Deciding to become a homeowner marks a significant step in your financial life: It’s likely one of the largest purchases you’ll ever make. And perhaps unbeknownst to you, you’ve been preparing for it for years, since the way you’ve managed your credit, assets and debts up to this point will determine your loan options and what you’ll ultimately pay for your home.
Whether you’re ready to apply for a mortgage or haven’t yet begun house-hunting, the more you understand about the mortgage process, the less daunting your role as homebuyer becomes. Here’s a step-by-step guide to securing a mortgage loan:
Once you’re ready to pursue a formal mortgage loan application, be financially predictable.
Get your credit in shape
Before you decide that it’s time to buy, obtain your free credit report at a site such as annualcreditreport.com. Aside from checking for inaccuracies (and attempting to rectify those errors with the appropriate credit bureau), take note of your loan balances—including those associated with credit cards you pay in full by the statement due date. Because lenders are required to evaluate a mortgage applicant’s ability to pay based on factors including monthly income, debt balances and the potential loan obligation, reducing outstanding debt is to your benefit.
Speak with lenders
Before you start contacting realtors, consult a mortgage expert to learn more about getting pre-qualified. (Citi, for example, offers a free evaluation.) The process usually doesn’t require more than a 15-minute phone conversation, and though it doesn’t guarantee your full approval, it will let you know whether you may qualify for a mortgage based on information you provide regarding your credit, debt and income—and if so, for what amount.
Additionally, your lender can suggest loan programs for you based on factors like your credit, the down payment you can afford as well as any gift funds you intend to put toward the purchase. It’s a good idea to speak to several lenders and compare rates and loan terms.
The amount you’re approved for and what you actually borrow is a matter of your personal financial comfort level. Online mortgage tools and calculators can help you understand what your monthly payment obligations would be for a range of different loan types and scenarios.
Keep your finances consistent
Once you’re ready to pursue a formal mortgage loan application, you can streamline the process by gathering the relevant financial documentation you’ll need beforehand. It’s also critical that you become financially predictable: Do not move, change jobs, open new credit accounts, close old credit accounts, buy a new car or co-sign for a loan.
If you need to transfer money to use for closing costs or your down payment, Brian Murphy, senior mortgage planner at Front Range Mortgage, LLC, advises consulting your loan officer before you complete the transfer (and keeping the transaction record). If you receive any funds outside of your typical income during the underwriting process, be prepared to show proof of the source of the funds. “Any other irregular deposit—including gifts, or even cash from a garage sale—may need to be documented by the underwriter for loan approval,” Murphy says.
Once you find a home and the seller accepts your offer, you’ll typically have a month or less to complete the closing process. Respond quickly and completely to your lender’s requests for additional documentation or clarification, and be forthcoming. Loan officers are accustomed to dealing with problems that arise during real estate transactions; keep them informed and most will happily work with you to find a solution.
Value the inspection period
You’re one step closer to owning a home when your offer is accepted, but the deal isn’t final until you sign the formal closing documents. Stay open-minded throughout the appraisal and inspection process. Rolando Moreno, vice president at First Equity Mortgage Bankers, Inc., also recommends contacting your county’s building and zoning department to make sure there are no code violations or open permits on file. Evaluate the findings objectively, and consider whether these are issues that you’re financially and emotionally prepared to face, now and in the future.