home has nothing preventing them from legally selling the property to you.
The underwriter will not only check the loan application against the lending criteria for the particular loan, but it will also review the lender overlays. Lender overlays are rules put in place by individual lenders. These rules determine the level of risk the lender is willing to accept for a loan.
For example, a certain loan guideline may allow a person to buy a home with only one month of liquid reserves. But the lender has learned from past mistakes that it is better to require 3 months of liquid reserves to approve that same applicant. It is merely a way for lenders to lessen risk based on statistical evidence for the borrower’s circumstances.
After all the information is reviewed, the underwriter will either deny or approve the loan.
Closing the Loan
After receiving approval from the underwriter, the lender will set a date and time for the closing. You should also be given a chance to perform a final inspection.
The final walk-through will give you one last chance to look at the property. If there were any issues discovered by an official home inspection, you should be able to determine if the issues were fixed or replaced. You can also make sure that there are no new problems that possibly crept into existence since your last walk-through.
Next, your lender will order the loan documents to be prepared and sent to the closing agent’s office. If this is your first home purchase, please BE PREPARED. There will be many documents that require your signature.
The lender will also request the funds necessary to close the loan are sent to the closing agent.
The closing agent will receive the funds and hold them in an escrow account. After all, documents have been signed and properly notarized, it is the job of the closing agent to make sure each party receives their portion of the proceedings. Here is a shortlist of people that will likely receive a part of the closing fees:
- The seller – if there is a mortgage, the mortgage will be paid off. Any leftover funds will go to the previous property owner
- Real estate agents – the agents representing the seller, and buyer, will get their commission
- Local courthouse – the courthouse for the county in which the property is located will receive a small amount to record the new deed
- County tax appraiser – The county tax appraiser responsible for collecting property taxes will be paid
- Insurance agent – the agent providing the new insurance policy for the new homeowner
- Lender – the lender will be paid a fee for facilitating the loan
- Appraiser – if the appraisal was not paid upfront, they will receive payment via the closing
The most important document that you will see at the closing will most likely be the first item and is called the closing disclosure. The closing disclosure is extremely similar to the Loan Estimate mentioned earlier. Where the loan estimate was an estimate of the closing costs, the closing disclosure is the factual numbers. However, new laws are in place to prevent the estimate from being vastly different from the actual costs.
The remaining documents deal with the loan, the appraisal, the condition of the home, any arbitration (if present in your state), and a host of other legal items.
Meeting at the Attorney’s or Title Company’s Office
Now is the moment of truth! The seller of the home, the seller’s real estate agent (if any), and your real estate agent will likely be at the closing with you.
Initially, you will sign a few papers that solidify the transaction between the seller and you. The remainder of the documents solidifies the loan between you and the lender.
NOTE: you and any co-borrower will be asked to provide an official ID at the closing. Usually, a driver’s license will suffice. However, you may contact the closing agent to verify what is acceptable.
If you are paying a down payment or any/all of the closing costs, please find out from the lender how the funds should be transferred. Some lenders prefer a cashier’s check while others ask for a wire transfer.
The following list represents the significant documents that you will be asked to sign, but it is not an inclusive list.
- Closing Disclosure
- Deed – This indicates that the lender may place a claim on the property if the loan is not fully repaid
- Promissory Note – This states that you, the borrower, promise to pay back the mortgage.
- Certificate of Occupancy – This is to indicate that you plan to live in the home as your main residence.
Please understand that it is common to ask questions about the documents. Although you are buying a home, it does not make you an expert at mortgages. Please get clarification on any document and make sure you don’t sign any form that has a blank section or blank line.
Summing Up How To Get A Home Loan
From the previous information, you can see that buying a home is a complex process. From getting pre-approved for a loan, to signing an offer on a home, to getting the home appraised and researched, to the closing, there are multiple steps that take place.
Most of the steps will require the involvement of more than one person or agency at any point in time. As long as you have your financial affairs in order and you are a bit patient, your lender and real estate agent can lead you through the entire process and enable you to achieve your goal of homeownership.
Additional Home Buyer Resources:
Establishing What a Buyer Wants vs Needs via Joe Boylan
Best Mortgages and Financial Advice Articles via Bill Gassett
What First Time Home Buyers Need to Know via Eileen Anderson
What Not To Do A With Credit While Buying A Home via Kevin Vitali