When buying a new home, chances are that you need a mortgage to complete the purchase. A mortgage is a special type of loan that is used to pay for a new home. Getting a mortgage from a lender can seem overwhelming and exhausting. Therefore, you need to be familiar with the process to make it as easy as possible.
The Preapproval Process
It's smart to get pre-approved for a mortgage before you start searching for the home. This process examines your credit and finances to see if you will qualify for a loan. If buyers see that your financing is already in place, they might be more willing to negotiate. Furthermore, you will also have a good idea about how much money you can borrow.
With this process, the lender will evaluate your credit and verifies your employment and income information. The lender will approve you for a certain loan amount, so you will know how much you can spend on the home.
As a general rule of thumb, you will usually qualify for a mortgage that is 4 to 5 times the amount of your annual income. The actual amount of mortgage you qualify for will vary depending on your specific circumstances, and the rules and policies of the mortgage underwriter.
Mortgage Application Process
You will need to be familiar with the process of applying for a mortgage. The steps of the process are as follows:
- Get pre-approved for the mortgage as explained above. (Day 1)
- Finish the application after you find your new home. (Day 3-21)
- Review the loan estimate and tell the lender you wish to proceed. (Day 10)
- The lender orders a credit report, an appraisal, and a title report. (Day 10)
- Make sure documents are submitted. (Day 10)
- Get an appraisal of the home. (Day 23)
- Loan is sent to underwriting. (Day 29)
- Receive the closing disclosure. (Day 31)
- Close on the loan. (Day 32-34)
- Own your new home. (Day 35)
Down Payment and Documentation Required
The down payment will depend on the type of mortgage. If you choose a VA loan, which are for military personnel and veterans, you will not need a down payment. FHA loans allow down payments as little as 3.5% and are available to most first time home buyers. Typical down payment requirements range from 5% to 20%. Many banks and mortgage brokers will allow you to negotiate the down payment amount and/or offer special programs that can reduce or even eliminate the down payment for specific situations. For example some banks will allow 0 down payment mortgages for doctors who recently graduated medical school. Always talk about the down payment before allowing a loan officer to access your credit report. This could be a major deciding factor in who you allow to originate your mortgage.
The documentation required for a mortgage usually include:
- Tax returns (and w2 forms if available) for the last one or two years
- Pay stub for the last month
- Bank statements for the last two months
- Driver’s license
- Proof of military service if getting a VA loan
- Alimony or child support documents
Credit Requirements for a Mortgage
To obtain a mortgage loan from a traditional bank or online lender, you will need to have a decent credit score. For an FHA loan, you will need at least a 580. For other loans the credit requirement might be higher. Most lenders like at least a 43% debt to income ratio.
Mortgage Brokers and Traditional Banks
The business of making mortgage loans is very profitable and has attracted many market participants. Your mortgage origination will usually be handled by either a traditional bank or a mortgage broker. There are pros and cons to using either.
A traditional bank or credit union is usually a name you know and trust. Most people know a traditional bank because it's where they already have their checking or savings account. Traditional banks will usually provide mortgage loans using the money they have on deposit from all their customers. Traditional banks are usually more stringent in their mortgage approval process because of the risks associated with loaning money on deposit, as well as their burden of financial regulations.
Some of the advantages of using a traditional bank or credit union include:
- Already have an existing relationship with the bank and may have a relationship with the banker who will be handling your mortgage
- The bank may seem more stable and trustworthy
- You might obtain lower interest rates
- Could make automatic payments from existing accounts
Some of the disadvantages of using a traditional bank or credit union include:
- Longer process and usually more stringent approval process
- Commission does not need to be included so they could overcharge
- Not as familiar with the mortgage process because many banks specialize in small business lending and/or other types of specialty loans
A mortgage broker is a person, or company, who originates your mortgage loan on behalf of one or more mortgage underwriters. The mortgage underwriter is a large company in the background that provides the actual cash to buy your new home. The mortgage broker is their representative that works with you directly to finish the mortgage transaction.
Some of the pros of choosing a mortgage broker include:
- More lenient credit score requirements
- They do most of the work for you
- They will compare rates for you
- Familiar with the process because they only work on mortgage loans
- More loan options because they often work with several mortgage underwriters
Some of the disadvantages of using a mortgage broker include:
- Could charge higher fees
- Might not have access to certain software
- Less regulated than traditional banks and more susceptible to predatory lending
FHA loans are probably the most popular loans. They are an excellent choice for first-time home buyers. This loan is backed by the Federal Government. You might only need a down payment of 3.5%. The credit requirements are more lenient than other types of loans.
Some lenders require mortgage insurance. If you get a conventional loan with a low down-payment amount or an FHA loan, you will probably need mortgage insurance. However some loans that are backed by the Federal Government, such as VA loans, do not require mortgage insurance.
Buying a new home is so exciting. The mortgage process is not as complicated as it seems. With the increased technology of today’s world, it is simple. You can then enjoy the advantages of being a home owner.