The Process of Applying for a Mortgage and What to Expect
Applying for a mortgage can seem intimidatingly complex. But it’s essential to be informed and prepared beforehand.
The initial step in buying a house is finding an experienced lender and getting preapproved. Doing this will give you peace of mind about your ability to purchase the property, while showing sellers that you’re serious about buying their residence.
Credit Score Requirements
Your credit score is one of the most crucial elements in purchasing a home. It determines your interest rate, payment terms and how much money you must repay over time. Having a higher credit score can save you thousands of dollars over the life of your mortgage loan.
The minimum credit score required for a mortgage loan varies by type, but is generally around 620. Some lenders have additional criteria such as debt-to-income ratio or down payment amount that must be met in order to approve your loan application.
Your credit score is calculated by the three major bureaus (Equifax, Experian and TransUnion), who review your financial history to assess how likely you are to repay loans. You can check your report for free at any of these bureaus once a year for free.
Before applying for a mortgage, you can take steps to improve your credit score by making timely payments and keeping your debt load manageable. Even just 20 points higher on your credit score can lower the interest rate enough to save thousands of dollars over the life of the loan.
Maintaining your credit utilization (the amount of available credit you use compared to your total credit limit) at 30% or lower can help boost your credit score and make lenders less risky by showing that you’re more likely to pay off debt.
When applying for a mortgage, your lender may request your credit score from one or more of the major credit bureaus. This process, known as a “hard inquiry,” could have an impact on your score but usually not more than five points.
Once your lender has verified that you meet all eligibility requirements for a mortgage, they can begin the process. They’ll review your financial history to confirm you meet all their other criteria such as income, assets and down payment amount. They also review credit reports to detect any issues which might prevent approval such as pending judgments, liens or late bill payments.
Pre-Approval Process
Becoming preapproved for a mortgage is an essential step before you start looking at homes. Your lender will review your credit report and documents to confirm you qualify for the loan, as well as determine how much you can borrow.
Most lenders allow you to complete the preapproval process online, by phone or in person. You’ll need to provide personal information like your social security number and financial info, as well as authorization to pull your credit report.
It may take a few days for the lender to verify your information and provide you with a mortgage estimate. It’s essential to remember that just because you have received preapproval does not guarantee you a loan or interest rate; any changes in financial circumstances between now and closing on a home could significantly impact eligibility, loan terms and budget.
When applying for a mortgage, always compare rates and fees from multiple lenders to get an accurate assessment of what you can afford and find the most suitable lender.
Once you’re ready to begin the mortgage application process, complete a uniform residential loan application (commonly referred to as a “1003”) with your social security number and other personal details. The lender will then pull a three-bureau credit report in order to assess your credit history and score.
A hard credit check is initiated when you apply for a mortgage, so your score may temporarily drop. While this drop is temporary, it could affect future borrowing rates and terms on other loans in the near future, so it’s wise to wait several months after purchasing your home before seeking other forms of financial assistance.
Once your lender has reviewed and approved your preapproval application, they will typically send it to an underwriter for review. An underwriter is a mortgage expert who will review all financial documents to guarantee you meet the loan guidelines specific to the mortgage you are applying for.
An underwriter will also inspect the property to make sure it’s in satisfactory condition and meets government safety standards if you’re using either FHA or VA financing. For instance, a home with cracked windows or lead paint could make closing on your loan more challenging.
Underwriting Process
When applying for a mortgage, the lender will review your credit report and score, assess your income and assets, order an appraisal on the property and initiate title search – this process is known as underwriting.
The underwriting process is essential in deciding whether or not your mortgage application will be approved. It determines if you have enough money to purchase and maintain your home, as well as if the value of the house exceeds what is owed on it.
Additionally, this guarantees the lender has enough funds to recoup what it lent you should you default on your loan. This includes both the mortgage amount and any additional fees or costs such as private mortgage insurance (PMI).
Your underwriter will request copies of W-2s from the past two years, pay stubs and bank statements to verify your income. They may also inquire about other sources such as retirement accounts, investments and rental properties to confirm sources.
Additionally, you must disclose your debt-to-income ratio (DTI), a percentage which tells lenders how much you owe compared to what you earn. This helps lenders assess your capacity to make payments.
Candidates with poor credit or low debt-to-income ratios (DTIs) may still be approved for a mortgage, though they will likely face higher interest rates and the need to pay PMI. Your down payment must also be sufficient enough so that PMI isn’t necessary; otherwise, the underwriter will evaluate if PMI coverage is needed.
Once the underwriter has all this information, they will decide if your mortgage application is approved, suspended or denied. This can take several days or weeks depending on the lender and your financial situation.
Factors such as the housing market and internal policy on how many loans a lender processes at any given time can all affect the underwriting process. Weather events, like heavy snowstorms in wintertime, may also delay this step.
In general, underwriting usually takes anywhere from one to seven business days from when your application is submitted until you receive approval – this period is commonly referred to as the “turn” time.
Closing
The closing process is the last step of your homebuying journey. It involves reviewing and signing several documents, such as a deed of trust or mortgage, promissory note and Closing Disclosure. At this point, your lender will transfer funds from your purchase agreement to the seller, making you the proud new owner of the property!
Before closing, be sure to review the Closing Disclosure carefully and compare it with your Loan Estimate. If there are any discrepancies, contact your lender immediately so they can be addressed before signing off on the Closing Disclosure and moving forward with the loan process.
Before buying a home, it’s wise to run a title search on the property. This will identify any liens or other issues affecting the title that could potentially jeopardize your rights in the property. Consider purchasing title insurance during this time; it will cover expenses in case of litigation regarding title disputes.
Before closing, you should get a home inspection performed to identify any problems with the house. This will give you leverage when negotiating repairs with the seller and give yourself an edge to ask for more money in case necessary.
The closing process can take anywhere from 30 to 45 days, depending on the mortgage type and any complications that could delay it. For instance, if you need an appraisal or termite inspection, this could add extra time onto the process.
Organizing your paperwork can help you stay organized and avoid delays, so make sure all documents related to your home purchase are stored together in one convenient location. This way, you’ll easily locate what you need when needed, eliminating the need to scramble on closing day to locate them.
Be sure to promptly and fully respond to all lender requests. Doing so will keep the process moving along smoothly, giving them all of the information they need to conclude your loan successfully.
The closing process can be lengthy, so it’s essential to take the necessary time to prepare. This includes organizing all of your paperwork and giving yourself enough time to sign required documents. Furthermore, working with experienced professionals who can guide you through this step by step and answer all of your questions is recommended.
