The mortgage loan process can be confusing, especially if it’s your first time buying a home. You have to go through multiple approvals, you have to provide a down payment, and you even have to haggle on the price.
But the loan process doesn’t need to be as painful as it seems at first glance. Here’s a list of six mortgage process steps that will take you from “just browsing” to moving day.
1. Get Pre-Approved or Pre-Qualified
It’s not strictly necessary to get a loan pre-approval before you start the mortgage process. No rule says you can’t go out and start submitting offers right now. But getting a pre-approval makes the process go more smoothly. There are a few reasons why.
First off, when you get pre-approved, your lender will tell you how large a loan you qualify for. This makes it much easier to shop for a house since you know what price range you can afford.
Secondly, pre-approval makes the underwriting process easier. This isn’t universally true, but in general, you can reduce the underwriting time from weeks to days.
Another advantage is that a pre-approval lets the buyer know you’re serious. It can give you leverage during a negotiation. For example, you may be able to buy at a lower price, because the person who bid higher was never pre-approved for a loan. This is especially true if sellers want to close a deal quickly.
Finally, many real estate agents will only work with pre-approved people. This is a relatively recent development. Back in the days of the last housing bubble, agents were willing to work with anybody, since anybody could get a loan. Now, they want to know you have money to spend before they’re ready to work with you.
Fortunately, pre-approvals generally don’t take very long. The lender just needs to run your credit report, where they will make sure all your payments are up to date. Based on that and your income, they tell you how much you’re qualified to borrow.
One term you may have seen is “pre-qualification.” Pre-qualification is not the same thing as pre-approval.
A pre-qualification is simply a short interview with a lender. It can be as basic as checking a few boxes on a web page. It will simply ask if your credit is good and how much you earn, but none of this information is actually verified. For this reason, a pre-qualification doesn’t carry much weight.
2. Choose a Home and Make an Offer
The next step in the mortgage process has nothing to do with your mortgage, at least not directly. But certain factors can affect your home’s cost.
For instance, the location can radically affect property tax rates and homeowner’s insurance costs. Since these costs are factored into your loan approval, it’s essential to keep them in the back of your mind.
It’s always a good idea to have an appraisal done first. An appraiser can let you know if the asking price is too high, or if it’s so low that you should be worried about hidden defects.
Now, submit an offer to the seller, and see how they respond. Provided you have an agent, they should be able to handle negotiations for you.
3. Apply For Your Mortgage
Once your offer has been accepted, it’s time to apply for a mortgage. If you’ve been pre-approved or pre-qualified, you’re already partway through the process. Even if you have, it doesn’t hurt to apply through more than one lender. You can sometimes get better terms if you shop around.
At this point, you’ll need to hand over documentation of your salary, expenses, debts, savings, and other assets. This information will go to an underwriter, who either approves or rejects your loan application.
4. Have the Home Inspected
While you’re waiting for your loan approval, schedule a home inspection with the seller. A lender may not require this until further along in the process, but it’s well worth investing money in. For one thing, the sooner you find out about any issues, the longer you’ll be able to negotiate a repair or a lower selling price.
Frequently, a professional inspector will notice defects that a home buyer might miss. For example, they can find foundation, roofing, and electrical problems that most people would overlook. In addition to defects, a home inspection will also notice good things about the house. For instance, if it has a brand new roof, the inspector will be able to verify this.
Regardless, receiving a home inspection may give you more leverage at the negotiating table. A lower price means a smaller mortgage, which increases your chances of approval.
5. Wait For Underwriting to Play Out
After going through the above steps, it’s time to play the waiting game. The underwriter may ask you for more information on your financial situation. Make sure to provide this information as quickly as possible, to keep things moving along.
Eventually, the underwriter will approve the loan, reject the loan, or approve it with conditions. For instance, the underwriter may ask for more information on your credit history or may require you to obtain proof of homeowners insurance before they approve the loan.
Once the loan is approved, your interest rate is ready to be locked in. You’ll be able to work with your loan officer to decide the exact date that it’s set. Keep an eye on the mortgage market, and see if you can set the rate when interest rates are favorable.
At this point, you’ll be ready to close on your home. This will also depend on the appraisal and title search being completed. You’ll also find out about your closing costs at this time.
6. Close the Deal
On closing day, you’ll officially become a homeowner. This is your final chance to review any documents or to talk to your realtor or lawyer. Once you’ve signed everything, you’ll also need to pay your closing costs. You’ll need a wire transfer or cashier’s check to cover these costs, so make sure to arrange payment beforehand.