You’ve started saving and looking for your first home. Unless you’ve got a lot of cash at your disposal, you’re going to need to take out a mortgage loan to make it happen.
In this article, we’ll go over all the details of the mortgage approval process and the different options available, so you’ll be ready to apply for and select your mortgage loan with confidence.
First-Time Home Buyers Guide: Navigating the Mortgage Approval Process
1. Gather your Documents
The first step to readying yourself is to collect all your financial documents. We recommend scanning all your documents into a single folder so you can easily print and send copies in person and online.
Most banks will want to see your last 2-3 years of tax returns and W2/1099s, the last few months pay stubs, and proof of any assets. This can include your bank statements as well as your retirement statements, especially if you’re planning to pull any money from the latter for your purchase.
2. Check your Credit!
If you’ve read our previous articles, you already know the importance of having your credit score in tip-top shape before beginning the process toward home ownership.
Poor credit will affect your interest rates and can even disqualify you from certain mortgage loans entirely. More and more banks like Chase and Capital One offer free credit reports to their consumers. Sites like Nerdwallet.com offer monthly credit report updates in addition to tips on how to improve your score.
If you have poor or no credit, there may be an agency in your area dedicated to improving it. Seeking a professional service like this before your purchase might take time, but can save you thousands of dollars of interest later on.
3. Scope out your Options
Once you’ve gathered all your documents and know your credit is in good shape, it’s time to look at the different options you have available to you, and begin securing a pre-approval.
Thanks to the Internet, homebuyers have more mortgage options than ever before:
A mortgage broker is an expert in mortgages who has contact with a wide variety of different lenders and may be able to get you your best rate. Because they look at mortgages for a living, they know how to spot clauses in a mortgage contract that may cost you later. They can also be the gatekeepers to particular lenders who will only work with brokers and not buyers like you directly.
Applying for different mortgages will require a “hard inquiry” on your credit, which can temporarily lower your score by a few points; a mortgage broker could bring you a variety of potential lenders without repeated inquiries on your credit history.
If you do choose this route you may have an additional up-front cost to cover – the fee for their services. Weigh the cost against the potential savings you might receive.
Big banks like JP Morgan Chase and Wells Fargo offer a variety of different mortgage loan options and can get you a pre-approval efficiently.
The downside? Following the 2008 housing crisis, big banks have fallen under much stricter requirements and regulations when it comes to mortgage lending. Consequently, if you are seeking a low down payment option (under 10%) or have poor credit, you’re much less likely to get approved.
Some will have other requirements you might fail to meet even if your credit is great – for example, a big bank may require documentation that shows you’ve worked at the same job or industry for the last two years, or expect to see a lot of cash reserves (in addition to your down payment) stowed away in savings.
But if you’re confident about your credit and your eligibility for the loan, contacting a large bank directly can still be a great option.
Online Mortgage Options
Online mortgage loans now allow you to get pre-approved almost instantly. You can even grant access all your financial information through online portals.
The largest online mortgage dealer, QuickenLoans allows you to get a mortgage pre-approval within minutes and connects directly online to your financial accounts. They also offer down payment options as low as 1%. Websites like Lending Tree allow you to compare mortgage rates from a variety of lenders. Just keep in mind that these comparisons are based purely on the numbers you provide, and not the full details of your financial documents.
One huge upside of online lenders – they don’t have the same steep regulations of big banks.
Small local banks are another option worthy of consideration. Some local banks can be just as or even more flexible than the online options available, and will know much more about the local market.
If you’re interested in working with someone local, ask your real estate agent if they can provide any recommendations.
4. Selecting the Right Loan for you
There are a variety of mortgage loans available, some of which even offer as low as 3.5% down payment options. You can check out this comprehensive list of the different types of available mortgages mortgages.
When considering which is right for you, be wary of the interest rate.
Adjustable interest rates were a huge part of the 2008 housing crisis. When interest rates rose, many families suddenly found themselves unable to make their mortgage payments. If you’re considering an adjustable rate mortgage (known as an ARM) ask yourself if you could still afford the payments if your interest rate doubled.
If the answer is no, you might want to consider a fixed rate mortgage, even if your initial payments will be higher.
4. From Pre-Approval to the Real Deal
If you’ve successfully secured a mortgage pre-approval, you are ready to start shopping around for your home, but you still need to be diligent about your finances. Any large financial transactions between the time of your pre-approval and the time you actually move to bid on a home can cost you your loan!
If a relative plans on giving you a financial gift as part of your down payment, this will need to be documented and both parties’ bank statements will be scrutinized. Any car loans, large purchases on your credit cards, or changes in your salary or employment can also affect your loan eligibility. So just because you have a pre-approval doesn’t mean it’s a done deal yet!
Once it’s time to bid on your dream house, you’ll have to harvest up all those financial documents again.
If you’re bidding on a co-op, they may ask for even more than you’d anticipated. So just make sure you know where all your items are located – homeowners will often prefer bidders who’s documents look secure and who trust that the buyer will be able to close on the home quickly.
If you’re getting a loan from your 401K or receiving a down-payment gift from your relative, talk to your lender and secure these funds in advance to help your loan approval go as quickly and smoothly as possible. Also be sure to ask them about any fees (like loan origination fees) associated with getting your loan, so you know exactly how much money you need on hand when you’re getting ready to close on your home.
In this First Time Home Buyer’s Guide series, we will dig deeper into each of these sections and give you the lowdown on what to expect and do each step of the way.
- Section One: Overview
- Section Two: The Financials
- Section Three: What Do You Need/Want in A Home?
- Section Four: The Mortgage Approval Process
- Section Five: Starting Your Search & Selecting an Agent
- Section Six: Making an Offer (Tuesday, 10/24)
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