Applying For A Mortgage
Your 4-step guide on how to apply for a mortgage
Applying for a mortgage is the first step to take when getting serious about buying a home. It will help you understand how much house you truly can afford. Get ready for the application process by gathering your financial info, finding a lender to work with, and getting pre-approved. You can always shop around and pick another lender once you get an accepted offer.
Mortgage loan pre-approval means approaching a lender with financial, credit, debt, and other information that will help them determine if you qualify for a loan at a certain amount.
There are four essential steps involved with mortgage pre-approval:
- Gather financial information
- Select a lender
- Get a mortgage pre-approval
- Close to your home
This article will give you an idea of how to get pre-approved for a mortgage and why pre-approval is important for buying a home. If you are not sure if buying a home is the right thing for you then I encourage you to check out my article on The American Dream (Nightmare) first.
If you are a business owner, especially in the earlier stages of your business, then take a look at my post Self Employed Mortgage for tips on how to get a mortgage as a business owner.
How to get pre-approved for a home loan
Step 1: Gather financial information
Before heading to your lender’s office, gather and prepare the following financial information:
Credit Information: Your credit score and reports will determine the size of the loan you may qualify for and the type of financing plan you will be offered. For example, a borrower with a credit score below 740 will usually have a higher interest rate associated with their loan. A borrower with a score below 580 will usually have to put down a higher down payment.
Pro Tip: Check your credit score for free with credit.com.
Debt Information: Gather and prepare any of your debt obligations. This includes student loans automobile loans, and credit card payments.
Pro Tip: If you have a significant amount of debt, the amount that you’re pre-approved will likely be smaller or rejected. Before applying for your pre-approved mortgage, try paying off your debts and minimize the number of new debts you take on.
Income Information: Gather and prepare income information from the previous two years. This includes tax returns, W-9s, pay stubs, and additional income information (from second jobs, overtime pay, social security payments, alimony or child support payments, etc.).
Asset Information: Asset information refers to assets you own other than your income. This involves gathering bank statements, property statements, investment information, and money received by family members.
Personal Information: Bring a personal ID such as a driver's license or passport and your social security number to your lender’s office.
Employment Information: This includes your proof of employment and the length of time you’ve been with your employer.
Budget Information: Before going to see a lender, determine your budget for buying a new home.
Pro Tip: Your total housing payment budget should not exceed 35% of your pre-tax income. The ideal percentage is 25% of your pre-tax income.
Step 2: Select a lender to work with
There are two types of lenders you can work with (1) big lenders (aka the bank) or (2) small lenders (aka small, community banks or small mortgage lenders).
There are pros and cons associated with each type of lender:
Pros of big lenders:
- Security: You can trust that big banks will protect your sensitive information as it’s a crucial part of their reputation.
- Customer support: Banks usually offer 24/7 customer support.
- Availability: Making an appointment for a loan will be easier with big banks as they have a larger number of loan officers available.
Cons of big lenders:
- Rates: The rates of the big banks are usually higher than the rates at small loan offices.
- Approval: Banks have a specific ‘credit model’ that they like to use as a guideline for approving people looking for loans. You may have a hard time being approved for a loan by a big bank if you don’t fit this ‘credit model.’
Pros of small lenders:
- Rates: Small lenders tend to have better rates than the big banks. Furthermore, smaller lenders generally let their customers exit early. In other words, small lenders allow their customers to pay off their mortgages early and either sell their houses or find a better mortgage.
- Approval: Small lenders will generally approve loans to freelance workers, property investors, or someone who doesn’t fit the bank's credit model.
- Customer Service: Small lenders provide more personalized customer service and usually have faster response times.
- Specialized Financing: Smaller lenders offer more specialized financing options than big banks. For example, if you’re looking for a small mortgage, most big banks won't accept your application because it’s not worth their time. The smaller lender, however, will be happy to work with you.
Cons of small lenders:
- Vulnerability: Due to their size, small lenders are more sensitive to market fluctuations.
- Availability: Smaller lenders may not have as many available lenders as the big banks.
Should I get pre-approved by multiple financial institutions to compare rates?
- Yes, because you can still shop rates before locking into a rate and accepting an offer. Research different lender’s reputations, search for their past clients, read their online reviews, and give them a call to get a ‘feel’ of whether or not you want to work with them.
Step 3: Get pre-approved
Most first-time home buyers are confused about the pre-approval process. So, to clear things up, we answer “how to get pre-approved for a mortgage” and the 6 other common questions first-time home buyers ask about mortgage pre-approval:
1. How do I get pre-approved for a mortgage?
- Gather Documents: Gather the necessary documents (as listed in step 1).
- Organize Documents: Create a Google Drive or Dropbox where you can organize all information in one, easily accessible place.
- Contact a Lender: Call, go online, or visit a loan office/bank. The loan officer will review your documents and give you a preliminary estimate of how much house you can afford, your monthly mortgage payments, and your mortgage interest rate.
- Find out if you’ve been pre-approved: You will receive a pre-approval letter that secures your interest rates for the next 90-120 days (more on this below). On the other hand, your lender will notify you that you have not been pre-approved.
2. Why get pre-approved for a mortgage?
Benefits of Pre-Approvals:
- Accurate: The best pre-approvals will give you an accurate idea of how much house you can afford. Furthermore, you’ll get an idea of your monthly mortgage payments and your short-term mortgage interest rates.
- Protection: When you apply for a mortgage pre-approval, there is usually a 90-120-day protection against rising rates. In other words, pre-approvals lock in interest rates and allow you to search for a home without worrying about interest rates increasing significantly.
- Trustworthy: A pre-approved mortgage signals to sellers and real estate agents that you’re serious about buying a home.
- Advantage: A pre-approved mortgage may be the deciding factor between you getting a home over another home buyer.
- Free: Getting pre-approved for a mortgage is free, and there is no obligation to use the lender that pre-approved your mortgage.
3. What is the difference between pre-qualification and pre-approval?
- Pre-qualification: During the pre-qualification stage of securing a mortgage, a lender will interview you to determine your income, expenses, and assets. The purpose of getting pre-qualified is to give you a rough estimate of how much house you can afford.
- Pre-approval: During the pre-approval stage of securing a mortgage a lender will look through your income, expenses, and assets more thoroughly. A pre-approval is a more concrete estimate of how much house you can afford.
4. What if I don’t get pre-approved for a loan? Now what?
If you don’t get pre-approved for a loan, your lender can tell you why you were rejected. Lenders can also offer advice on how to get approved in the future.
For example, you may have to:
- Build Credit: If bad credit was the reason you aren't pre-approved, then pay off your credit cards and try not to miss your debt payments for the next 6-12 months.
- Build Savings: Lenders usually want to see a significant amount of cash reserve in your savings account. Again, pay off your debts and try to save some money before applying for a pre-approval again.
- Build Income: If your lender says that you don’t make enough income for a certain loan amount, either try applying for a smaller loan or, if you're married, ask for a joint loan with your spouse.
- Build Employment History: Usually, lenders don’t like to see inconsistencies in employment history. Wait until you’ve been at the same job for two years before applying for a loan.
5. Does pre-approval guarantee a loan?
Pre-approval does not guarantee a loan. It is only a review of your qualifications for how much you might be able to borrow.
Buyer receives their pre-approval letters, search for their dream home within their pre-approved amount, have their offer and financial structure accepted by the sellers, and then submit their proposal to the lender.
The lender then reviews the proposal, the buyer’s finance details, and the details of the property. If everything goes smoothly (i.e., the home doesn’t look like a money pit), the buyer will be approved for a mortgage.
However, the pre-approval letter alone does not guarantee a mortgage.
6. How long does it take to get pre-approved for a mortgage?
Depending on who you’re working with, you can get pre-approved for a mortgage in minutes. Sometimes all it takes is a phone call.
7. What impact (if any) will this have on my credit?
The short answer here is that it depends.
As mentioned above, lenders will look at your credit score and history to determine if you’ll be pre-approved. These are called credit report inquiries.
First-time home buyers usually don’t have to worry about inquiries damaging their credit score. However, the more inquiries your credit history shows, the more it can damage your credit score.
Inquires hurt your score because it shows lenders that you could be doing something with your credit that puts you at risk.
Step 4: Close on your home
Once you’re pre-approved for a mortgage, you can start the process of searching for a home, within your pre-approved amount.
The process of closing your home looks like this:
1. Application: The mortgage application involves submitting the documents outlined in step 1.
Time it takes: 1 day
2. Loan estimate: The lender analyzes your financial information and produces a loan estimate. A loan estimate describes the details of your loan including the terms and the predicted costs associated with your loan.
The loan estimate does not tell you if you have been approved for a loan. It simply estimates what your loan would look like if you’re approved and will help you determine if you would like to move forward with the mortgage application process.
Time it takes: The law states that you must receive your loan estimate 3 days after submitting your mortgage application.
3. Open a file: Your file is submitted to a loan processor who analyzes your financial documentation and property information. The loan processor places all this information into a loan package that is to be submitted to the underwriter.
Time it takes: 1 day
4. Loan underwriting: An underwriter analyzes your loan to determine the risk of approving your mortgage. Essentially, the underwriter is the key decision maker and determines if you’re a good candidate for a loan based on the likelihood of you paying your mortgage each month.
The duties of an underwriter:
A. Assess: The underwriter assesses your risk by verifying that your credit, debt, income, and savings information is true. For example, they may call your employer to confirm that you do work x amount of hours and are paid x amount of dollars.
B. Appraise: This is where the underwriter determines if your desired property’s price is comparable to the prices of similar properties. The purpose of the appraisal is to determine if the money you would like to borrow matches the value of the home you would like to purchase. If the appraisal is less than the loan amount, the underwriter will usually disapprove the mortgage or suggest another loan amount.
C. Approve or reject: The underwriter considers all this information and then approves or rejects your loan application.
Time it takes: 1-7 days.
Pro Tip: The underwriting process generally takes longer and requires more documentation if you’re self-employed.
5. Mortgage Commitment: If the underwriter approves your loan, you are officially locked into an interest rate.
Time it takes: 2-4 days
6. Closing: This is the step in the home-buying process where you sign all the necessary documents to own the home officially.
As you can see, it can be a bit of a process, but that is the simplicity of it all too. Just follow the process and the rest should fall into place.
Happy house hunting!
Cheers,
Derek
