So you want to buy a house- great! Unless you’re able to buy cash, you will have to talk to a lender to get pre approved for a mortgage. Your lender will help you with this process, but it’s good to know in advance what to expect.
Getting pre approved: Speak with several reliable lenders (realtors often know the ones who get offers to settlement). You will need tax returns for the previous 2 years, recent pay stubs, and bank statements for the previous 2 months. While some have success with it, I generally don’t recommend going on-line to get an instant pre approval; many of those pre quals over-estimate a borrower’s purchasing power, which then sets an unrealistic price range for the buyer. In addition, I’ve had those pre quals blow up mid-deal, when an un-investigated credit issue shows up in underwriting and puts the brakes on the whole purchase.
If you bought a home in the early to mid-2000’s, you may be surprised by how stringent lending is these days. Just remember, the mortgage crisis was largely caused by poor lending practices, when borrowers often didn’t even have to prove their income with pay stubs!
Appraisal: once a buyer is “under contract” with a house, they complete a mortgage application and start the process to get their loan committed by the lender. In this step, the house is appraised, at the borrower’s expense, by a licensed appraiser, who visits the property and compares it to recent sales in the area. The lender wants to be sure that your purchase price is not significantly higher than recent sales in the neighborhood. If you are going with an FHA loan (government insured), the appraiser will also complete an FHA inspection at the property, and possibly request repairs to be made in advance of closing. Repairs are usually the responsibility of the seller, but sometimes can be completed by the buyer, if both parties are willing. The appraiser will return to the property before closing to ensure the repairs were properly completed.
Mortgage Commitment: While the appraisal is being completed, the lender moves the mortgage application to underwriting. Underwriters scrutinize every aspect of the borrower’s income, debt, credit, and assets, determining if he or she is eligible to take on the mortgage. Underwriters will review bank statements and want documentation for any large deposits (generally over $500). Avoid making large cash deposits in the months preceding a home purchase. Additionally, expect your employment to be verified in writing and over the phone by your supervisor. Assuming all goes as plans, after the underwriters are satisfied with the contents of the loan application, and the appraisal goes well, you will receive a mortgage commitment from the lender. Commitment means that you will get your loan, barring any unexpected bumps in the road.
Final Approval: Approximately 10 days before settlement, the underwriters will once again review the complete application, and supporting documentation, verify employment, and give their final approval on the mortgage. Once you have the final approval, you will also receive the Buyer’s Closing Costs sheet, and federal document that outlines every penny you will spend, both the closing costs (cash needed at settlement) and the mortgage monthly payments for the life of the loan. The borrower at this point has the opportunity to request any changes to the sale, for example changing the down payment amount or disputing a previously unknown cost. Keep in mind, however, that any changes made to the Closing Cost sheet will delay settlement.
Settlement: Your loan officer is usually present at settlement, assisting the borrower with the final documentation required for the mortgage. Once every page is signed, the lender wires funds to settlement, and those funds, combined with the buyer’s contributions, will conclude the sale of the home and the transfer of ownership.
As you may have guessed, the mortgage process is a lot of work! Expect more document requirements if, for example, you are self-employed. Reply promptly to all requests from the lender, and keep in touch with your loan officer and realtor. Most people will be stressed by the process, but in the end it’s worth the effort. Many of my clients have bought using a mortgage, and none of them have regretted the hard work that got them into their new home!