8 Steps In Home Loan Process To Know Before Applying For A Mortgage
While a lot of banks will line up at your doorstep to offer you loan as soon as they come to know that you are in the market looking for home, a small mistake in choosing the right mortgage program may cost you thousands of dollars. It is very important to do your due diligence before committing to a mortgage program.
This article explains the step-by-step home loan process that will help you know how it works and how to avoid common pitfalls:
Step 1: Checking Your Credit Score
The first step towards getting a home loan is to check your credit score. You may believe that since you have never missed a credit card payment or auto loan installment, your credit score must be great, but it’s better not to be in for any last-minute surprises and make sure that you are qualified for a mortgage. Order free copies of your credit report from all major credit rating agencies. Look for any discrepancies in the report and file a dispute if you find any. To qualify for a mortgage with a good interest rate offer, your minimum credit score should ideally be more than 650.
Step 2: Getting Pre-approved
Most homeowners believe that pre-qualification and pre-approval are the same thing. Well, they are not. Pre-qualification is something a lender gives you on the basis of basic information about your income and debts. But you are pre-approved for a mortgage after a lender has thoroughly checked your income and debt documents, credit score, bank statements, employment history etc. You should always get pre-approved before you even start your hunt for a home. Sellers take buyers who are pre-approved more seriously. You will also know how much mortgage you will be approved and what your budget should be. Another thing to keep in mind is that there are different types of mortgages available. You should get pre-approved for each type of loan. There are mainly five things you need to get pre-approved:
- Income proofs: They may include recent pay stubs and documents showing any additional income (other than from full time job such as bonuses or income from part-time jobs).
- You will also need to show to the lender that you have arranged cash for down payment and closing costs.
- Your credit score will be taken into account before you are pre-approved.
- Your lender would want to submit a proof of employment. Some lenders even contact employers to verify the status of employment.
- Identity documents including your driving license, and social security number.
Step 3: Choosing The Right Home Loan Program
Mortgage programs differ based on the following things:
- Fixed-rate mortgage: The interest rate remains the same throughout the life of the loan
- A variable-rate or adjustable-rate mortgage: The interest rate changes based on the condition of the credit markets.
- Balloon payment loan
- Amortization period: The number of years by which you need to pay off the loan.
These are just some of the parameters that define a mortgage program. It can get quite complex if you are not very savvy with financial terms. Which program you should opt for depend on a variety of factors including your current income and investment goals. Do you want to sell your home a few years later? If so, maybe you should choose for an adjustable rate mortgage. If you plan to keep your home forever you can go for a fixed-rate loan. You can hire an experienced mortgage professional to guide you in the right direction.
Keep in mind, interest rate for a loan may vary from lender to lender, so you should shop around to find the best rates before applying for a mortgage.
Step 4: Making Sure You Have Enough Money For Down Payment
Ideally you should put at least 20 percent of the sales price down when buying a home. You will have to pay for Private Mortgage Insurance (PMI) on top of monthly installments if your down payment is less than 20 percent. You can qualify for a good home loan deal if you are a first-time home buyer. The government runs many first-time home buyer programs where you can put as little as 3.5 percent down; however most of these programs will require you to pay PMI.
Step 5: Knowing What You Are Committing To
If you have applied for loan after providing basic information such as your name and social security number and have been pre-qualified, your lender would provide with you an estimate of the loan. You should go through this document carefully because it will have all the details about processing fee, interest rate, likely amount of monthly installment payments, amortization period etc. It will also mention penalties in case of late-payments. This is a standard form and it is mandatory for lenders to make it available to their customers.
Step 6: Getting Through Appraisal And Title Report
After processing all your documents including credit report, your lender will ask for an appraisal and title report. You will have to pay for getting the home you are planning to buy appraised by a licensed appraiser. If the appraised value of the property comes in above the contract price, you will proceed to closing; however a low appraisal can have an impact on the amount of loan you will be approved. Your lender will approve the loan based on the appraised value of the property, not based on the sales price negotiated between you and the seller. Similarly, your lender will ask for a title report to check there are not any liens or judgments.
Step 7: Getting Through The Underwriting Process
Once the loan application is processed and the processer, employed by the lender, clears your mortgage file, an underwriter at the bank will go through all the details and take a final call. The underwriter may ask for additional details or documents from the borrower. Once the underwriter clears the file, you will be given a closing disclosure document with complete details of the terms.
Step 8: Lender Releasing Funds To The Seller On The Closing Day
You will be required to submit cashier’s check for down payment and all the closing costs that are applicable in your case. Talk to your lender about the method of payment. An attorney will get you to sign the loan documents and turn them over to the lender. On the closing day, the loan is released to the seller and the mortgage note and deed of trust is recorded.
So this is how the home loan process works. If you have any confusion, you should talk to your loan officer or lender.
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