The mortgage loan process can be daunting for first –time home buyers. Scary as it seems, the process involves seven basic steps. Knowing more about these steps will alleviate stress and help you make better decisions.
Here’s a summary of the seven steps:
1. Shopping for a lender
You’ll find different lenders charging different amounts for things like origination fees, interest rates, points, and more. Rather than look at individual costs, look at the APR or Annual Percentage Rate. This is a different way of calculating the interest rate because it factors in all closing costs. Interest rate and APR should be the same only when a lender isn’t charging closing costs. This is unusual, so expect to encounter basic fees including origination fee, credit report fee, home inspection fee, and fees to prepare documents. Consider working with a reputable local lender who’s more familiar with the local market, local laws and other important issues.
2. Choosing a mortgage type
Many loan programs are out there and lenders can provide more information about them. The two most popular are fixed rate and adjustable rate mortgages (ARM). Lately FHA Home Loans are becoming more and more popular. Monthly payments on fixed rate mortgages never change during the loan term which is typically 15 or 30 years. Monthly payments on ARMs fluctuate up or down based on the movement of the index to which the mortgage is tied.
3. Submitting an application
A mortgage application is where you provide the lender with your personal, employment and financial information. Complete this after you’ve chosen a lender. From there the lender calculates your debt-to-income ratio, gets your credit score and determines the mortgage programs you qualify for and should pursue based on your financial situation and home-buying goals.
4. Getting preapproved
If a review of your application is favorable, your lender will generate a letter that virtually guarantees it’ll lend you money to purchase your new home. This letter is an excellent negotiating tool because it shows sellers you’re a qualified buyer.
5. Application processing
This step involves the lender verifying all the information provided on your mortgage application. Be sure to provide whatever documentation the lender needs to complete this step.
6. Underwriting/Final loan approval
Once you’ve selected a property, the lender’s underwriting department will review the appraisal to ensure it’ll retain its value in the event you default and the lender foreclose on it. The underwriters also review the survey for any encroachments. If none are found, they’ll approve the survey. They may also require certificates for insects like termites and depending on the property’s location, may require flood certificates.
7. Loan Funding/Closing
The closing date is when buyers and sellers get together to sign a pile of paperwork. Once signed, it’s returned to the lender for verification. At this point the lender determines the final funding amount and releases the funds so the purchase can be completed.
After that, you’re handed the keys to your new home!