When you’re in the process of applying for a mortgage, it’s a good idea to evaluate your finances and create a budget. Then, to find out how much you may borrow, apply for a preapproval. Here’s what to anticipate at each stage of this particular section of the mortgage application process:
Examine your financial situation
Your financial situation determines whether you qualify for a mortgage, how much you can borrow, and the conditions of your loan. Borrowers with credit scores in the mid-700s or higher and debt-to-income ratios of 45% or less often get the best loan conditions.
Consider examining your credit record for mistakes before applying for a mortgage.
People are sometimes startled by their credit score since it has been driven down by something on their credit reports that they were unaware of.
A standard loan typically requires a credit score of 620. A credit score of at least 580 is required for a government-backed loan, however this might vary depending on the loan.
To qualify for better loan conditions, you may choose to contest inaccuracies on your credit report, focus on improving your credit score, or pay down your debts. If you need to enhance your finances, this section of the mortgage process may take a few weeks or longer.
Make a budget
Setting a budget ahead of time can help you avoid falling in love with a property you can’t afford. According to one rule of thumb, your total housing payment should be no more than 28% of your monthly salary.
Your debt-to-income ratio, like your income and credit score, is a powerful indication used by lenders to assess whether you have the necessary cash flow to qualify for a mortgage.
The amount of all your minimum monthly debt payments is divided by your gross monthly income to get your DTI. Credit card bills, student loans, and vehicle loans are examples of monthly debts that must be included into your DTI. When computing DTI, expenses such as food or a Netflix subscription might be excluded.
The DTI a lender is looking for varies depending on the sort of mortgage you’re asking for. A DTI of 50% or less is often the baseline for a traditional mortgage, however many government-backed loans will have higher limits.
For example, if your monthly take-home income is $7,000 before taxes, you may spend up to $1,960 on your mortgage payment. This sum should cover your principle, interest, taxes, mortgage insurance, and homeowners insurance, as well as any HOA costs.
The most common error is spending what you are fully qualified for rather than what your budget permits.
A mortgage calculator may help you determine the houses you can afford depending on your monthly budget and the amount you’ll put down at closing. A lender may tell you that you may borrow more depending on your financial situation, but only you know how much you can afford to pay each month while still fulfilling your other responsibilities.
Once you’ve decided on a budget, contact a lender and get a preapproval in that amount. You’ll save time if you have the following papers at hand:
- W-2 forms from the previous two years.
- Your most recent pay stubs.
- Copies of tax returns from the last two years.
- Personal bank statements from the previous two to three months.
- Proof of identification, such as a driver’s license.
To establish if you qualify for a house loan, the lender will check these papers and pull your credit. If everything checks out, the lender will send you a letter stating how much money you may borrow. The majority of preapproval letters are only valid for 60 to 90 days.
This letter has two purposes: it helps you determine your purchasing power and it demonstrates to sellers that you have secured financing. If you don’t have a preapproval letter, you may not even be able to see specific homes in certain markets.
Finding A Property And Making An Offer
Different homebuyers will have different timelines for searching for and putting an offer on a house, but a real estate agent may make the process go more quickly. The appropriate real estate agent can help you find affordable houses in your area and navigate the whole buying process.
If a home you see doesn’t exactly meet your needs, you may give your real estate agent feedback on what you liked and didn’t like about it. Remember to keep track of the listing price and final sale price of the property. That can help you set expectations.
After you have located the perfect house, you and your real estate agent will work together to make an offer. You may expect to see a price, a proposed closing date (anywhere from 30 to 90 days after the offer is accepted), and terms that enable you to cancel or renegotiate the deal spelled out in this document. Your offer might be conditioned on the approval of a mortgage and the results of a house inspection, for instance.
Making An Offer
You should make an offer on a home if you’ve located one that meets your needs. You’ll need the assistance of a real estate agent for this, since various sellers may accept varying types of bids for their individual homes.
You’ll need to show that you’re serious about the property you’re interested in by putting down some “earnest money” at this point. Between 1% and 2% of the purchase price is the typical amount of the earnest money deposit.
If a real estate transaction closes, this sum will be used as a down payment.
Your offer should also include a termination provision, or “contingency,” in case a certain condition is not met. If the home you’ve decided on turns out to be less than ideal, these safeguards will keep you and your money safe. Typical contingencies include:
- Appraisals must be close to the loan amount, not lower
- Home inspections must not reveal severe flaws in the property
- You are able to get final mortgage approval.
When you and the seller reach an agreement on price and conditions, both of you will sign a purchase agreement.
Applying for a Mortgage
Once a buyer has a signed purchase agreement, they will normally apply for a mortgage and schedule a home inspection. Steps to take next:
Select a mortgage bank or broker. Do your homework on a variety of financial institutions, from large banks to local credit unions, while looking for a mortgage lender. There’s no rule saying you have to acquire a mortgage from the same bank that issued your preapproval letter, but it doesn’t hurt.
Get loan quotes from many institutions and compare their APRs, points, and other fees. Because some lenders may match interest rates or give reductions, using the best offer to bargain with can be effective.
Doing this might easily save you $10,000 or more. As an example, if you put down 10% on a $400,000 property and get a 6% interest rate instead of a 6.5% interest rate, you’ll save $117 every month. That adds up to more than $42,000 in savings over the life of the loan.
Bear in mind that the only way to acquire a loan estimate is to formally apply for one. The impact of several mortgage applications should be considered when comparing loan estimates.
Multiple home loan applications made within a 45-day period will only show up on your credit record as a single hard inquiry. Submitting an application outside of this time frame might have a negative impact on your credit rating.
Instruct the loan officer that you are ready to go ahead with the mortgage application after you have located the appropriate lender. Your “intent to proceed” is defined as the following:
Get a professional home inspector to have a look at the place. Your offer to buy a house is not final until an inspector has thoroughly inspected the property’s structure, systems, and main appliances.
Understanding what you’re purchasing requires a thorough evaluation of the house. They are investigating the electrical panels by exploring the basement, attic, and roof. They are examining the structure of the house.
The inspector will compile a report of their findings after the walkthrough. If the report finds major damage that you don’t want to deal with, you may be allowed to back out of the purchase, depending on the conditions of the contract.
After a purchase agreement is completed and a mortgage application is submitted, the underwriting process may begin. According to ICE Mortgage Technology, a provider of loan software, this section may take anything from a few days to a couple of weeks. Timeliness of your responses to underwriter queries and submission of required paperwork will determine how soon your application is processed.
What to anticipate at this stage:
Read the paperwork. When you apply for a mortgage, your paperwork will be sent to the underwriting department for evaluation. All of your financial information, including your income, job history, and savings for a down payment and closing expenses, is verified by the underwriter to ensure you qualify for the mortgage. To keep your closing date on schedule, be sure to respond swiftly to any inquiries or requests for extra papers, such as a letter explaining the source of a significant bank deposit.
Acquire a professional home valuation. An appraisal will be ordered by your lender to confirm the home’s valuation, which will be determined by the home’s current condition and the going rate for houses in the region that are in comparable condition. Lenders take these precautions so that they may recuperate their investment via the sale of the property in the event of a default.
You’ve discovered a good bargain if the home’s assessed worth is more than the selling price. However, the opposite might produce issues since the bank would not lend more than the assessed worth of a property. If that’s the case, you may choose between a few alternatives:
- Just foot the bill for the price difference yourself, however it may be a hazardous move if the house isn’t worth what they’re asking.
- Talk down the asking price of the house with the seller.
- Depending on the specifics of the agreement, you may be able to back out of the arrangement.
Carry out a title search. A title search is the process by which an attorney or title company verifies the property’s rightful owner and checks for any outstanding claims or liens against the property via a review of public records. You may safeguard yourself against any legal challenges to your property ownership by purchasing title insurance. Lender’s title insurance is mandatory, while an owner’s coverage is not.
Close on the Property
If your mortgage loan application was accepted, the closing process may begin. You will now be asked to a closing meeting at the title company (or attorney’s office), where you will be presented with a mountain of paperwork.
Your closing disclosure form will be one of the most significant papers you review at this meeting. This form includes columns for both the projected and actual closing expenses, as well as a spot to note any price increases.
Generally speaking, closing expenses are between 2% and 5% of the purchase price of the house. So, if you’re purchasing a home for $200,000, your closing fees might be anything from $4,000 to $10,000. Closing costs may add up quickly, so it’s crucial to pay attention to the specifics of your state, loan type, and mortgage lender.
Inquire further with your lender and/or real estate agent if any expenses appear that weren’t included in the initial loan estimate or if your closing costs seem much higher than expected.
Sign the acceptance of the mortgage and get the keys to your new property if everything checks out.
Three-Day Review Period And Final Walk-Through
A countdown starts at this moment. Your mortgage will become active in three days if no further action is taken. At this point, though, you have the right to spend three days evaluating your documentation to ensure that everything is in order.
Compare your closing disclosure to the loan estimate you obtained in step 4 above. Small adjustments, inconsistencies, or mistakes are permitted, but if you find anything that you don’t understand, ask for an explanation immediately.
Furthermore, some modifications may result in the suspension of your mortgage agreement. This will occur if:
- The loan’s APR varies by more than one-eighth of a percent (most fixed loans) or one-quarter of a percent (most adjustable rate loans).
- A prepayment penalty is applied to the loan.
- Loan products have changed (for example, a change from a fixed-rate loan to an adjustable-rate loan).
Assuming everything is in order, your mortgage will be activated automatically within three days.
Mortgage contracts often provide you the opportunity to a final walk-through of the property at least 24 hours before closing. You may utilize this visit to ensure that the prior renter has vacated the property and has completed any necessary repairs.