An overview of the mortgage process, from pre-approval to closing! Use this guide to get familiar with what will happen over the coming months.
The Whole Mortgage and House Buying Process, Explained
When it comes time to buy a home, there are five very important steps that you will go through. We’ll go through these five steps one-by-one and describe in detail what happens. Working with us, we’ll make our way from steps 1-5 and you’ll be a homeowner! How awesome :)
Before you start working with a Real Estate Agent to search for a home, we encourage you to obtain a pre-approval letter from your mortgage broker. This is a document that shows you are prepared and able to purchase a home. It is what makes you a serious buyer instead of someone just shopping around.
Pre-approvals are quick and easy, think of it like a physical exam of your finances. We’ll pull a three-bureau credit report, which gives us a credit score and credit history to look through. The credit history includes your payment history (hopefully you’ve been paying bills in full and on time!), lines of credit, and overall financial history. In addition, we’ll ask you for your bank account information, assets, debts, income and employment history, past addresses, and some other important details. This information allows us to calculate your debt-to-income and loan-to-value ratios, which are key components to the pre-approval loan amount.
It’s worth the short wait, because we’ll have a pre-approval letter valid for 60 days that allows you to begin your house hunting and offer submitting phase.
Don’t confuse the pre-approval letter with a pre-qualification -- they are very different things. A pre-qualification is nowhere near as accurate and is solely based upon information provided by you. Therefore, when you do submit an offer on a house, you’ll be at a disadvantage. The sellers want to know that your financing will go through, otherwise they just wasted a month trying to sell your their home. We definitely recommend going for the pre-approval increase your chances of getting an offer accepted.
2. Find the right home
If you don’t already have a real estate agent in mind, now is the time to find one! There is no reason for you to do this on your own, since you’re not paying for your agent - the seller is! If you don’t yet have a real estate agent that can work hard on your behalf, consider choosing me to be your agent. That’s correct, I am able to handle both the real estate purchasing paperwork and loans. This can make the process much smoother since you’ll only need to communicate with my team and I, instead of two separate entities.
Once you have an agent, you should start searching online through sites like RedFin, Zillow, or Realtor.com. Set your criteria based on your pre-approval amount, your desired locations, bedrooms/bathrooms, etc. As you browse the pictures and find homes you potentially see yourself living in, bookmark them and ask your real estate agent to set up showings. Your agent should work hard to book timely appointments, preferably condensed one after another on the same day. This way, you can be efficient in viewing the homes and narrowing the search down even further.
One you find a home you’d like to make an offer on, celebrate! But don’t celebrate too early, because depending on the market, many other buyers could be eyeing the house too.
Making the Offer
This can be the frustrating and nerve-wracking part, because it’s really up to the seller whether or not they want to accept your offer. You should work with your agent to come up with a reasonable offer. Your agent should do a CMA (comparative market analysis) for you, which will be a more accurate estimate of what the home will sell for. Don’t rely solely on RedFin and Zillow’s estimates, as they can be off by 8% in either direction. Your agent will advise you on a proper offer amount given the local market conditions. Ultimately, it is up to you to decide however.
The price is not the only thing you can negotiate on the offer. The second important aspect of any offer is the contingencies (or conditions) that need to be satisfied in order for the deal to go through. These are the three common contingencies that most home buyers will utilize:
Home Inspection contingency: this states that you can cancel the deal without repercussions, if you don’t like the inspection report findings. For example, If the roof needs to be changed and the seller does not agree to cover it, you may cancel. This contingency is known as the “ultimate” contingency, since it pretty much allows you to cancel for any reason. If you don’t like the direction the wind blows in the backyard, you may use that as the reason to cancel :)Appraisal contingency: If the appraisal comes in lower than the purchase amount, then you may cancel. Most of the time, the appraisal will come in at or a little higher than purchase price, thankfully.Financing contingency: If you are unable to secure the loan to purchase the house, then you may cancel. This is an obvious one that pretty much all offers will have (except all cash offers), since you need the money to actually buy the property.
The reason why you want to set these contingencies is to protect your earnest money. Earnest money is a deposit to the seller showing that you’re a committed buyer. Typically, buyers will give 1 or 2% of the sales price, but in hotter markets it can get even higher. Should one of your contingencies not be met, you are entitled to the full deposit back. However, if you just decide to cancel the purchase without any of these contingencies not met, then the seller can keep your money.
Once the offer is approved by both parties, both you and the seller will sign the purchase agreement. This is a binding offer, and you’re one step closer to closing! Awesome!
In order to secure a mortgage, you will need to submit a mortgage application along with documents to verify your information. Here is a long list of items we will be needing, taken directly from Investopedia.com:
Type of mortgage and terms of loan – The specific loan product for which you’re applying; the loan amount; terms, such as length of time to repay the loan (amortization); and the interest rate.
Property information and purpose of loan – The address; legal description of the property; year built; whether the loan will be used for purchase, refinance or new construction; and the intended type of residency (primary, secondary or investment).
Borrower information – Your identifying information, including full name, date of birth, Social Security number, years of school attended, marital status, number of dependents and address history.
Employment information – The name and contact information of current and previous employers (if you’ve been at your current position less than two years), dates of employment, title and monthly income.
Monthly income and combined housing expense information – A listing of your base monthly income, as well as overtime, bonuses, commissions, net rental income (if applicable), dividends/interest, and other types of monthly income such as child support or alimony. Also, you’ll need an accounting of your monthly combined housing expenses, including rent or mortgage payments, homeowners and mortgage insurance, property taxes, and homeowner’s association dues.
Assets and liabilities – A list of all bank and credit union checking and savings accounts with current balance amounts, as well as life insurance, stocks, bonds, retirement savings, and mutual funds accounts and corresponding values. You’ll also need to list all liabilities, which include revolving charge accounts, alimony, child support, auto loans, student loans and any other outstanding debts.
Details of transaction – An overview of the key transaction details, including purchase price, loan amount, value of improvements/repairs, estimated closing costs, buyer-paid discounts, and mortgage insurance (if applicable). (Note: The lender will fill in much of this information.)
Declarations – An inventory of any judgments, liens, past bankruptcies or foreclosures, pending lawsuits or delinquent debts. You’ll also be asked to state whether you’re a U.S. citizen or permanent resident, and whether you intend to use the home as your primary residence.
We will work with you to find and submit the right documentation. Expect lots of emails, texts, and calls from us requesting information - the timer has started and our goal is the help you close as soon as possible! Here is where the teamwork begins - when we request a document, the faster you send it, the smoother the process will be :) And sometime along this process, we will lock the interest rate for 30 days. Since the rates are always changing, we will choose the appropriate time to lock the rate for you.
Within three days of your application, you will receive a Loan Estimate. This document will include estimated closing costs, the interest rate, projected monthly payment, and any info on when the rate can change if it is an adjustable rate loan (ARM). It will also disclose if the loan contains negative amortization (the loan balance increases even with on-time interest-only payments) or if there is a prepayment penalty clause.
The loan estimate is a guide for you to know the costs associated with the loan, and to be prepared for it.
4. Loan Processing and Underwriting
By this stage, you’ve already done most of the work you’ll have to do. We will take the documentation you have provided us, and assemble a neat orderly package for the underwriter. The underwriter is a person at the lending institution who is the key decision maker. You want to be friends with this person. Unfortunately, you cannot be in contact with them, but hopefully they will see your ability and willingness to pay off the loan amount.
The following will be ordered at this stage:
Credit report (Needed but you’ll have done this for the pre-approval, which is great)Verification of Employment and Verification of DepositsHome appraisalTitle searchProperty inspection (if offer is contingent upon this)
Remember the package of documents we sent to the underwriter? They will closely examine everything we have submitted to see if you are eligible for the selected loan, and verify. The key things they are looking for is your ability to repay the loan and if you are a trustworthy buyer. They need to minimize their own risk, so no stones will be left unturned. Any delinquent accounts, past judgements, undocumented child support payments will be found.
After reviewing, the underwriter will normally need additional documentation that wasn’t needed before. This is called an approval with conditions. They will provide a list of further documentation needed, and we will submit these for further review. Sometimes it can open a can of worms and additional rounds of docs are needed. However, once these conditions are satisfied, you will have an approved loan!
We’re almost at the end of the process! Now, all we need to do is sign a huge stack of papers. Three days before the closing meeting, you will receive a Closing Disclosure to review. This is like a finalized version of the Loan Estimate your received earlier, and it should match up very closely! Laws prevent it from differing too much, so there won’t be much surprise here.
24 hours before the closing meeting, you have the right to do a final walk through of the home. You can make sure any agreed upon repairs are complete, the place is in good standing, etc.
Meanwhile, the loan documents will be drawn and sent to the title company. The closing meeting can either take place at the title company or through a public notary that travels to your home. On signing day, all you’ll have to do is sign every form needed. Note that you will need to bring two forms of ID, such as passport and driver’s license.
For most loans, closing costs will be rolled into the loan amount, meaning you will get less than the “actual” loan amount. These fees go towards paying for the cost of doing the loan, as well as prepaid fees. Prepaid fees are fees that go into an escrow account to pay for property taxes, mortgage insurance, and/or homeowner’s insurance, depending on the lender. We recommend bringing a checkbook just in case there are any small differences in the estimated balance owed and the final amount.
After the meeting is over, your involvement is complete! The rest takes place behind the scenes, when the title company records and funds the loan. The house is yours!!
We hope you found this summary of the home buying and mortgage process to be helpful. It is a long and complicated process, but the more you know and expect, the easier it will be. Of course, we will be fully guiding you throughout the process, so leave the stress in our hands. Cheers to your future real estate journey!
For an even more detailed, step-by-step guide provided by Freddie Mac, click here.