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If you’re planning to buy a home in the near future and need a mortgage to finance it, you’ll want to gain a better understanding of the mortgage process. There’s quite a laundry list of events that take place from the moment you start looking for a home to the moment you get final mortgage approval.
Let’s go over your mortgage application to-do list to help you get familiar with what’s required of you.
1. Understand How Much You Can Afford
Before you apply for a mortgage or even start the house-hunting process, you may want to find out what you can afford in a home purchase first. There’s no sense in looking at homes that are well over your budget, only to find out that you can’t get approved for a mortgage to finance the purchase. Instead, get a clear idea of what your finances can handle before you start your search for a new home.
To do this, you’ll need to create a budget and clearly understand what your expenses will be relative to your income. More specifically, consider the following expenses related to buying and operating a home:
- Down payment
- Closing costs, such as lawyer fees and real estate commissions
- Maintenance costs
- Monthly house-related expenses, including your mortgage payments, home insurance, property taxes, utilities, and so forth
- Current debts, such as car loans or student loans
- Current spending habits
Take a tally of all of these expenses and compare them to what you bring in every month. Ideally, you should have plenty left over after all of your bills have been paid so you’re not strapped for cash and left “house poor”.
There are two ratios you should calculate, which your lender will also want to assess before they agree to approve your mortgage application:
Gross Debt Service (GDS) Ratio. This number is a measure of your gross income relative to your mortgage expenses, such as the principal, interest, and property taxes. Your GDS should be no higher than 28% to 32%, depending on your exact situation and the lender you’re working with.
Total Debt Service (TDS) Ratio. This number is a measure of your gross income relative to all of your debts, and not just your mortgage. This can include things like car payments, credit cards, and personal loans. Your TDS should be no higher than 37% to 40% of your gross income, depending on your situation and the lender you’re dealing with.
2. Get Pre-Approved
Once you understand how much of your income is currently covering your current debts, as well as what you’d need to add a mortgage to the mix, you should speak with a mortgage specialist and get pre-approved for a home loan.
A pre-approval allows the lender to evaluate your borrowing power. They’ll look at a variety of documentation related to your financial health, such as your bank statements, tax returns, pay stubs, letter of employment, and statement of assets and liabilities.
The lender will also perform a credit check to see what your credit score is and to review your credit report. Your credit standing will play a key role in your ability to secure a mortgage.
Based on all this information, your lender will determine whether or not you can get approved for a home loan. If you do, your pre-approval letter will also detail what type of interest rate you can get and the maximum loan amount you can get approved for.
Getting pre-approved for a mortgage is useful for many reasons:
- It will tell you how much you can spend on a home purchase
- It will help you narrow down the properties you visit that fit within your budget
- It shows sellers that you’re a serious and qualified buyer
- It will help speed up final approval after you’ve bought a home
Keep in mind that a pre-approval does not guarantee that you will get final approval after your offer on a home is accepted by the seller. If anything changes in your financial life from the time you get pre-approved to the time you need to finalize a mortgage — such as a job change, a decrease in salary, or added debts — the lender may have to start the process over.
Further, pre-approvals are only good for so long and don’t last forever. Generally speaking, your pre-approval letter will likely expire after 60 to 120 days, depending on your lender.
Get A Mortgage Broker
While you can always approach your local bank branch to get a mortgage, they’re not the only source for financing a home purchase. In fact, you may want to consider other options when it comes time to apply for a mortgage.
Mortgage brokers are independent specialists who help buyers get the financing they need to buy a home. Unlike banks, mortgage brokers do not work for one specific financial institution. Instead, they work with a network of lenders, which means you’ll have plenty more options when it comes to who you work with and the types of mortgage products you have available to you.
Rather than working for one particular lender, mortgage brokers work for you. That means they have your best interests in mind and are not simply trying to earn a profit for the lender. And borrowers do not have to pay mortgage brokers for their services. Instead, brokers are paid a commission from the lender that you end up getting a mortgage with.
You can use your mortgage broker to find a lender who will give you a mortgage with the best terms and lowest interest rate to help you save money over the long run. Otherwise, you can always conduct an online search for a mortgage lender and compare their rates and terms.
You can start working with a mortgage broker right away to help you get pre-approved and to find a lender who can accommodate your specific situation.
3. Go House Hunting
Once you know how much you can afford to spend on a home purchase, you can start the hunt for your new home. Team up with a seasoned real estate agent who is familiar with the area that you plan to buy in. Try to visit several homes to compare each instead of settling for the first home you fall in love with.
When you find a home you love that checks all the boxes, it’s time to make an offer. Your agent will compare the sale price of other similar properties in the area that have recently sold to help you come up with a fair and sound offer price that accurately reflects the home’s current market value.
You may also want to include some conditions in your offer that must be fulfilled before the deal is sealed, such as a home inspection or financing condition. This will make the sale “conditional”. These conditions will give you a chance to have the home inspected by a professional and to ensure you can get final mortgage approval before the deal closes.
If these conditions are not satisfied before a certain date, the deal will fall through. These clauses are meant to protect you so you don’t get stuck with a home that you can’t afford or that may have issues with it. There are other contingencies that you may want to explore, depending on your situation and needs.
When you make an offer, you’ll also have to offer a deposit, which goes towards the down payment of the mortgage. The deposit is meant to secure your offer on the home and show the seller that you’re serious and have the financial means to go through with the deal.
Generally speaking, the deposit should be at least 5% of your offer price, though this may vary depending on where you’re buying.
4. Apply For a Mortgage
If you include a financing condition on your offer, you’ll have a few days to get final mortgage approval before the deal is sealed. As soon as the seller accepts your conditional offer, it’s time to apply for final mortgage approval with your lender.
If you’ve already been pre-approved, the lender will have most of the information needed about your financial situation. Now, they’ll just need a few more things, such as the purchase agreement.
The lender will want to know how much you agreed to buy the home for before they extend a mortgage to you. They’ll also want to verify what the home is worth according to current market conditions.
To do that, they’ll appoint a professional appraiser who will appraise the property and determine exactly what the home is worth. As long as the home’s value is determined to be right around what you agreed to pay for it — and everything about your financial profile checks out — the lender should approve your home loan application.
Consider the differences between bi-weekly and monthly mortgage payments.
5. Supply All Required Mortgage Documents
The following are the types of documents your lender may wish to see when you apply for a mortgage:
- Letter of employment
- Recent tax returns
- Notice of Assessment
- Bank statements
- Pay stubs
- Statement of assets and liabilities
- Agreement of Purchase and Sale
- Photo identification
This list is not exhaustive. Depending on your situation, you may be asked for other documents to help the lender fully assess your financial health.
Many of these documents can be given to your lender when you get pre-approved. Once you’ve agreed to buy a home, you’ll need to follow up with additional documents, including the real estate contract.
6. Mortgage Underwriting Process
The underwriting process simply involves your lender verifying your income, assets, debt, and details of the home you are buying based on all the documents you’ve provided. This information is important for the lender to determine whether or not to issue final approval for your mortgage.
More specifically, mortgage underwriters assess your credit history, assets, and the loan size needed. They’ll also make an educated assessment of the likelihood of you being able to repay the loan in full by the due date. In fact, it’s the job of the underwriter to determine the value of the risk, which is at the crux of loan approval and the establishment of a mortgage interest rate.
Once all information has been received and assessed, it should take no more than 3 or 4 days to make a decision about loan approval. That said, more complicated scenarios could take much longer.
Don’t Forget Closing Costs
Closing costs include all the fees and charges associated with buying a home and taking out a mortgage. You’ll be responsible for covering these closing costs upfront, so you’ll need to budget for them. Generally speaking, closing costs account for anywhere from 2% to 5% of the sale price of a home.
Closing costs can include any of the following:
- Down payment
- Lawyer fees
- Real estate commissions
- Title search and insurance
- Appraisal fees
- Underwriting fees
- Home inspection
- Land transfer taxes
All these costs will be included in a closing disclosure provided to you by your lender. This will give you enough time to look over all costs before you finalize the mortgage.
What Happens if Your Lender Rejects Your Mortgage Application?
There could be a number of reasons why your mortgage application gets denied. Maybe the home appraised too low, or perhaps your financial situation has changed. Or your credit score may be too low for your lender. Regardless, you may have some recourse. More specifically, your lender may offer to do any of the following to help you get approved:
- Approve you for a lower loan amount (which requires a higher down payment)
- Charge higher interest
- Require a co-signer
What credit score do I need to get a mortgage?
Should I use a mortgage broker?
How long does a pre-approval lock in an interest rate?
If you’re ready to apply for a mortgage to buy a home, be sure to partner up with a seasoned mortgage specialist who can help you navigate the mortgage application process. These professionals can help you pair up with the right lender who can provide you with the mortgage product you need that suits your financial situation, thereby improving your odds of a successful home purchase.
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