You’re probably familiar with some of the steps in the home buying process. You shop for your dream home, make an offer, go through a home inspection, and receive the keys. You know you’ll need a mortgage, but unless you’ve bought a house before, you may not know what’s involved.
Home loans are subject to a lot of regulations in the U.S., and most lenders have a rigorous approval process. As a result, there’s a lot of back-and-forth to get your loan approved and close on your home.
Buying a home can be stressful, but if you know what to expect, you can be more prepared. We’ll walk you through the steps to securing a mortgage so you know what’s involved and the timing of each step.
1. Pre-qualify for a mortgage
It’s easier to go home shopping if you know you’ll qualify for a loan — and know the amount you can potentially borrow.
To get started, you can pre-qualify for a mortgage. Pre-qualification is a quick process that you can usually do online. You’ll provide some basic information about your income, your desired loan amount, and the amount of your down payment. A lender will sometimes run a credit check–typically a soft credit check at this stage, which doesn’t impact your credit score–and tell you if you would qualify for the loan based on the information provided.
A loan officer will discuss your options with you, including different loan terms (such as a 15-year versus a 30-year mortgage) and interest rates. Interest rates can fluctuate, so it’s important to understand the rate may change by the time you’re ready to complete the application process and lock in your rate. Your locked-in rate will be the rate when you close on the home, even if the rate the lender offers changes before your closing date.
If you don’t have a lender in mind, you can start with a mortgage broker who will shop around on your behalf and find the best mortgage terms based on your financial situation. You can also look at local banks and credit unions. It’s best to work with an institution that can provide personalized service and understand your specific region and needs.
Multiply Mortgage is a mortgage broker serving the Denver and Boulder areas. For more information and to see interest rates, click here.
2. Pre-approval for a mortgage
People sometimes use the words “pre-qualification” and “pre-approval” interchangeably, but they’re two distinct processes. A pre-qualification gives you an estimate of how much you can borrow. A pre-approval goes a step further: the lender verifies the information you provide. It’s a lengthier process in which you’ll have to provide proof of your income, account statements, and other documentation.
The advantage is that if you obtain pre-approval, the lender will issue a pre-approval letter. While you’re home shopping, a pre-approval letter holds more weight than a pre-qualification. It shows a seller that you’re serious and have financing available. A pre-qualification is more like a “just browsing” step that you might do in the earlier stages of home buying.
Because the lender is verifying your information for a pre-approval, you’ll get a more accurate loan amount. Most lenders will do a standard pre-approval, but in more competitive markets, you may want to work with a lender that will do a fully underwritten pre-approval. A fully underwritten pre-approval incorporates everything from Step 4 in this article, with the exception of having made an offer or signed a purchase agreement with the seller. You’re doing the bulk of the work upfront but can fully assure the seller that you can obtain the loan. A lender might not give you a loan — even if you’ve received a standard pre-approval — if something arises during underwriting.
3. Submit an offer to purchase
Knowing the amount you can borrow, you can submit an offer to purchase. Your real estate agent will include your pre-approval letter to make your offer more attractive. If you’re relying on financing, your agent may include a contingency that you must receive a commitment from the lender to close the sale. If, for some reason, the loan falls apart during underwriting, the contingency lets you back out of the deal. Other contingencies may include a home inspection and that the house is appraised at the sale price. However, in competitive markets, you may need to submit an offer with no contingencies in order to be competitive.
If the seller accepts your offer, you’ll move forward with your lender. You’ll submit your accepted offer and finalize your loan application with the address of the property. At that point, the lender gets to work, locks in your interest rate, and gathers everything needed to close the loan.
4. Complete the underwriting process
The next phase of your loan can take several weeks, during which there’s a lot of activity. Your lender will order an appraisal to determine the value of the property and order title insurance, which is a policy to protect the lender against liens on the property.
You’ll also provide additional documentation to the lender. Until this step, it’s likely you’ve mostly worked with your loan officer. Now, an underwriter will get to work on your loan. The underwriter is responsible for verifying all financial information and following the lender’s guidelines. Some lenders will have all communication go through the loan officer; some will have your work with the underwriter directly. If you have questions, you can always direct them back to your loan officer.
There is typically a lot of back-and-forth as the underwriter combs through your account statements, pay stubs, tax returns, and more. You may need to explain items on your credit report. All of this is normal, as the underwriter needs to document everything for your loan file.
Once underwriting is complete, the lender will issue a commitment letter. The letter is an agreement between the lender and the borrower that you’ll receive a specific loan amount at specific terms. The commitment letter may specify certain conditions (such as additional documentation) that need to be met prior to closing.
Lenders also require homeowners insurance on the property. You’ll need to contact an insurance company in advance and provide proof that the policy will be effective as of the closing.
5. Close on your home!
Closing on a home purchase involves a lot of people: the sellers, the buyers, the real estate agents, an escrow or title officer, and the lender. You may even have attorneys involved.
The closing happens once the loan is ready: underwriting is complete, and the lender has received the appraisal and title insurance. The lender will prepare closing documents and send them to the closing location, which is often a title company (and additional people to coordinate). You’ll receive instructions in advance about your down payment, whether you need to wire the funds to an escrow account or bring a cashier’s check.
The closing process varies by state, but you can expect to sign your name on many, many documents. At the end, the lender will complete some internal post-closing steps and you can look forward to making your first payment!
