Prepare Before Submitting the Application
One can prepare for the mortgage process by taking these steps.
- Credit Score Check. Your credit score is used by lenders to decide whether or not you qualify for a loan. Where you do qualify, your score is also used to determine the interest rates you qualify for. Then, you can also get a free credit report to find out why your credit score is where it is. Improving your credit score is the main way you can qualify for better mortgages.
- Choose The Right Mortgage Type. The most common type of mortgage is a “conventional fixed-rate mortgage”, representing over three-quarters of all home loans. Among the terms offered, 30-year fixed-rate mortgages are the most common. To understand if this, or any of the alternatives, is the mortgage you want, you can find out what your options are. Then, choosing from one mortgage type narrows down your search options.
||When To Consider It?
||When searching for the lowest fixed rate possible
||When trying to pay a mortgage off faster
||When your credit score is 620 or higher
When a 3% down payment is adequate
||When seeking a standard down payment
When borrowing with a low credit score
||When you are a military veteran
When you don’t want to or can’t make a down payment
When you don’t want to pay for mortgage insurance
- Compare Lenders. The mortgage industry is very diverse and there are many lenders that offer mortgages. One can potentially save a lot of money by simply taking the time to compare the lenders that offer the mortgage type they are looking for. Have a look at the best mortgage rates on our site.
- Get Pre-Approved. Get pre-approved to borrow a given amount of money. Mortgage pre-approval letters are normally valid for 30 to 90 days. Obtaining that letter can also provide more time to discuss the various options and a budget with the lender. It’s essentially meant to help you get some more flexibility while you’re still preparing to buy a home.
- Prepare Paperwork and Documents. Preparing your paperwork in advance helps avoid a big rush at the last minute. Lenders require:
- Proof of income
- Proof of employment
- Credit history
- Government-issued ID
- Proof of address/rental history
- Other information laid out by the lender
- Search and Find a New Home. This is the step where people normally search for the home they want to purchase. After following all the above steps, it’s possible to be better prepared to get the ideal home.
Step 1 - Fill out a Mortgage Application
The first step to getting approved for a mortgage is to apply for a mortgage. People can now apply for a mortgage online if they want the speed and convenience of applying from home. Most lenders can also take loan applications via a phone call.
Even if you’ve been preapproved for a mortgage, you’ll still have to submit a formal application. Getting preapproved can make the process progress more smoothly, but lenders still want to see the borrower’s most recent personal finance information.
Mortgage applications are normally sent alongside the borrower’s recent financial documents, which can include:
- W-2 forms
- One of the most recent pay stubs
- Tax returns
- Other proof of income
- The last bank statement
- Long-term debt documents
Depending on the type of mortgage you’re applying for and your lender, you may be asked for other documents or proof you meet their minimum financial requirements. If you’re self-employed, you may be asked to provide more proof of financial stability. This may mean providing more bank statements that date back further.
After a mortgage application has been submitted, most lenders get back within a few days with a loan estimate. A loan estimate is a document that outlines:
- The total cost of the mortgage
- Fees associated with taking the mortgage, such as closing costs
- Your interest rate and APR
When you have a loan estimate, you will know the real rate you are being offered. At that point, some people opt to pay a larger upfront fee, which is essentially an interest prepayment. This is known as “buying points” and is included in the list of closing costs. Some people take this course of action if they plan on staying in the home for a long time.
Step 2 - Review the Loan Estimates
Now that you have some loan estimates, it’s time to inspect them. This is where you can investigate the most important details of each offer before you choose a lender.
This is your opportunity to review:
- Total costs. This is the total balance that will have to be paid to take the mortgage. It includes all costs but assumes that you pay according to the schedule provided. It cannot account for missed payments, early repayment, or other factors.
- APRs. Annual percentage rates are the representation of your offered interest rates but on an annualized basis. The formula is: A = (P(1+rt)). A is the total accumulated amount, P is the principal amount, r is the interest rate and t is the time period.
- Interest rates. An interest rate is the amount of interest due per period as a percentage of the principal.
- Principal. This is the amount that you borrowed from the lender and must now pay back. You normally pay back the interest first.
- Any closing costs. Mortgage closing costs often range from 2% to 5% of the total loan expenditure. Individual expenses often include closing fees, mortgage insurance, and more.
Normally, different lenders will provide loan estimates that vary widely in cost. You can only know which loan will end up cheaper by reviewing all the loan estimates you receive. You can also compare the results of buying points for each specific mortgage.
Step 3 - Choose a Lender and Commit
At this point, the mortgage lenders would have sent you a clear picture of what each mortgage would cost. It’s the borrower’s responsibility to choose a lender based on their best judgment. Once the borrower has made their choice, they must commit to the terms that the lender has provided to get the mortgage.
Step 4 - Loan Processing
After making a decision and submitting a formal application, the loan process begins. The lender will check the information provided before approving the loan. They will receive several important documents which they will pass on to an underwriter. This includes:
- Credit report
- Verification of Employment (VOE)
- Verification of Deposit (VOD)
- Property inspection and appraisal
- Title search
Loan processors professionally gather and organize the information that concerns the buyer and the property. They then pass on the documents as a complete package for the underwriter. They also open the file for you so the process can get moving.
Step 5 - Underwriting
The mortgage underwriter is the decision-maker. They will be the one who evaluates the documents provided after it’s organized for them by the loan processor.
The underwriter is responsible for cross-checking the information provided to verify its authenticity and accuracy. They are there to ensure that the borrower and the property line up with the eligibility requirements of the mortgage. They also perform any additional verification, such as checking the military service of a borrower for a VA Home Loan. This is essentially a broad verification process where they look for red flags that point to potential fraud.
After verifying the information provided, underwriters review the borrower’s financial ability to repay the mortgage. They weigh the property, which serves as collateral, in their decision.
Finally, the underwriter decides to approve or reject the mortgage application. In some cases, they can approve the application under additional conditions. They may also ask for additional information, such as a written explanation of items in the borrower’s credit history.
Step 6 - The Loan Is Cleared to Close
If the underwriter signs off on the mortgage, the deal is cleared to close – but it isn’t closed quite yet.
A lender has a few responsibilities to fulfill prior to closing a mortgage. Title insurance is ordered, and documents that many in the industry refer to as the “loan docs” are drawn. They are printed and sent to the title company or attorney’s office. There, the closing meeting takes place.
One of the most significant factors in the closing process is the Closing Disclosure. The Closing Disclosure is a federally regulated form that essentially follows up on the loan estimate provided to the borrower. That’s because the loan estimate covers expected costs, while the Closing Disclosure actually confirms those costs. There are regulations that ensure that the two documents don’t contain information that deviates too much. However, there may be some small differences between the information on the two.
Borrowers have the right to review the Closing Disclosure for 3 days before the closing meeting. This is the final chance for a last review of the mortgage details. Borrowers are also entitled to a final walk-through of the property 24 hours prior to the closing meeting.