Get a Pre-approvalThe first step we recommend any home buyer take is getting a pre-approval. The idea behind a pre-approval is simple: Before checking out what’s on the market, you should be confident that you know how much a lender will loan you.
When you get pre-approved, your credit is pulled. This gives the lender two things: your actual credit score and a look at the data on your credit report. You need to have a credit score of 580 to qualify for a loan through the Federal Housing Administration (FHA) and a 620 for a conventional loan through Fannie Mae or Freddie Mac. A VA loan backed by the U.S. Department of Veterans Affairs doesn’t require a specific score, but lenders can set guidelines themselves. At Quicken Loans, we look for a credit score of at least 620 for VA loans.
In addition to your credit score, lenders will see how much debt you’re carrying and whether you have any bankruptcies or collections on your record. If you do have something like this on your record, it’s still possible that you could get a mortgage, but you might only qualify for certain loan options.
The lender will also ask about your income and assets upfront to calculate how much you can afford based on a debt-to-income (DTI) ratio. The more information you can give your lender upfront, the stronger your pre-approval will be because both you and the seller can have confidence that your loan is more likely to be approved in the end.
Your income is verified when you give the lender your W-2s and 1040s. Bank statements also show assets. These are key in making sure you have enough reserves to make your mortgage payment for a while if you’re between jobs.
You’ll also be matched up with a preliminary loan program, although this could change later in the process.
Income and asset documentation can be provided later at the underwriting stage, but submitting it upfront will likely give you a better understanding of how much you can afford to pay.
BudgetYour pre-approval letter will tell you how much money a lender is willing to let you borrow. However, just because you can borrow a certain amount doesn’t mean you have to push your budget to the limit. You can put various purchase prices into a mortgage calculator to come out with a realistic estimate of a monthly mortgage payment. (You can also add the cost of taxes and insurance if you know what they’re likely to be.) You want to make sure you have enough money every month for savings, emergencies, investments and other expenses. Don’t forget to leave a little bit of room for fun money as well!
House HuntingGoing out and looking at homes is usually the part of the home buying process that’s the most fun. You get to imagine what your life would be like in each house you walk through. Even here, though, you’re going to want to make sure you start with a solid game plan. Depending on your budget, it may or may not be possible to find a home with every feature you want. With that in mind, make a list of your top priorities for the homes you’re looking at. Once you have your wish list in place, we recommend hiring a real estate agent. They know the market. They see a ton of homes every year and can work with you to find something that meets your needs and is within your budget. We can help work with you to find a house that matches your needs.
Making an OfferLet’s say you’ve found the perfect house. It’s now time to make an offer. There are several things to think about here. You’ll work with your real estate agent or attorney to write the purchase agreement, includes your offer for the purchase price as well as a list of anything from the house that you might want included in the sale. Although these types of details are negotiable, sellers are likely to want an agreement with very few strings attached – one that’s as clean as possible. This may mean avoiding things like asking for seller concessions and for furniture to be included in the deal. It’s also at this stage that you’ll make an earnest money deposit. This is a percentage of the purchase price given to the seller when the offer is accepted to show that you’re serious about the property.
UnderwritingOnce your offer is accepted, the purchase agreement is sent back to your banker. The banker will review your options to make sure you’re in the right loan program for you. Once that happens, your loan is sent through for underwriting.
During the underwriting process, your income, assets and employment are verified and compared to the information on your credit report. Lenders always pulls your credit at the beginning of the process, but a pre-approval lasts for just 90 days. If you’ve been house hunting for a while, it may be necessary for the lender to pull your credit again. Try not to take on additional debt during the house hunting process. Doing so while trying to buy a house at the same time could put your financing in jeopardy. It’s also during this time that your lender may ask for additional or updated documentation if they need it for approval purposes.
Appraisal and InspectionYour lender will set up a home appraisal as you’re going through the underwriting process. The appraisal protects both the lender and mortgage investor (Fannie Mae, Freddie Mac, FHA, etc.) as well as the buyer of the property.
During the appraisal process, the home is evaluated against comparable properties in the area. That means that if the property you’re buying is a two-bedroom ranch with a recently renovated master bath, the appraiser finds properties in the area that are as similar to your property as possible, looks at the sales data and gives you a dollar value for the home you’re looking at.
Having an estimated home value protects you from overpaying for the home. Mortgage investors also don’t allow lenders to loan more than the home is worth because if something happened and the lender had to take the house back when payments weren’t being made, the lender or would have to try to recoup their investment in a sale. Knowing the appraised value keeps them from making risky investments.
If the appraisal comes in lower than the sales price, you have three options. The seller can lower the price to the appraisal value. You also have the option of bringing the difference between the appraisal value and the sale price to the closing table. Or you can walk away from the home.
While not required, it’s highly advantageous for you to get a home inspection as well. Even if there’s nothing currently wrong with the home, walking through it with an inspector will give you an idea of what to watch for in the future should problems arise. If there’s anything truly serious, you also have the chance to back out at that point. Yes, you’ll have to start over in your search for the right home. On the other hand, you won’t be living in a house that might fall apart in six months. However, sometimes sellers will lower the price so you have the money to fix whatever’s wrong, or they’ll fix the issues themselves before you move in.
Certain basic safety items are looked at during an appraisal, but a home inspection goes deeper. If you’re moving into an older house with lead-based paint, for example, that would be caught by an appraisal and may have to be fixed before you can move in.
ClosingWhen the underwriting process is complete, it’s time to come to the closing table. You’ll bring your down payment and any other closing costs, sign the mortgage and take possession of the deed. There are ways to keep your closing costs down. One way you may be able to do this is by increasing the price of your offer in order to convince the seller to pay for other things. In this way, you roll the closing costs into the loan.
How Long Does the Mortgage Process Take?Now that you know how the process works, how long does it actually take to get the keys? That’s different for everyone, but let’s try to give you a rough idea. The longest part of the process is often shopping for a home, so if you have a list of wants and needs you can take to your agent, that should help you get started quickly. Once you have your purchase agreement and underwriting starts, they try to close your loan within 30 days. Besides looking for the home, the next biggest delay in the process can sometimes be getting an appraisal scheduled. There are areas of the country where there’s a shortage of appraisers. If you’re buying in one of these areas, it’s important that both the buyer and seller have realistic expectations. You can really help speed up the process if you get all the documentation that you’re asked for turned in on time. This may be the one thing about the mortgage process that’s most directly in your control.
Now that you understand the process, are you ready to get started?