Purchasing your first home can be an adventure, the steps to mortgage approval and closing can be steep and may vary slightly depending on the lender you are using and laws in the state where you reside.
Home-buyers should go through this financial screening before they even start shopping for a home. This process will give you an idea of what size mortgage you can afford and will tell the realtor and the seller that you are serious. If you decide to put in an offer, the seller will want to know that you are financial capable before accepting.
Get Pre-Approved (Pre-Qualification vs. Pre-approval)
With pre-qualification you sit down with a lender and review your overall financial situation, the lender then gives you an estimated mortgage size that you’ll qualify for. Some buyers use this to shop around for the best mortgage rates. If you only go for a pre-qualification before shopping for a home, you might not find out about underlying credit issues until you lose out on a dream home. It’s always better to be proactive when shopping for a home. Fixing credit problems well in advance will allow buyers the best interest rates, largest size loan, and strength at the negotiation table.
A pre-approval is a much more accurate and respected view into a buyer’s financial capability – you fill out a mortgage application and go through an in-depth financial and credit screening. With this approach the lender will be able to offer you the exact loan amount you’ll qualify for, this way you can shop at or below that price. If approved, the lender will issue you a pre-approval letter and it has much more weight to a realtor and seller. Part of the pre-approval process requires an investigation of your credit history and scores. If there are any issues with your credit this is the time when your lender will instruct you on where your score needs to be. Your pre-approval letter shows the seller they your offer is solid and can be relied on for a successful closing transaction.
Start House Shopping & Purchase Agreement
Once pre-approved you can shop at a price limit with confidence. Most buyers use a real estate agent to assist them in house hunting. While shopping be sure to consider the taxes and any HOA fees into your monthly expense. Remember, just because you qualify for an amount does not mean you can afford to purchase a home at that price. When the seller accepts an offer, a purchase and sales agreement will be signed by both parties. This agreement is then sent to your lender.
Full Mortgage Application
Once you find a home and the seller accepts the offer, you will need to fill out the Uniform Residential Loan Application (URLA) or Fannie Mae form 1003. On this form you will give data on the home you are purchasing and the type of loan you agreed to.
At this point all the necessary documents will be collected on the borrower and the property for processing. Some of the information your lender will collect will be: Credit reports (if you have a cosigner their credit will be pulled as well), Asset, employment, and income verification, property value assessment through a home appraisal. (The bank wants to make sure you are not overpaying for the property)
This is a very important point in the mortgage process – it can make or break your mortgage. The underwriter reviews all the documentation to make sure it complies with lending guidelines. He or she has authority to reject a loan if the pre-established criteria are not met. The underwriter can ask the borrower for clarification on specific transactions and may issue conditions for the loan to be approved.
For instance, if the borrower missed a credit card payment since their pre-approval that has knocked their credit score down by 50 points. The underwriter would come across this issue and tell the borrower that their score has now fallen beneath the threshold. It’s important to be extra careful about your finances, bills, and credit, years before shopping for a home, during the process of underwriting, and until the closing is done. Just because you were pre-approved does not mean the loan is guaranteed to go through.
Mortgage approval and closing
The final step is closing. Depending on your situation it may come easily or there might be some bumps in the road. After all documents are prepared and signed by all parties the final settlement can occur. Depending on what state you live in, the buyer and seller might do this process together at the same table or separately.
Buyers should make sure to complete their own research and work before agreeing to purchase a home. This is such an extended agreement that careful consideration should be taken and it’s best to be over-prepared. Before you even speak with a realtor or lender, it’s a good idea to pull your credit reports. Consumers can pull their own reports and scores without causing a hard impact or damage to their scores. Scores even a few points below threshold can cost you thousands over the life of a mortgage.
Make sure you are looking at the correct mortgage FICO scores since there are hundreds of scores sold (or offered for free) that are not FICO scores and there are over 50 versions of the FICO score. The right FICO score can be purchased at Myfico.com. Buy the 3B FICO monitoring product and print out the full 3B credit reports. Look for the “mortgage lending FICO score” lenders look at the middle mortgage lending scores. Since we all have three scores, each representing the information on Experian, TransUnion, and Equifax, it is extremely important to know all three. The bank takes the middle of the three NOT the average. Ex: Experian 720, Equifax 680, TransUnion 650 = a 680-mortgage lending score.