Five Steps to Obtaining a Mortgage
This is the fifth article in our series called, Buying a Home 101: Everything You Didn’t Know You Needed to Know Before You Buy Your First Home. This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and even to maintaining your home after you’re all moved in.
Today’s mortgages are not “one-size-fits-all.” That means you’ve got lots of options out there that could fit your budget and finances. This is good news for many home buyers like you!
However, you do need to do your homework first so that your mortgage application can be processed properly and with success. The current lending environment can be complex and complicated at times. Lenders, underwriters and mortgage insurers must all complete certain steps before they can have your financing in place.
It’s important to try and keep things going smoothly by taking on a few steps of your own, and knowing what needs to be done next. This preplanning will help get your mortgage and financing all figured out so that you can make an offer on a home. Plus you can avoid any snafus when you least want them to appear!
Once your mortgage situation is all set, you’ll be in a much better position to negotiate with the sellers and move forward on a purchase. Here’s what you need to keep in mind:
1. Evaluate your affordability and don’t forget about monthly budget.
Do you truly know how much mortgage you can afford and how lenders determine it?
Lenders and mortgage insurers look at a variety of factors, but the two most important are your monthly mortgage payment and your total debt load, relative to your gross income. You may hear a lender call this your “debt-to-income ratio.”
But wait, let’s hit pause first and ask this question instead: How much are you actually comfortable spending on a mortgage payment each month?
This is a much better way to determine your affordability. We emphasize knowing what your monthly budget is for housing, NOT just the purchase price that your lender will approve you for!
Many of you will want your monthly housing expenses to be much lower than what a lender is willing to lend you. We covered this topic in detail in Do the Math – A Mortgage You Can Afford, the third article in our series. Go back and review it if you need a refresher.
This article makes you carefully look at your monthly budget, including current expenses and future ones as a homeowner, before you even speak to a lender.
2. Shop around and interview lenders to find the best fit for your needs.
Talk to several lenders of different sized banks. Rates and fees are typically very competitive between lenders of similar loan products, so it’s often more important to focus on other factors, including the level of service provided and how well they’ve executed transactions for other buyers.
However, the type of mortgage you are seeking may also impact your choice of lender, since some are more familiar with certain mortgage programs than others. This is so important to understand, and lenders should understand that you will be shopping around.
Especially these days, different banks can offer different programs. We’ve seen clients save over $200 a month on their mortgage payments just by talking with another lender that had a loan program the first bank they spoke to wasn’t able to offer!
3. Discuss your loan options with lenders and your agent.
Deciding what types of mortgages are best for you depends on your personal situation, your financial scenario, and your future plans. It’s something you’ll discuss during your lender interviews.
For example, if your down payment isn’t large enough to qualify for a conventional loan, an FHA mortgage can be an excellent option. Alternately, you may qualify for an attractive first-time home buyer program offered by a local jurisdiction.
Mortgage programs are always changing. You need to sit down with your lender to understand the different options out there that could work for you and the type of home you most likely will purchase. And don’t forget that your agent is a good resource who can help guide you on your decision.
4. Get pre-approved (not pre-qualified) by your lender.
Plan to complete a loan application with one or more lenders. Make sure to take it one step further from getting pre-qualified and get pre-approved instead.
By doing this you will know exactly what loan amount you will be approved for by the lender. (Remember, stick to your monthly budget no matter what you get approved for!) But this does give you the go ahead to look at homes in a certain price range.
To start this process, you will need to supply information to the lender along with your application. So make sure you’ve gathered the required documents before you meet with them. To get pre-approved, the lenders will perform an extensive check on your financial background and credit rating. You will be notified in writing the amount they are willing to lend you for a home purchase.
This process is an important step that will put you in a better negotiating position with sellers. Your pre-approval signifies to sellers that you are a committed buyer who has financing secured. When you make an offer, it won’t be contingent on obtaining a mortgage.
5. Commit to a lender once you’re under contract.
As soon as you are under a contract to purchase a home, you must “lock-in” and commit to working with one lender to complete your mortgage application. This needs to happen immediately upon going under contract to meet the deadlines you’ve agreed to in your offer.
You will probably be charged a fee at this point because this is when the lender starts incurring processing expenses on your behalf. If you are already pre-approved, that side of the process can move quickly.
However, they also will be “approving” your home and will await its appraisal to determine if they will lend you money. You want the appraisal to come in at or above the sales price. Show your lender that you are serious about working in partnership with them by submitting all the required documentation as quickly as possible.
As you can see, there are certain basic steps you’ll need to take at this stage. We’ll discuss more details with locking in a mortgage rate in week eight of our series, The Inside Scoop on Locking in Your Mortgage and Appraisals.
Next week we’ll cover how to really look at homes and not waste time in It’s the Fun “House Hunting” Guide, the sixth article of our Buying a Home 101 series. You’ll learn to shop productively with tactics that will streamline your search and end with success. Stay tuned!