__By Michelle L. Black __
Whether you’re a first-time home buyer or you want to upgrade or downsize your current residence, buying a home can be exciting.
Yet there’s one important hurdle you’ll need to clear before your homeownership dreams can become reality. Unless you have a giant stash of cash tucked away somewhere safe, you’ll need to qualify for a mortgage to purchase your home.
Of course, convincing a lender to loan you enough money to buy a home is no small order.
So what are the steps in the mortgage process?
Below you’ll find a nine-step guide to help you navigate the home loan process a bit more smoothly.
Anytime you apply for financing a lender will want to assess the risk of doing business with you. To figure out your risk as a borrower, most lenders will check your credit report from at least one major credit bureau and a credit score based on that information.
With mortgages, lenders want to know even more about your creditworthiness since you’re likely asking to borrow a significant amount of money. (Per Experian, the average mortgage debt in 2020 is nearly $216,000.)
As a result, your mortgage lender will check all three of your credit reports from Equifax, TransUnion, and Experian along with a FICO Score based on each one.
Before a lender takes a deep dive into your credit history and you start the mortgage loan process, be proactive and check your three credit reports first. The Fair Credit Reporting Act (FCRA) lets you access a free report from each credit bureau once every 12 months at AnnualCreditReport.com.
Note: Through April 2021, in response to the coronavirus pandemic, you can claim weekly reports from the same website.
Depending on the loan type, most lenders have minimum credit score requirements you must satisfy before you can qualify for a mortgage. So, it’s also a good idea to check your different credit scores.
Credit scores you find online probably won’t match the scores a lender uses when you submit a mortgage application. Yet they can still be a helpful tool to review your credit risk and track whether it’s getting better or worse over time.
As you review your credit reports you should watch closely for errors or mistakes. Wrong information on a credit report, especially if it’s negative, might lower your credit scores in an unfair way.
It may be possible to buy a house with no credit or bad credit. But the process is often more difficult and more expensive than it would be otherwise. Therefore, when you discover incorrect information on a credit report, you should take action. Even mistakes which seem minor, like incorrect dates or balances, might affect your scores more than you realize.
On the bright side, the FCRA gives you the right to dispute any credit reporting errors you discover. When you submit a dispute to a credit reporting agency it must investigate your claim. If the credit bureau can’t verify that the information you’re challenging is accurate, it must delete the account from your credit report or correct it.
Aside from errors, there may also be legitimate problems with your credit reports or scores. In these situations, you may need to work to build or improve your credit before you can qualify for loan approval.
This guide can show you the factors that influence your FICO Scores for both the positive and negative.
Before you and your Realtor start the house hunting process, make sure a lender will pre-approve you for a mortgage. Although it may be tempting to skip this step, you shouldn’t. It can be incredibly frustrating to find a home that you want to buy only to discover that you don’t qualify for a mortgage after the fact.
To receive a pre-approval letter from a mortgage lender, you’ll need to complete a basic loan application and supply some initial documentation.
Every lender is different, but you may need to supply the following:
The lender will check your credit reports and scores as well. If your credit is up to par and you satisfy other loan requirements, the lender can calculate your debt-to-income ratio (DTI) and figure out how much house you can afford to buy.
Note that you might qualify for a larger loan than you want, depending on your personal budgeting goals like retirement savings or debt elimination.
Also, be aware that the mortgage pre-approval process might impact your credit scores (albeit usually only slightly). So, it’s best to wait until you’re ready to start the home shopping process before you seek pre-approval.
With your pre-approval letter in hand, you’re ready to begin house hunting. If you’re not working with a real estate agent already, consider asking friends and family members for recommendations.
Remember, as a home buyer you typically won’t pay Realtor commissions out of your own pocket. In general, the seller of the property you purchase will cover those costs.
A trustworthy real estate agent can help make the home buying process easier (not to mention a lot more fun). He or she can help you search for available properties in your price range with the features that matter most to you.
An experienced agent might also help you negotiate a better purchase price, navigate a competitive buying situation, arrange a home inspection, and make an official offer to purchase.
If a seller accepts your offer, you should be prepared to put down an earnest money deposit. The size of this deposit can range from $500 up to several thousand dollars depending on location and other factors.
Talk to your real estate agent ahead of time to learn how much you should tuck away for earnest money to avoid any unpleasant surprises.
When a seller accepts your offer to purchase a property, it’s time to go shopping again. This time you need to search for the best home loan available for your specific situation.
Not sure which loan type you should choose? These guides might benefit you.
You may already have a mortgage company in mind if you completed the pre-approval process before looking at properties. Yet just because a lender gives you a pre-approval letter does not mean that you’re obligated to use the company for a mortgage.
It’s in your best interest to consider several borrowing options before you commit to a mortgage that could span several decades.
The Federal Trade Commission (FTC) states that comparing multiple mortgage offers could save you thousands of dollars. And the Consumer Financial Protection Bureau (CFPB) recommends requesting loan estimates from a minimum of three lenders.
As you research mortgage details and compare loan offers, be sure to focus on key factors like:
Remember that many fees are negotiable. So, if you find a lender that you’re comfortable working with, don’t be afraid to ask whether it’s willing to lower or waive certain costs in order to win your business.
Once you find the right home loan for you, it’s time to complete a full mortgage application with your chosen lender. Even if you stick with the lender who issued your initial pre-approval letter, you’ll likely have to complete more paperwork and supply additional (or at least more up-to-date) documentation.
As you fill out your mortgage application, you’ll provide your lender with details about yourself and the property you plan to purchase. According to Freddie Mac, this information may include:
You may also need to supply documentation proving that the information above is accurate.
Next, the lender will give you an official Loan Estimate within three business days. This form will give you a summary of your estimated mortgage loan terms including interest rate, closing costs, fees, monthly payment amount, and escrow information like taxes and insurance premiums.
If you’re happy with the offer, you will need to sign a Commitment Letter to accept the Loan Estimate within 10 days. Otherwise you might have to start the application process over again if you wait too long to act.
Signing a Commitment Letter puts you a step closer to getting a mortgage. But it doesn’t guarantee that you’ll receive the funds you want to borrow to purchase a home. The lender may still come back and ask you for more information or documentation (known as loan conditions) before it approves or declines your application.
At this point in the mortgage process you and your real estate agent may work hand in hand with a loan processor. Be sure to respond promptly to any requests the loan processor makes for additional information or documentation.
The loan processor may also help you complete other important steps such as:
After you provide the processor with the information he or she needs, you’ll enter what’s known as the mortgage underwriting process. An underwriter will look over your official application, the documents you provided as proof, and your credit reports and scores to make sure everything is in order.
At the end of the day, it’s the mortgage underwriter who decides whether you officially qualify for mortgage approval.
The loan process takes time to complete—often 30 days or more. During this time it’s critical to avoid mistakes. Namely, you don’t want to change jobs or apply for new financing before you close on your home loan. Be careful to avoid increasing the amount of credit card debt you owe as well.
A new loan or larger credit card balance could increase your DTI and affect how much money you can borrow. Credit applications, new accounts, or a higher credit card utilization rate might also harm your credit scores.
If your DTI goes up or your credit scores drop, the interest rate on your mortgage could increase. And in some cases, such changes could mean that you no longer qualify for a mortgage at all.
If you make it through the mortgage process successfully and the underwriter approves your loan application, you can breathe a sigh of relief. You’re in the home stretch. The last stop is the closing table.
A few days prior to closing you’ll receive what’s known as a Closing Disclosure. This paper reveals the final, official details of your mortgage loan including:
The disclosure will also reveal your closing costs and the funds you need to bring with you to the closing table. You’ll generally bring these fees to the closing attorney’s office in the form of a certified check.
At closing, you’ll be presented with a small pile of documents to sign. Any co-borrowers will need to sign these forms as well. (You can request these documents up to three days ahead of time to review them in advance, if you like.) Some of the documents you may need to review and/or sign include:
During the closing process remember that there’s no rush. After all, you’re paying attorney’s fees for guidance and representation. Don’t be afraid to ask as many questions as you need to be sure you understand what is happening.
Getting a mortgage can be overwhelming. But when you’re ready to buy a house, a little research can help you feel less anxious about the process. Educate yourself about the steps you need to take to get a home loan. Then you’ll know what to expect and, hopefully, which pitfalls to avoid from the beginning.
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication.