So you're beginning to embark on your homebuying journey and wondering how to get a mortgage?
Well, you're in the right place as we've broken down the process, step-by-step, from pre-qualification and pre-approval, rates and loans, and more.
Credit reports don’t have your score.
To get a preliminary estimate of your buying power which you can compare to your final pre-qualified amount; this will also enable you to play around with inputs like your other monthly debt payments (car, credit card, student loan), property taxes, and down payment amount to see how they impact your buying power; for instance, using extra cash to pay down debt could increase your buying power, and you may want to do that before continuing on your homebuying journey; use the US Bank Calculator.
A pre-qualification is not a pre-approval! During a pre-qualification, a lender will provide you an estimate of your maximum loan amount based on your self-provided information. They will not do a credit check, which is helpful at this stage, since it could negatively impact your credit score. However, this is also why it is not taken seriously by homesellers who want certainty about your financial capacity, and why you will need a pre-approval before you submit an offer.
Pre-qualification is typically a <5 minute online application (example) or use your other favorite bank.
1. Ideally you will identify at least 2 lenders to be pre-approved with; at this point, you are either going to work with a mortgage broker, or act as your own mortgage broker shopping amongst different banks and credit unions.
2. Go through the online application and get a pre-approval letter. Learn the difference between a mortgage broker, a mortgage banker, a bank, and a credit union; a mortgage broker or mortgage banker will typically have access to loan products from multiple sources, which could save you the time and effort of having to scour the market yourself.
If your financial health is lacking, you may need a federal government insured program to qualify for a loan; they are typically more expensive than conventional loans, which are just loans that aren’t government insured.
If you're thinking of purchasing a home that is more expensive than the average home price in your county, then the loan will likely be considered non-conforming, or above the maximum conforming limits set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that support the US mortgage market. Read: Good News on 2021 Loan Limits for more info.
a. Fixed rate means the interest rate doesn’t change during the term of the loan. These are often considered riskier by lenders, and so the interest rate is usually higher than an adjustable rate loan. Adjustable rate loans usually have a fixed period to start, such as 5, 7, or 10 years, and then they adjust to a new rate based on the market interest rates at that later date. This shifts the risk to the borrower of interest rates potentially being higher in the future.
b. Most mortgages have a term of 30 years, meaning the principal balance is repaid by the end of the 30 years; rather than a balloon payment, where the entire loan balance is paid off at the end of the 30years, typically the principal is amortized over the 30 year period using “mortgage-style amortization”, or the “constant payment method”, which keeps your total monthly payment, including theprincipal and interest components, equal for every period (360 monthly periods for a 30-year loan). Shorter maturities, such as 15 years, are available in the market; however, because the principal payments are spread over 180 periods rather than 360, your monthly payments will be higher, which typically makes them unattractive for most borrowers.
a. Choose the lender with the best rate and product to move forward with your loan application; this should be a lender you are pre-approved with, since you can’t take chances at this point of being denied while you have the home under contract.
b. In the Bay Area, you are expected to be able to close within 30 days, which is the amount of time your lender has to process your loan application; it is not uncommon for lenders to take up to 45 days when they are backed up, and this needs to be communicated to the seller who may demand extra compensation for going along with the lengthier timeline. What enables this process to run smoothly in the Bay Area compared to other cities is that sellers typically provide 3rd party inspection reports upfront and very limited due diligence is needed after the purchase agreement is signed.
c. Complete a formal loan application to kick-off the mortgage underwriting process.
Documents as part of the application are likely to include the following:
d. Wait for underwriting results and respond to additional requests.
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