A Step-By-Step Guide to the Mortgage Application Process
So, you’re ready to buy a home! Congratulations, we’re here to help you every step of the way. One of the first steps is submitting your application for a mortgage. If you’re a first-time homebuyer or perhaps it’s been a while since you applied for a mortgage, you’ll need to know the documentation required to apply. In this blog post, we’re sharing a complete guide for the application process and what to expect along the way!
Check Your Credit Reports
When you apply for a mortgage, you may expect the lender to look at your credit score to determine the level of risk you pose as a borrower, wherein the higher your score, the lower the perceived risk. As a result, it’s ideal for you to know what lenders will see when they pull up your credit reports. If you feel your credit score is lower than you would like, you should consider improving it before applying for a mortgage.
There are instances when mistakes or erroneous entries make their way to people’s credit reports, causing their credit scores to drop. Going through your credit reports from the three major reporting bureaus -Equifax, Experian, and TransUnion – enables you to spot any inconsistencies, after which you may contact the bureaus in question and get them rectified.
Keep in mind that your credit score might play a role in the type of mortgage you apply for, especially if it falls below a particular limit. More often than not, you need a credit score of 620 or higher to qualify for a mortgage, but there are exceptions. Your credit score also may affect the interest rate that applies to your mortgage.
Getting a free copy of your credit report from the three major credit bureaus once a year is easy, and you may do so by visiting their websites.
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Contact UsReview Your Debt-to-Income (DTI) Ratio
While a lender looks at your credit score when reviewing your mortgage application, they also pay attention to other aspects of your financial profile. For example, you may expect a lender to check your debt-to-income (DTI) ratio to determine how much of your monthly income goes toward servicing your existing debt.
Calculating your DTI ratio requires adding up all your monthly debt payments and dividing the total by your gross monthly income. For example, if your gross monthly income is $10,000, out of which you use $3,500 to make debt payments, your DTI ratio is 35%. Keep in mind that your DTI ratio also includes your mortgage principle, interest, taxes, and insurance. Ideally, your DTI ratio should be 36% or below, although some lenders are okay with this number going as high as 43% if there are other offsetting factors.
Determine How Much You Can Afford
Fannie Mae’s mortgage affordability calculator lets you get some indication of how much you can afford to borrow based on various factors like your income and existing debt. However, much like calculating your DTI, it does not account for expenses that fall outside of the debt category. These may include phone bills, insurance payments, and day-to-day expenses that can vary significantly from one person to the next.
To determine how much you can afford to borrow through a mortgage, make sure you account for your lifestyle as well as ongoing maintenance costs. When it comes to the latter, expect to spend 1% to 4% of a home’s value on its upkeep every year.
When addressing this important aspect of the mortgage application process, you should ideally avoid determining the most you can borrow. Instead, you should focus on how much you can afford to repay comfortably each month.
Think About the Down Payment
Just about every mortgage loan process flow chart you look at will devote a section to down payment because of the crucial role it plays. For starters, while many people feel they need to make at least a 20% down payment to get a conventional mortgage, this is not the case.
Depending on the program you qualify for, you might be able to pay as little as 3% to 5% toward down payment on a conventional mortgage, although you will need to pay extra for private mortgage insurance (PMI). Getting a no down payment mortgage might also be an option, provided you meet the required eligibility criteria.
While you might qualify for a mortgage that requires a small down payment, know that there are potential shortcomings. For example, a larger down payment will bring down your monthly payments and reduce how much interest you pay during the term of the loan. In addition, making less than 20% as down payment for a conventional loan will require that you get PMI.
Keeping adequate funds aside to cover the closing costs is ideal, as these can vary from 2% to 6% of the amount you borrow.
Look at Different Types of Mortgages
Given the different types of mortgages, it’s important to compare them and determine which programs best fit your needs. For example, if you know you will live in the house you purchase for just a few years, you may consider getting an adjustable-rate mortgage (ARM) with a low introductory rate.
Conventional Loans
Conventional or conforming loans are the most common type, and qualifying for these non-government-backed loans requires that you have a credit score of 620 or higher. Some lenders might be willing to accept down payments as low as 3%.
VA Loans
Backed by the U.S. Department of Veterans Affairs, qualifying for a VA loan requires that you have a credit score of 620 or higher. You may qualify with a lower score if you have a valid Certificate of Eligibility (COE). In addition, you may get a VA loan without making a down payment.
USDA Loans
The U.S. Department of Agriculture guarantees all USDA loans. You may apply for one as a low- or moderate-income borrower with a credit score of 640 or higher. Typically made available for eligible rural homebuyers, you may also apply for one as a resident of a suburban area of a large city or a town where the population does not exceed 25,000. Like VA loans, USDA loans come with no down payment requirement.
FHA Loans
The Federal Housing Administration guarantees these loans. You may qualify for an FHA loan with a credit score of 500 or higher, in which case you’ll need to make at least a 10% down payment. If your credit score is 580 or higher, the minimum down payment requirement drops to 3.5%.
Jumbo Loans
If you need to borrow an amount that exceeds conforming loan limits set by the Federal Housing Finance Agency (FHFA), you may consider applying for a jumbo loan. In this case, you’ll need a credit score of 700 or higher. The down payment amount may vary from 10% to 20%.
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Contact UsFixed Rate vs. Adjustable Rate
The mortgage you get can come with a fixed or adjustable interest rate. With a fixed-rate mortgage, the interest rate remains the same throughout the term of the loan. This ensures that your payments won’t fluctuate with time.
If you get an adjustable-rate mortgage (ARM), the interest rate is subject to change after an initial period when it remains fixed. For example, with a 3/6 ARM, the interest rate will remain the same for the first three years, and it can then change every six months. If interest rates fall in the future, you stand to gain, but the reverse holds true as well.
Loan Term
Another important aspect of the mortgage application process, when you’re comparing different types of loans, is to determine what loan term suits you the most. A 30-year mortgage term is the most common, although you get other options from which to choose. For example, many lenders offer 15-year and 20-year mortgages.
Bear in mind that the loan term affects the overall cost of a mortgage. This is because the more time you take to repay the money you borrow, the more you end up paying as interest. However, while a shorter loan term can lead to savings in the long run, you will need to make higher monthly payments.
Get Pre-Approved
Even though you’ve done a fair amount of groundwork before you get to this stage, the mortgage loan process timeline typically begins when you apply for pre-approval. This process usually takes one to three days. Getting a pre-approval is ideal because it gives you a clear indication of whether you qualify for the type of mortgage you select and how much a lender is willing to lend.
During this stage, you may expect a lender to go through your credit reports, verify your employment and income, and look at your existing assets and debt. Getting pre-approved before you begin looking for a home is ideal as you can limit your search to the given budget. It also helps demonstrate that you are a serious buyer, which is perfect when you’re negotiating.
Find a Home
With a pre-approval in place, you may begin looking for a home. Depending on your requirements, the neighborhood you want to purchase a home in, and other factors, this may take a week to a month or more.
Make an Offer
Once you find a home you like, it’s time to make an offer. Real estate agents come in handy during this stage too because they know how to structure these documents and know which contingency clauses to include. For example, your agent might include a mortgage contingency clause that gives you a predetermined time period to get a mortgage. In this case, if you terminate the contract before the contingency date, you stand to get your earnest money back.
The earnest money is what you need to pay as the cash deposit that secures your offer. Depending on how hot any given market is, this could be as little as $5,000 or up to 5% of a home’s selling price. If you’re buying a house in a competitive market, make sure you’re ready to write a check or carry out a wire transfer when you make your offer.
Submit Your Mortgage Application
You may complete this crucial section of the mortgage application process timeline in an hour or two if you have all the required paperwork and information at hand. While some lenders might require additional information, this is what you need to provide when dealing with a typical mortgage application.
- Photo ID and Social Security number
- Employment and income information
- Pay stubs and W-2s (self-employed applicants can provide tax returns)
- Proof of additional income
- Income tax returns
- Bank statements
- Retirement and investment account statements
- Details of existing debt
- Details of alimony/child support payments (if applicable)
- Signed purchase and sale agreement
What Happens Next
Moving down the mortgage loan process flow chart, once you submit your application, the appraisal can take one to seven days, as is the case with the home inspection. The title search can take one to two weeks, and you may expect the underwriting process to take 10 to 15 days. Once you receive the loan estimate, review it carefully. Then, compare it with the closing disclosure you receive at the time of closing to ensure that the terms and conditions remain the same.
Conclusion
With knowledge of what the steps in the mortgage application process are, make sure you follow the right approach to becoming a homeowner. If you find yourself stuck at any stage or if you need more information about the process, consider seeking professional assistance. This can be from a real estate agent when it comes to looking for a home or from a mortgage provider if you need any mortgage-related information.
