Buying your first home can be daunting. This post is meant to be a guide to help you through the process of getting a mortgage. We will follow up in a few weeks with a post specifically about getting a loan with us, but for now, we will talk about the traditional mortgage process.
Getting a mortgage
In 2018, 87% of recent home buyers purchased a home with a mortgage. There are many reasons to use a mortgage. The most common ones are the inability to purchase one outright with cash, tax deductions, and low-interest rates. The average mortgage closes in 47 days. It is a long and arduous process (even when nothing goes wrong!), so strap in and read on.
Selecting a lender
The companies that ultimately provide your mortgage are called lenders. There are several types of lenders: banks, direct lenders, mortgage brokers, and more recently, online lenders. Each group has its pros and cons so it's important to know what you want when selecting a lender.
With banks and direct lenders, you get a personal service, but typically not the best rates. Mortgage brokers will shop around for the best rates but often charge a fee. Online lenders offer fast service and a variety of loans but lack the personal touch that can be required if things go wrong.
Now that you have selected a lender, we recommend you get a pre-approval letter from them. Having a pre-approval letter takes your average closing from 47 days to almost 30 days. In addition to speeding almost the time-to-close, it gives you a sense of which mortgage products you may qualify for. Some lenders (like us!) even require you to have a pre-approval letter.
You will have to submit several documents (typically proof of income, proof of assets, enrollment verification, driver's license, and SSN) to get a pre-approval letter. Remember, the more work you put in now, the firmer your pre-approval will be. Most lenders will do a hard credit pull to check your credit rating. If they don't pull your credit, that is a sign that your pre-approval isn't very strong, and that there will be a lot of conditions remaining on your mortgage!
If approved, you will receive a letter that you can show to sellers as you shop around for a home. This letter will outline who approved you, for how much, and the remaining conditions for underwriting. While having a traditional pre-approval helps, it does not guarantee you will get a mortgage. The lender will do additional underwriting after you close on a house. The home will typically need to be inspected and appraised. There can also be issues such as changes to your employment or credit that can hold up or prevent you from getting a mortgage at all.
Shop for a home
The next step is to shop around for your dream home, bid, and win! Most sellers look to see if you have a pre-approval before accepting your bid. It is a huge hassle for a seller to have to re-list their home so they want to make sure you will be able to qualify for the mortgage.
The closing process of the mortgage doesn't actually begin until after the seller accepts, signs, and returns your purchasing offer (also known as a purchase agreement). The seller will typically ask you to deposit earnest money upon accepting your purchase offer (usually 0.5% to 2% of the purchase price) into an escrow account. This earnest money is non-refundable so make sure you are serious about purchasing the home before you deposit it!
Some states (such as Texas) have option periods written into their purchase agreements. An option period allows a seller a period of time to back out of the transaction (and receive their earnest money back). These option periods are purchased by the buyer for a small amount. The amount is typically a few hundred dollars for a 10 to 12 day option period.
Many lenders require you to get a home inspection as a condition of underwriting your loan. A professional inspector will look for defects such as structural problems, broken appliances, and any building code violations.
Lenders will also require that your home get appraised before underwriting your mortgage. If your home does not appraise for the amount you purchased it for, the lender may hold up your mortgage or require you to pay for the difference.
After passing the previous steps (also known as contingencies), the lender will finally start finishing your application. If you didn't get a pre-approval, you will need to submit several documents at this point: tax returns, W-2s, paystubs, bank account statements, etc. Even if you have been pre-approved, the lender may ask for a few additional documents.
Once the lender has all of their documents, they will underwrite your mortgage. This is where the lender makes their final decision on whether to issue you your mortgage and at which rate.
During this process, you will also need to sign up for homeowner's insurance and submit the proof of insurance to the underwriter. Shop around for homeowner’s insurance early in the process so you can get the best rates.
Once approved, you will "close" on your home. On the closing date, you will sign several documents with your title or escrow agent, real estate agent, and the seller's counterparties. After everything is signed, you will finally get the keys to the house.