By Michael Burge
With all the people, paperwork and time-intensive steps involved, getting a mortgage can be a harrowing proposition. But if you take the time to understand the homebuying process and come to it with a strong sense of your own finances, you can run the mortgage obstacle course without a scratch.
Get ready to go from homebuyer to homeowner. Here's how to get a mortgage:
- Examine whether you're financially ready to buy a home.
- Get preapproved for a mortgage.
- Choose the right mortgage.
- Find the right lender.
- Submit the application.
- Get officially approved.
- Prepare for the closing process.
- Close on the home.
How long it takes to get preapproved, locate the home you want, find the right mortgage and choose the best mortgage lender can vary. But once you've submitted your application, it usually takes 30 to 60 days to get the keys to your new home, assuming there are no major roadblocks along the way.
Now let's dive into each step.
Get ready financially
Before you set off to get a mortgage, make sure you're financially prepared for homeownership. Do you have a lot of debt? Do you have plenty saved for a down payment? What about closing costs? Take the time to answer the question "How much house can I afford?" before you go further.
Once you've thoroughly assessed your finances and decided that you're able to buy a home, you're ready for the next step.
When you're at the starting line, get preapproved for a mortgage, even before you begin looking at homes. Getting preapproved gives you a leg up once you begin looking, because it shows sellers that you can make a solid offer up to a specific price.
You don't have to stick with the same lender once you're ready to apply for the loan. But if you do, the process will go a little quicker since you've started the ball rolling with paperwork and a credit check.
Once you've figured out your price range, you're ready to look at houses.
Choose the right mortgage
Consider the following factors when choosing the best mortgage for you.
- Do you want a conventional or government-backed loan? Government-backed loans, such as FHA loans, can make it easier for you to buy a home if your credit score isn't great or if you don't have money for a big down payment. Conventional loans come from banks, credit unions or online lenders, and usually require larger down payments than government-backed loans.
- Do you want a fixed- or adjustable-rate mortgage? Fixed-rate mortgages tend to be safer because the mortgage interest rate won't change over the life of the loan.
- What about the mortgage term? Do you want a 10-year, 20-year or 30-year mortgage? With a 30-year term, your monthly payments will probably be smaller, but you'll pay more interest over the life of the loan.
- Make sure you know your loan's annual percentage rate, or APR, which will likely be higher than the quoted interest rate. This is because the APR includes all the associated costs such as origination fees and points. We'll get into points later.
- Don't borrow more than you can handle. Use our mortgage calculator to see what works for you.
Find the right lender
Just like you want to get the home that best suits your needs, you'll want to find a lender that best suits you. If you shopped around before getting preapproved, you're already one step ahead.
- Consider using a broker to help you find a lender.
- Talk to your real estate agent.
- Ask friends and family for referrals.
- Compare at least three lenders. Ask about fees and down payment requirements.
- Check current mortgage rates to get the best deal.
If you're using the same lender that preapproved you, you'll have to submit your most recent financial information. If you're going with a new lender, here's the information you'll need:
- W-2 forms from the past two years.
- Pay stubs from the past 30 days.
- Federal tax returns from the past two years.
- Proof of other sources of income.
- Recent bank statements.
- Details on long-term debts like car or student loans.
- ID and Social Security number.
There may be other kinds of documentation required, depending on the type of mortgage you're getting or if you're self-employed. If you're self-employed, you'll have to provide extra proof of your financial stability, including having a higher credit score or large cash reserves, and possibly providing business tax returns.
Within three days of receiving your application, your lender will give you a loan estimate, which is how much the loan will cost, including all the fees and closing costs. Your loan estimate may include an interest rate lock. If not, you can decide whether you want to lock it in within a certain time frame, typically 30 to 60 days before closing.
Keep an eye on interest rates. If they start going up, lock in quickly. If they go down, consider waiting.
The underwriting process
This part can be the most nerve-wracking, even if you've been preapproved. It's more waiting, this time to get officially approved for the loan. Here's what happens during the underwriting process:
- The lender determines whether you're eligible for the loan you've applied for. Your credit and job history will be examined, as will your debt-to-income ratio, the percentage of your income that goes toward your monthly debt obligations.
- The lender orders a property appraisal and credit report. An appraisal tells the lender the market value of your home, which it matches against the loan amount to see if what you're asking for makes sense.
- You'll schedule a home inspection, which will reveal any defects in the home. You can negotiate repairs or a lower sale price before closing.
During the underwriting process, you'll want to avoid making changes such as switching jobs or taking out another line of credit. Avoid large purchases that increase your debt. Increasing your debt can lower your credit score, which could make the loan more costly.
After you're approved
Finally, your loan is approved. But you've got a few more steps to take before the process is complete.
- Do you want to pay an upfront fee -- known as points -- to lower your interest rate? This is a good option if you plan on staying in your home for at least seven years.
- Purchase homeowners insurance. Your lender will require you to do this. Shop around for the best policies. If you don't have insurance by closing, your lender might choose a more expensive policy for you.
- You'll purchase a lender's title insurance policy. And while it's not required, it's wise to also purchase owner's title insurance. Both policies protect the lender and you in case there are problems with the title to the property down the road.
- Do a final walkthrough of the home to make sure nothing has changed -- or to make sure the repairs have been made -- since the home inspection.
- You'll receive a closing disclosure three days before the scheduled closing date, which lists all the closing costs.
- Get a cashier's check from your bank to cover closing costs.
You're almost done! Here's how the last step usually unfolds.
New mortgage closing rules set up by the Consumer Financial Protection Bureau might extend the closing process with the intention of simplifying all the paperwork before closing and avoiding any surprises.
Typically you'll pay between 2% and 5% of the home's purchase price in closing costs. You'll also probably have to pay for private mortgage insurance if your down payment is less than 20% of the home's purchase price.
If you start having second thoughts at this point -- maybe it's all much more expensive than you thought it would be -- you can still walk away. You might lose your deposit -- also called earnest money -- if you decide not to close. Keep in mind that some fees are negotiable. It's also not unusual for sellers and lenders to pay some of the closing costs.
State laws will determine who's present at closing. These people can include:
- Your lender.
- Your real estate agent.
- A closing agent.
- Your attorney.
- The seller's attorney.
- A title company representative.
- The seller and the seller's agent.
Don't be afraid to ask questions. Getting a mortgage comes with a lot of paperwork. Take the time to understand it all. Know what you're signing and what you're paying.
And that's it -- you made it through the mortgage obstacle course, and the loan is yours. It's finally time to move into your new home.
Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.