Understanding the key stages of the mortgage process will help reduce stress and boost your confidence as a homebuyer. The process is outlined here in 8 basic steps.
Step 1: Get your finances in order
Before you can purchase a home, you must prepare your finances and gather the information you will need to qualify for a mortgage loan. This includes the following:
- Proof of income and assets (and sufficient debt-to-income ratios, 28%/36%)
- Proof of steady employment (for the past 2 years at least)
- A good credit score (740 or higher will get the best rates)
- A down payment (preferably 20%, but can be as little as 0% or 3.5%)
Step 2: Find a mortgage lender
It’s important that you do your research and shop around to get the best mortgage rates and terms. Compare the programs offered by different lenders and don’t be afraid to negotiate. You should choose a mortgage lender you feel comfortable with ― one who is willing to work with you to meet your needs. There are many ways to find a mortgage lender:
- Contact your bank or financial institution
- Talk to real estate professionals
- Talk to a local non-profit housing association
- Use the Internet
- Ask your family, friends and coworkers
- Go through a local newspaper or phone book
Step 3: Get pre-approved for a mortgage loan
Getting pre-qualified or pre-approved for a loan is smart because it gives you an idea of the price range you can afford. It also makes you a more attractive buyer and equips you with some negotiating power.
Pre-qualification is like a test run for loan application, based on a brief review of your finances. “Prequal” is generally nonbinding and free of cost because your information has not been officially verified.
Pre-approval takes “prequal” a step further. For pre-approval, the lender will seek actual verification of your income, debts and credit history. You will then be issued a pre-approval letter, stating that your mortgage is approved for a certain amount within a specific period of time. Pre-approval may involve an application fee, though it is still not a loan guarantee.
Step 4: Find a house
With your mortgage pre-approval in place, you are ready to start house hunting! Research the neighborhoods you’re interested in and check the Internet or local newspaper for available homes. It’s a good idea to make a house wish list that includes the features you need, the amenities you want, and the things you can live without. A wish list can help keep you on track as you navigate through open houses and property tours.
Whether or not you hire a real estate professional is up to you. Licensed agents have more access to property listings and can help find a home that fits your needs and your budget. However, they will likely charge a hefty commission fee.
When you do find the right house, you should make an offer based on hard data about the property. A real estate agent can provide numbers from comparable sales in the area to support your decision. You will put together a written offer stating the amount you’re willing to pay and under what conditions you will buy ― your offer should be contingent on your financing (which still needs to be approved by the lender) and a successful home inspection.
Also be prepared to negotiate and have a back-up plan in case the seller declines your initial offer.
Step 5: Complete the mortgage loan application
At this time, you will need to make a final decision about the type of mortgage loan you want. You should also lock-in an interest rate for your loan. Your loan application information will be closely reviewed for accuracy and completeness.
Once you’ve found a house, the lender will order an appraisal of the property to determine its market value (before officially approving your loan). Most lenders do not approve mortgages for amounts that exceed 90% of a home’s appraised value (also known as the “loan-to-value ratio” or LTV). During this time, the house should also be examined by a professional home inspector.
Within 3 business days of applying for a loan, the lender is required to provide you with a good faith estimate (GFE) that covers the fees and closing costs associated with your mortgage. Keep in mind this is only an estimate ― the final settlement costs may be different.
Step 6: Mortgage loan approval and commitment
Once the lender has verified all your personal and financial information, and the home appraisal is complete, a loan decision will be made. The process of reviewing your application and assessing your eligibility is called “underwriting.”
When a loan is approved, the lender presents an offer defining the mortgage amount, the terms of the loan, and any conditions that must be met before closing. If satisfied, you may sign the papers and proceed towards the closing process. If unsatisfied, you may negotiate with the lender (to adjust the loan terms) and/or the seller (to adjust the home’s price).
Step 7: Pre-closing
This phase, also called “loan settlement,” occurs after the application process is complete and before closing procedures begin. By this time, your financing is secure, the seller has accepted your offer, and the house has passed inspection.
Now there are several things you should do to assure a smooth transaction at closing time, including:
- Obtain homeowners insurance
- Prepare your down payment and closing costs (cashier’s check)
- Review the good faith estimate (GFE)
- Have a property title search performed (and purchase title insurance)
- Do a final walk-through of the property and double-check everything
Gather and organize all of your insurance, tax, and property-related documents to determine the exact amount you will need to bring to the closing.
Step 8: Closing the mortgage loan
On closing day, you will sign two major documents:
- The agreement between you and your lender for the mortgage loan
- The agreement between you and the seller for property ownership transfer
You will also pay the closing costs and deposit money into an escrow account (for taxes and insurance) ― depending on the lender, you may or may not be required to have an escrow account.
At closing, all parties involved sign the papers to finalize the deal and ownership of the property is transferred from the seller to you.