You’re finally ready to buy a home, but you’re a little daunted by the prospect. Here are ten easy steps to the perfect loan process!
Step One: Choose Your Lender
You have seven main choices when it comes to choosing a lender:
- A big name bank: If you have great credit and a high net worth, these are fine
- Local banks/credit union: Appealing if you want your financial products consolidated
- Online lenders: Rates are transparent, but customer service and preapprovals are iffy
- Retail mortgage banks: Higher commission fees due to experienced Loan Officers
- Mortgage brokers: Middlemen give you access to options but not personalized care
- Call centers/ direct mail lenders: A bad risk as they often aren’t above board
- Full service mortgage banks: Can deliver great rates and loan structuring advice
The lender you choose will directly affect your interest rate, fees, and loan programs you have access to. If you are a first time home buyer, look for a lender who can guide you.
Step Two: Get Preapproved
A preapproval isn’t the same thing as a prequalification. A “prequal” is a rough guess at what you might be approved for based on your say-so of what your credit, income, and assets look like.
A preapproval is a started loan application up to (and even sometimes including) the underwriting phase, so you can home shop with confidence knowing your loan is more than halfway to approved already.
Sellers take a preapproval more seriously than a prequalification. A preapproval means you’ve already supplied your documentation and credit to your lender, and it has been verified.
To get preapproved, you’ll need to give your lender proof of your identity, employment, income, and assets, fill out a loan application, and approve them to pull your credit. They can determine your debt to income ratio (DTI) and preapprove you for a set loan amount based on your predicted down payment and interest rate.
Step Three: Stay on Task
Once you are preapproved, you need to put the brakes on any financial activity that could lower your credit score or change your DTI ratio. Avoid multiple pulls on your credit, put off shopping for a car, and don’t open any new credit cards or take out a line of credit for your bank.
You’ll also want to maintain job and income stability. If you change jobs, show an uninterrupted income stream and tell your lender as soon as possible.Keep your loan application updated as new bank statements and paystubs come in.
Step Four: Make an Offer
When you find the home you want and you’re preapproved, you can go ahead and make your offer. Your agent can help. There’s really no excuse not to use a professional real estate agent, since the seller pays any commissions.
You’ll need to know the market, and tailor your offer to fit the circumstances. This could mean coming in a little under asking at first to give yourself room to come up. Alternately, you might want to make your best offer out of the box on a home just hitting a competitive market and hoping the buyer accepts it before a bidding war breaks out.
If buying a new home depends on selling one you already own, build a contingency into your offer that gives you an out if you can’t sell your old house before closing on the new home. Be aware this won’t work in a competitive market, but could be accepted in a slow one.
If the market is hot, and you want to judge a buyer into accepting an offer, you can waive contingencies like a home inspection, but this is a risky move. Better to include a lot of contingencies, then waive them all and keep the home inspection, especially if the home is more than a few years old.
If you do get into a bidding war, set a hard cap on your bidding and resist the temptation to go over. You’d hate to buy a home and not be able to keep up with the payments.
Step Five: Set Your Closing Date
When you negotiate the purchase and sale agreement, you will set a closing date and it will be included in your contract. If you don’t show up to closing with closing costs in hand and ready to sign, you default on the contract and the seller keeps your earnest money.
Usually, a closing date is set 30-45 days from the offer date. That doesn’t always mean you’ll get your keys and be able to move in right away. The seller may have included a clause to give themselves time to move out, or you may choose to rent the property back to them for a time while you settle your own affairs.
Step Six: Proceed to Escrow
You’ll need to have an escrow account to deposit earnest money into to get a seller to take the house off the market. You’ll also need to add money for things like your appraisal and inspection, prepaids like property taxes, and additional fees and closing costs. If you deposit enough into the escrow account, you may not need to add additional funds at closing. Just be aware that if the sale falls through on your end, you’ll forfeit those monies. If there is anything left in escrow after closing costs, you can apply it to your down payment.
Step Seven: Go Through Appraisal, Inspection, and Rate Locking
After you make your offer, things start to move quickly. Your lender can lock your rate, protecting you against jokes in interest. Your appraisal will be ordered, and you’ll need to arrange the home inspection as quickly as possible.
These steps keep taking you closer and closer to your closing date and a successful home purchase. You’ll still be within the time period that a contingency clause can get you out of the deal if something happens or you find out details about the home that make it a poor purchase.
Step Eight: Complete Underwriting
The underwriting process determines your final loan approval for the house you want to buy. Your Loan Processor sends your file to the underwriter, who reviews your documents even more closely, verifies the property’s value, and makes sure that the title search came back clean.
In some cases, you can have most of the underwriting process completed as part of your preapproval. Your lender can completely vet you, and all that will be left is the parts of the process that have to do with the property you make an offer on. This is a good plan in a competitive market or when you find a home you want to make an offer on before you even start the process.
Once underwriting is complete, if there are no problems found, your loan can be fully approved and you can look forward to closing. Ideally, your loan term, monthly payment, down payment, interest rate, and closing costs will line up with what you were originally quotes when you got preapproved for your loan.
Step Nine: Keep Communicating
As you continue through the home loan process, you’ll need to stay in constant communication with both your real estate agent and your ledner, Your LO, transaction coordinator, or loan processor should be updating you as your loan moves through the different phases.
If you’re asked for additional information, documentation, or action, be ready to comply as swiftly as possible. There are a lot of people and moving pieces involved such as the appraisal, the inspection, and the title search. Your job is to be available and responsive.
Step Ten: Be Ready For Closing
Finally, it’s closing day! Here’s what you need to do to get through closing:
- Make sure your down payment was received
- Check to make absolutely sure what funds you need to bring for closing costs (if any)
- Compare your Closing Disclosure to your original Loan Estimate and look for errors
- Be ready to sign (or e-sign) your final loan documents
You’ll either get you new house keys at closing, or on a preset date defined in your contract. Either way, you’ll have successfully navigated the home buying process. Congratulations!
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