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Mortgage 101

Goal

The mortgage process can feel tedious, but this guide will outline the groundwork buyers need to prepare for homeownership. Buyers will learn exactly what to expect during the mortgage process, the types of home loans available, how to qualify, and how long the entire process will be. Additionally, buyers will get a snapshot of their closing day and professionals they will need during and after the home transaction to keep their investment protected and up to date.

Overview of the Mortgage Process

Buying a home is an exciting journey and understanding the mortgage process will help buyers prepare for homeownership. The first step in the process is filling out a mortgage application, which requires documentation relating to the buyer’s personal information and finances. Documents buyers will need to have handy include:

  • Income and employment history
  • Tax returns
  • Marital status
  • List of dependents
  • Assets and investments
  • Debt and liabilities
  • Property address
  • Social security number to check credit

A lender will likely request a home appraisal to determine the property's value based on current market conditions. If the value is less than the loan amount, the lender can adjust the loan without losing money. A home inspection will need to be scheduled as soon as possible to fix any issues. A lender will also require proof of insurance before the home loan can be fully approved.

One of the final steps in the mortgage process is paying the down payment with either a cashier’s check or a wire transfer. Be sure to read over all documents and ask any last-minute questions. After the final paperwork is signed, buyers will receive the keys to their new home!

Types of Loan Programs and Approvals

Before buyers settle on a home, it helps to know which type of home loan will help them obtain their dream home. There are several options to choose from with both government and non-government assistance. The following loans are available for financing:

Conventional:

  • Governed by Freddie Mac and Fannie Mae
  • Under strict guidelines and requirements
  • 5%-20% down payment
  • 680+ credit score
  • May be required to pay private mortgage insurance (PMI)

FHA:

USDA:

  • Governed by USDA guidelines
  • 0% down payment
  • 620+ credit score
  • May be required to pay PMI
  • Available for those in eligible rural areas

VA:

  • Governed by the Department of Veterans Affairs
  • 0% down payment
  • 620+ credit score
  • No PMI needed
  • 2.5-3.3% processing fee
  • Available for veterans, active service members of the military, and their eligible spouses.

After the right loan is chosen, buyers must obtain approval to determine how much home they can afford. A prequalification gives buyers an idea of what they can afford. This does not require a credit score or application, and can be obtained in as little as 30 minutes. A pre-approval lets buyers know exactly how much they can afford. Because this approval is more accurate, it requires a full review of the buyer’s credit report, financial history, and application. An approval will be sent to the buyer within 3 days.

How Do Buyers Qualify?

Lenders will consider several factors to help buyers qualify for a home loan. This includes:

Credit History: Three credit bureaus will send their reports over to lending agencies that break down the buyer’s overall credit health. The higher the credit score, the better the interest rate and loan type.

Income Capacity: Lenders will calculate the buyer’s taxable income against their debt. This determines how the buyer will pay back the loan over time and which factors could interfere with on-time loan payments.

Collateral: Lenders will take into account the down payment and all available funds, including savings, investments, properties, and other assets, that could be sold to secure the repayment of the loan.

For buyers looking to qualify for government assistance, USDA and Veteran Home Mortgage Assistance loans are the best options. For more information, visit our Government Assistance quick guide.

Importance of a Credit Score

Lenders look at a buyer’s credit history to uncover their relationship with past loans. If buyers have a very short credit history or don’t have one at all, a lender has no way of knowing if they’ll pay on time or default. Buyers with a credit history of on-time payments are more likely to obtain a loan. Contrarily, if buyers have outstanding debt, lenders may be hesitant to offer more credit. Additionally, lenders may offer a lower or higher interest rate based on the buyer’s credit health.

What to Expect on Closing Day

Closing day is the final step to becoming a homeowner. Closing costs and fees must be paid with a cashier's check or proof of wire transfer for the exact amount needed to close. Closing usually takes place in an escrow, title, or attorney's office. If requested and allowable, a mobile notary may be provided for a fee. The following people typically attend the closing:

  • Buyer and Co-Borrower(s)
  • Buyer's Real Estate Agent
  • Sellers and the Seller's Real Estate Agent
  • Closing Agent
  • Escrow Officer

The closing agent will list all the money owed between the buyer and the seller, such as remainder of down payment, prepaid taxes, etc. Buyers will be asked to sign documents that confirm they agree to the terms of the loan, as well as a number of affidavits and declarations that legally bind the buyer to the agreed upon financial obligations. The seller will then sign a deed and transfer ownership of the property over to the buyer. Once all the financial and legal contracts have been signed, the settlement agent will transfer money to the seller. After all the lines are signed, it’s time for the buyer to move in!

Consider Third-Party Services

Third-party services are necessary to ensure the home maintains its condition. Required inspections and services can vary depending on property location and loan program. Here's a list of some of the third-party services buyers may need:

Home Inspection: A home inspection will determine if there are any problems or issues with the property. These are not always required, but highly recommended and should be conducted by a licensed real estate inspector.

Homeowners Insurance: This is also referred to as hazard insurance and is required. It is best to have this done prior to closing.

Appraisal: The appraisal is a required assessment of every mortgage and provides the buyer and lender with a fair value of the property. Appraisals are conducted by a licensed third-party professional.

Termite & Pest Inspections: Have a licensed pest inspector check the home for termites and other pests to ensure there are no issues with the siding, attic, and basement.

Conclusion

There is a lot that goes into the mortgage process, but it shouldn’t be stressful when buyers have the right team behind them. From finding the right lender to deciding which home loan is best, buyers can rest assured their needs will be met when working with HomeHunt. Contact HomeHunt today to get started!