The home buying process can be an exciting one, but it can be daunting as well. Making a wish list for features of a home, then finding that home, placing an offer, having the offer accepted, doing inspections on the home, and then finally calling that home your own can be nerve wracking.
And that’s just one half of the home buying process.
Getting approved for a mortgage — that other half — is the part most people dread. There’s tons of paperwork to fill out, documents to dig up, and choices to make based on what can seem like complicated numbers. But no part of the home buying process should be dreadful, and getting a mortgage doesn’t have to be, either.
Getting approved for a mortgage is the most important part of the whole process. Unless you have cash to pay for the entire cost of the home, you’ll be using a loan to help you finance your purchase. That’s why spending the time and putting in the effort to prepare yourself for a mortgage approval will go a long way in reducing stress and anxiety. The more prepared you are, the smoother the entire mortgage process will go.
Follow this general guideline to getting approved for a mortgage, and you’ll be able to avoid any surprises and extra stress during what should be an exciting time.
Step #1: Get Your Pre-Approval
It’s natural to want to jump right into the home buying process by browsing a list of homes for sale on a popular website, going to open houses, or visiting homes during a private appointment with your real estate agent. But the easiest way to avoid disappointment in the home search process is to figure out first how much of a home you can afford, how much you’re comfortable spending each month, and then what that means in terms of a home’s final sales price.
The easiest way to do this is to get a mortgage pre-approval. This is a document the mortgage company will give you before you start your home search. The pre-approval will tell your real estate agent — and any seller’s real estate agent — that you have been preliminarily approved for a mortgage up to a certain amount. They’ll then know that you’re qualified to buy the home you’re browsing.
The pre-approval process is quite simple.
The mortgage company will run your credit using your Social Security number and will ask you to fill out some paperwork with your general income and debt information. There’s no commitment to lend at this time.
Some mortgage companies, such as Embrace Home Loans, go a step further and offer a program called Approved to Move™. This takes the process to the next level, providing a fully underwritten approval to help you avoid the potential pitfalls of a mortgage between the time when a seller accepts an offer and when the deal is officially closed.
More on that in a bit.
The Approved to Move™ program will verify all your documents and not just run a quick credit check — ensuring the “pre-approval” document you take with you on your home search is a rock-solid approval.
Step #2: Get Your Documents in Order
Whether you get an Approved to Move™ document or go the standard pre-approval route, you’ll need to gather the same documents for your mortgage company. The only difference is with Approved to Move™, these documents will be required up front, while with a standard pre-approval, the mortgage company most likely won’t request the documents until after a seller accepts your offer on their home. This is another reason why Approved to Move™ is so advantageous: There’s no chance of having a deal fall through because your mortgage didn’t close, because you won’t be making an offer on a home until your approval is fully underwritten. There is still a chance, however, that a loan could fall through after an appraisal.
So what documents will you need for a fully underwritten approval?
In addition to providing your Social Security number for a credit check and providing basic information about yourself such as name, date of birth, current address, and employment details, you’ll need to gather some other documentation. These documents include:
- Statements for all checking and savings accounts
- Copies of tax returns, usually for the last two years
- Pay stubs and W2s from your employer, if you’re a salaried worker
- Statements for asset accounts, such as mutual funds, stocks and retirement accounts
- A list of your debts, with the total outstanding balance and your minimum monthly payments
Your mortgage company will ask you for this list of documents up front. As they begin the verification process, they may ask you for clarification on a few items or ask you to provide a few additional documents. With all this in hand, the mortgage company will be able to make a determination on what they are willing to lend you based on certain factors, including, but not limited to:
- Your total income
- Your debt-to-income ratio
- Your credit score
Step #3: Choose the Type of Loan
Once the mortgage lender examines your entire financial picture, they will present you with a few options. A conventional mortgage may be offered to you if you meet the standards for credit score and income ratio, and if you have a decent-sized down payment.
If you don’t intend to put that much down, or if your other information doesn’t meet conventional loan standards, no need to fret. There are other loan programs available.
- An FHA loan might be good if you have a lower credit score, and it allows you to make a down payment as low as 3.5%.
- A USDA loan could be good if you have a low- or moderate-income and if you are buying a home in a rural area.
- A 203(k) loan could be good if you’re buying a home that needs some work and you want to finance the cost of the improvements in the same loan as your mortgage.
Some of these non-conventional loan types may require you to pay what’s called Private Mortgage Insurance (PMI), though, so make sure you find out all the costs associated with each type of loan program and then pick the one that’s right for you and your family. There is no PMI, however, for FHA and USDA loans.
Step #4: Select Your Home and Make Your Offer
Once you have a fully underwritten Approved to Move™ document in hand, you can search for the homes that fit the financial criteria outlined in your approval. Your real estate agent will help you find that home and make an offer that is both good for you and for the seller as well.
Once your offer has been accepted, your real estate agent and the seller’s agent will set up a projected closing date. This is the day when you’ll sign the official documents that make the home legally yours. If you went with a standard pre-approval and not Approved to Move™, you’ll want to immediately start the underwriting process with your mortgage company so everything can get finalized well in advance of your closing date.
Also, during this time period there must be an appraisal conducted, as well as possible inspections of the home and any re-negotiation of the sales price depending on what’s discovered in the inspection.
Step #5: Close on Your Home
Once the mortgage is fully underwritten, all you need to do is show up on the closing date with your down payment in hand. You’ll be greeted by your mortgage loan officer as well as your real estate agent and the buyer and their real estate agent as well.
Once you sign all the documentation, the home will officially be yours.
Having a mortgage company that you can trust every step of the way can help make the home buying process that much more enjoyable and allow you to focus on what you’re most interested in – finding the home of your dreams.
At Embrace Home Loans, we have more than 35 years of lending experience and many types of loans to fit just about any buyer’s needs.