Do your homework
Before you start house shopping or apply for a mortgage, you need to have a thorough understanding of your financial situation and your homeownership goals.
Start by answering two key questions:
- What can you afford?
Assess your financial situation to see how much down payment you have, and how much you'll be able to afford to pay every month in mortgage, taxes, and insurance. You'll also need to know your credit score because it will have an impact on your interest rate – the higher your credit score, the lower the rate you'll be able to qualify for.
- How long do you plan to stay in the house?
If you plan to be there for the long haul, you'll want to look at 15- or 30-year conventional mortgages because you can lock in a fixed rate and monthly payment for the life of the loan. If you'll be in your home for just a few years, an adjustable-rate mortgage (ARM) allows you to take advantage of the lowest rates and monthly payments available.
Once you know how much you can afford and how long you plan to be in your home, you're ready to start shopping for financing. Start with your bank – they often give interest-rate discounts to customers as a thank you for your business. Then check out wha the competition is offering. Use a third-party website like bankrate.com to see a comparison chart of the mortgages and rates being offered by lenders in your area.
Once you've selected your lender and the mortgage that's right for you, get pre-approved. The lender will review your financial information and credit score, and let you know how much they'll lend you. When you go house shopping or make an offer, you'll be taken more seriously and have more negotiating power when sellers see that a lender has already pre-approved you for a mortgage.
Begin the loan application process
After your offer has been accepted, your realtor will open escrow with the title company, and the mortgage application process begins. You've already been pre-approved for credit, but now the house and the sale have to be approved. There will be a lot of information required, so the faster you can provide it the faster your application can be processed. Make sure your application is complete with no missing information – anything that's omitted or incorrect will only hold up the process.
Provide the requested documentation
The lender wants to be sure you're a good credit risk and that you'll be able to make your mortgage payments on time every month, so you'll be asked to document your personal finances with:
- Income tax returns
- Pay stubs and IRS form W-2 or 1099
- Bank account statements
- Investment and retirement account statements
The lender also wants to make sure the property is worth enough to justify the loan, so they'll require documentation about the value, condition, and ownership of the property, including:
- An appraisal of the property's value from a professional appraiser
- Home and pest inspections
- A title search by the title company
Wait for underwriting and loan approval
Once your application is complete and all required documentation has been submitted, it goes to underwriting. The underwriters will evaluate all the information and approve or deny the loan. They may also ask for additional information or offer you adjusted terms – like a different down payment or rate to minimize their risk.
Close escrow and get ready to move
If your loan is approved, a closing date will be set and you'll sign the loan documents. Then the lender will wire the money to the title company, escrow will close, and the property will be recorded with the county to reflect the change in ownership. Congratulations! You're a homeowner.
Navigating the mortgage process can be challenging. Talk to a professional – like your local Rabobanker. We're always here to help.
The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.