You’re finally ready to buy a home! You’ve done the hard work: saving up for a down payment, deciding where you’d like to live, and starting to think about the house you want to live in. Maybe you’ve done a little window shopping online, or visited an open house or two. It’s time to take the next big step towards home ownership: starting the loan process.
Making the loan process go smoothly is easier than you think. This guide can help you as you progress through each step, from choosing a lender and getting preapproved to closing on your house and receiving the keys to your new home.
Step One: Choosing a Lender
You have many options when it comes to choosing a lender. Your choices include:
- Big name banks: Lots of options for those with great credit and a high net worth
- Smaller banks/credit unions: Nice for those who want consolidated financial products
- Online lenders: Transparent rates, but questionable customer service and preapprovals
- Retail mortgage banks: Experienced Loan Officers (LOs) but higher commission fees
- Mortgage brokers: Middlemen offering lots of options, but lack of customized care
- Call center or direct mail lenders: Highly suspect, and usually not worth your time
If you want the best rates possible, solid advice on loan structuring, a LO who stays by your side throughout the process, and consistent handling of your loan for the application stage to closing and beyond, you can choose a full service mortgage bank like Sammamish Mortgage.
Step Two: Getting Preapproved
Once you choose a lender, it’s time to get preapproved. Don’t worry, you can switch lenders after getting a preapproval; you aren’t locked in. However, having a preapproval letter can improve your chances of having your offer accepted when you find the home you want, and will also help you find out if there are any potential obstacles in the way of home loan approval before you get too far into house hunting.
Preapproval is not the same thing as prequalification. With a prequalification, you provide some basic information, and how much home you can afford is estimated without verifying anything. A preapproval means your entire application has been reviewed, your information verified with supporting documentation, your credit checked, and a preapproval letter issued. Sellers give much more weight to a preapproval than to a prequalification.
- Gather your documentation: You’ll need proof of your identity, employment, income, assets, and payment history (see the full list here)
- Fill out the loan application: You can do this through an online portal or have a Loan Officer (LO) help you (see how easy it is to apply)
- Give permission for your credit to be pulled: Your lender will pull a hard credit report to verify your credit score and determine your debt to income (DTI) ratio (check your credit in advance)
Getting preapproved means that when you find a home you want, you can make an offer knowing what your house budget, down payment, estimated monthly payment, and available programs will be. It also shows listing agents that you are a serious buyer, and can move you closer to the top of a seller’s short list.
Step Three: Keep a Clean Financial Profile
Once you are preapproved, it’s time to focus on finding the home you want, making an offer, and finishing the loan approval process. Avoid anything that would lower your credit score or change your DTI ratio.
- Don’t trigger multiple pulls on your credit, like applying for credit cards or trying to buy a car or get a personal loan
- Do take steps to make your credit even better, like paying bills on time and not missing payments
- Don’t quit your job, change jobs, or accept a pay cut if you can possibly help it, as changes in income can adversely affect your application
- Do keep your loan application documents updated with the latest information in regard to pay stubs and bank statements
- Don’t overestimate your down payment; you’ll need to have money for closing costs and room to negotiate with a seller if needed
Being aware and responsible with your finances throughout the loan approval process is a must. Once you’re safely moved into your new home and have a few mortgage payments under your belt, you can start thinking about that new car or putting in a hot tub.
Step Four: Making an Offer
Once you’re preapproved and you find the home you want, it’s time to make an offer. Once you’ve reached this stage, things start to move quickly. You’ll need to have all of your ducks in a row.
You should really have a real estate agent working on your side: the seller normally pays all agent fees, so there’s no excuse not to have your own home buying expert helping you.
When you make your offer, take the following into consideration:
- Know the market: Should you make your best offer upfront or leave room to escalate? This depends on how competitive the property is. If it’s a newly listed home with multiple offers expected not going in with your best foot forward could be a mistake.
- Contingent offers: If you need to sell a current home before buying your new one, a contingent offer leaves you an out so you don’t end up with two house payments. This is common in buyers markets but in a competitive sellers market like we’re seeing right now getting a contingent offer accepted is almost impossible.
- Waiving contingencies: If you are confident in the home’s value and/or condition, you may waive the appraisal, the inspection, or both to make your offer competitive. This comes with significant risk so make sure you understand the situation and are comfortable with the plan you and your Realtor have made.
If you’re in a bidding war, make sure you look deeply into your finances and loan options, and ensure you know where your cutoff point is. It’s no good buying a home if you end up being unable to afford it down the line because you overextended.
Step Five: Set a Closing Date
Your closing date is determined at the time of negotiating the purchase and sale agreement, and is specified in your contract. This is the day you promise to show up and pay your closing costs, after your down payment has been wired, your loan is funded, and that the title deed is recorded.
In most cases, the closing date is set 30-45 days from the offer date. However, if you and the buyer are trying to move quickly, the closing timeline can be shorter. Just be aware that your rate is only locked until your closing date, and failing to close can cause a lot of issues.
Closing doesn’t automatically mean you get the keys that day. If your seller needs more time to vacate, you may opt to give them a rent-back, letting them stay in the house for a specific amount of time so they can move out leisurely, and then you’ll take possession on a future set date. Their payments to you can be set to cover your mortgage payment in the meantime.
Step Six: Deposit Earnest Money and Open Escrow
Here’s when you’ll need to come up with some cash. Aside from the appraisal and inspection, there will be some additional upfront costs and expectations for prepaids that you’ll need to have tucked away in an escrow account.
- Deposit earnest money: You’ll have to put down some earnest money to get the seller to take the house off the market while you complete your purchase. This money typically goes to the title company, which places it in escrow.
- Open escrow: If your earnest money deposit was low, you may need to deposit some additional cash into an escrow account to handle prepaid items, like taxes and mortgage insurance. Your LO will make sure you know about these estimated costs.
Remember, if you built the proper contingencies into your offer, you’ll get your earnest money back if anything goes wrong, like appraisal coming in too low, or inspection turning up serious issues with the house. Anything in escrow that isn’t assigned to other costs by closing will be restored to you at that point, and can be used towards closing costs or your down payment.
Step Seven: Lock Your Rate, and Move Forward with Appraisal and Inspection
Once you make your offer, you’ll need to be prepared to:
- Lock your rate: Locking your rate keeps your interest rate from going up while you complete the homebuying process, protecting you until you close on your new home.
- Pay for the appraisal: Your lender will order the appraisal when you lock your rate, to determine the true value of the home, so be ready to hand over a credit card number.
- Get the home inspected: You don’t want to skip this step – nothing is worse than buying a home “as is” and then finding out it needs new wiring, plumbing, and a roof.
Step Eight: Go Through Underwriting
The underwriting process in most situations will happen once you are under contract on a home and the appraisal is complete. This means you’re getting close to finalizing the home purchase process, so your loan approval needs to be complete.
Your Loan Processor will send your file to the underwriter, who will do a more comprehensive review of all of your information and documents. They also look at the property that you have chosen to verify its value and review the results form the title search to make sure there isn’t a former lien on the property that could interfere with you taking ownership.
Once underwriting is complete, your loan can be fully approved. This means that your home purchase can move forward and you will be able to close on your new home.If everything goes well, the underwriting doesn’t turn up any red flags and your loan term, monthly payment, down payment, interest rate, and closing costs end up being an extremely close match to the original numbers you were given.
On occasion, you may want an underwritten preapproval. This is done prior to making an offer on a home, and is advisable if you are trying to purchase a competitive home with multiple offers. The underwritten preapproval simply pushes the majority of this underwriting process to the beginning (except for the review of the appraisal and title policies which can’t be done until after the home is under contract.)
If you’ve gathered all of your information for your loan application, gone through the steps for preapproval with your LO, and are getting ready to make an offer, an underwritten preapproval can help you stand out as a motivated buyer ready to set a closing date and complete the sale quickly. If you have a buyer seeking to unload their home in a hurry, having already completed the majority of the underwriting process can give you an edge and help you get the home of your dreams.
Step Nine: Stay On Track
As you progress through the home loan process, it’s vital to stay in constant communication with your real estate agent and your LO. Your LO in particular (or another person from your mortgage company, like a transaction coordinator) will be letting you know when additional information, documentation, or action is needed.
They should be also coordinating with the seller to help arrange the appraisal, and with the title company to facilitate escrow. By being fast to respond every time you receive a message, you can keep your home purchase moving steadily forward towards closing and get early notice if any obstacles arise so you have time to address them.
Step Ten: Show Up To Close
You’ve made it all the way to the closing of your loan! The main things to remember during closing are:
- Ensure your down payment has been wired on time
- Check to see if your exact closing costs will be covered by escrowed funds or if you need additional funds at closing
- Compare your Closing Disclosure (which should be received 3 days in advance of closing) to your original Loan Estimate
- Be prepared to sign your final loan documents (or in some cases and areas, to eSign)
Depending on the terms of your contract, you might get your keys and be able to start moving right away. Otherwise, you’ll receive your keys on the agreed upon date.
Congratulations! You’ve just successfully navigated the home loan process, and are the proud owner of your new home.