While finding a new home can be exciting, navigating the mortgage process can be overwhelming for some. Knowing what steps you need to take can help the process go more smoothly
The mortgage loan process can seem overwhelming, especially if you’re a first-time home buyer. But you don’t have to go it alone. Your real estate agent and mortgage loan officer will be your guides. It also helps to be educated on what’s coming at each stage of the process so you can be prepared to ask the right questions and make the best decisions. Here is a step-by-step guide of the mortgage process, from pre-approval to closing.
- Budgeting
- Pre-Approval
- House Hunting
- Choose a Mortgage Lender
- Mortgage application
- Home inspection
- Home appraisal
- Underwriting
- Closing day
1. How much home can you afford?
The most important step before kicking off the mortgage loan process is knowing your budget or how much you can afford. This lets you set realistic expectations for house hunting and choosing a mortgage loan.
Instead of trying to define your maximum home purchase price, it may be better to determine the monthly payment you can reasonably afford. Then, you can work backward using today’s mortgage interest rates to determine your maximum home buying power.
2. Get pre-approved for a loan
Once you’ve estimated your budget, you might start looking at homes within your price range. But first, you need to get a mortgage pre-approval letter from a lender. This letter shows how much money a mortgage lender would let you borrow based on your savings, credit, and income.
You’ll want to do this before you make an offer on a house. Most sellers and agents won’t even consider an offer unless the buyer is pre-approved, because the seller needs solid evidence that you’re qualified for a loan to purchase the home.
You are NOT required to stick with the lender you use for pre-approval when you get your final mortgage. You can always choose a different lender if you find a better deal.
3. Find a home and make an offer
It’s time for the fun part: house hunting! After visiting properties with your agent and picking out the home you want, it’s time to make an offer.
Your real estate agent will help you structure the offer. It should include contingencies (or conditions) that must be satisfied before the deal is complete. When you make your offer, you’ll also submit your earnest money deposit.
The earnest money is a cash deposit made to secure your offer on the house and show you’re serious about buying. It can be as little as $500 or as much as 5 percent of the purchase price or higher, depending on local custom.
Be ready to write a check or make a wire transfer when you have an offer accepted — especially if you’re buying in a competitive market.
4. Choose a mortgage lender
Now that you’ve found a home and your offer has been accepted, it’s time to make a final decision about your lender.
You can stick with the lender you used during the pre-approval process or you can choose another lender. It’s always a good idea to shop around with at least three different lenders.
When shopping for a mortgage, remember your rate doesn’t depend on your application alone. It also depends on the type of loan you get.
Of the four major loan programs, VA mortgage rates are often the cheapest. USDA and FHA loan rates look low at face value and come with obligatory mortgage insurance that will increase your monthly mortgage payment. Conventional loans also have PMI, but only if you put less than 20% down.
So look at a few different lenders’ rates and fees, but also ask what types of loans you qualify for. There may be a better deal out there for you.
5. Complete a full mortgage application
After selecting a lender, the next step is to complete a full mortgage loan application. Most of this application process was completed during the pre-approval stage. But a few additional documents will now be needed to get a loan file through underwriting.
For example, you’ll need to provide the fully executed Purchase Agreement, as well as proof of your earnest money deposit. Your lender may also request updated income, liabilities, and asset documentation. If you’re self-employed, this process will be more complicated. You may need to show tax returns. If you receive income from Social Security or a long-term disability policy, you’ll need to share supporting documents with your lender.
This process will help determine your debt-to-income ratio which helps lenders see whether you could afford the new loan’s monthly payments. You will receive a Loan Estimate within three business days which will list the exact rates, fees, and terms of the home loan you’re being offered.
6. Order a home inspection
As you work through the mortgage process, you may also order a home inspection. Home inspections are usually recommended, though some buyers choose to waive them in a competitive market.
A thorough home inspection gives you important details about the home beyond what you may be able to see on the surface. Some of the areas a home inspector checks include the home’s structure, foundation, electrical, plumbing, and roofing.
Getting a home inspection is important because it helps the buyer know if a home may need costly repairs. If the home needs extensive repairs, you may want to look for another home.
Even if you do want to continue with the purchase, what is uncovered during an inspection can become part of a sales negotiation between buyer and seller, and their real estate agents.
7. Have the home appraised
Your lender will arrange for an appraiser to provide an independent estimate of the value of the home you’re buying. The appraisal lets you know that you’re paying a fair price for the home. Most lenders use a third-party company not directly associated with the lender.
Also, in order for the loan to be approved at the contracted purchase price, the home will need to appraise for the contracted purchase price.
8. Mortgage processing & underwriting
Once your full loan application has been submitted, the mortgage processing stage begins. Here’s what happens behind the scenes during this waiting period:
First, the Loan Processor prepares your file for underwriting. At this time, all necessary credit reports are ordered, including your title search and tax transcripts. The information on the application, such as bank deposits and payment histories, are verified. Any credit issues, such as late payments, collections, and/or judgments, require a written explanation.
Once the processor has put together a complete package with all verifications and documentation, the file is sent to the underwriter. During this time, the underwriter will review your information in detail. It’s their job to “nitpick” the information you’ve provided looking for missing items and red flags.
During the underwriting process, your loan officer may come back with questions. Respond ASAP to any requests during this period to make sure underwriting goes as smoothly and quickly as possible.
9. Closing day
Congratulations! You are closing. The lender will send your closing documents, along with instructions on how to prepare them, to the closing attorney or title company.
Prepare yourself for a big stack of papers you’ll be signing on the closing date. This is traditionally done in person, though e-closings are becoming more common.
One of the more important documents is the Closing Disclosure. It should look similar to the Loan Estimate you received when you originally completed the full loan application.
The Loan Estimate gave you the expected costs. The Closing Disclosure confirms those costs.
Both documents should match pretty closely. If everything is in order, you’ll sign all your documents, receive your keys, and just like that — you’re a homeowner!
Mortgage Loan Process FAQ
How long does the loan process take for a mortgage?
For most lenders, the mortgage loan process takes about six to eight weeks. But times to close can vary based on lender and loan type. Banks and credit unions tend to take a bit longer than mortgage companies. Also, high volume can alter turn times. It may take more than 60 days to close a mortgage during busy months.
What do loan officers look for when applying for a mortgage?
Your loan officer will scrutinize your credit report closely, looking at your credit scores, payment history, credit inquiries, credit utilization, and disputed accounts. Lenders want to see a strong borrowing history where you’ve consistently paid back loans on time. Loan officers will also look very closely at your income and asset documentation to make sure you have enough cash flow to make monthly mortgage payments.
How long does underwriting take?
Underwriting turn times vary greatly depending on the institution. Many lenders will render an underwriting decision in as little as two or three days. But for some banks and credit unions, underwriting decisions can take a week or even longer.
How long does an appraisal take?
The actual property inspection conducted by the appraiser can take anywhere from 30 minutes to a few hours. The times vary according to the size and details of the home. The full window — from the time an appraisal is requested by your lender, to when your lender receives the appraisal — is typically five to 10 days.
What happens after a mortgage loan is approved?
There are two types of mortgage loan approvals: conditional approval and final approval. After your application is received, either your loan officer or the loan processor will contact you with any additional conditions that are required to get your loan fully approved. Once those conditions have been met, you’ll receive final approval.
Why would an underwriter deny a loan?
Underwriters have to protect the financial health of the lender. If your credit history, income, assets, and liabilities show you’re a higher risk applicant, the underwriter could deny your loan. Be sure you’re sharing up-to-date, accurate, and complete financial documents so your underwriter can get a precise picture of your financial life.
What’s the best loan term for a mortgage?
Shorter loan terms cost less over time but require higher monthly payments along the way. Most mortgages have 15- or 30-year loan terms. You can also find 10- or 12-year loan terms. For most borrowers, the best loan term is the shortest one whose monthly payments you can comfortably afford.
Is a fixed-rate mortgage better than an adjustable-rate mortgage?
A fixed-rate mortgage locks in an interest rate and payment for the life of the loan. An adjustable-rate loan features a fixed rate for a while, but then the interest rate fluctuates with the market each year. Some borrowers choose an adjustable-rate mortgage (ARM) if they plan to sell or refinance the home within the first few years. Otherwise, ARMs can be risky.
How much down payment is required?
A larger down payment opens up more mortgage opportunities for borrowers, but not all new home loans require a large down payment. USDA and VA loans, for example, offer zero-down mortgages. Conventional loans typically require at least 3 percent down, and FHA loans require 3.5 percent down. A low-down-payment loan typically requires mortgage insurance, which increases your monthly payment.
How much will borrowers pay in closing costs?
Closing costs include a variety of charges, like loan origination fees, appraisal fees, title fees, and other legal fees. You can expect closing costs to be around 2 percent to 5 percent of your loan amount.
What credit score is required for a new home loan?
Credit requirements for homeownership vary between lenders and loan types. Typically, FHA loans require a credit score of at least 580; conventional and VA loans require a score of at least 620; and USDA loans require a credit score of 640 or higher. But lenders often set their own requirements which may be higher or lower.
Why do lenders charge mortgage insurance?
Mortgage insurance premiums help protect your lender in case you default on the loan. A foreclosure typically costs the lender as well as the borrower. While mortgage insurance may seem annoying and expensive, it also helps you get approved if you can’t afford a 20 percent down payment.
