Step No. 1: Shop for a mortgage
Before you start shopping for homes, you should shop for a mortgage. Many first-time buyers wait until they’ve found the perfect home to start shopping for a mortgage, and that’s a mistake. The reason: All lenders are a little bit different, so it pays to compare what they’re offering in terms of interest rates, closing costs, and more, says Richard Redmond, a mortgage broker and author of “Mortgages: The Insider’s Guide.”
This step will also help you pinpoint any concerns lenders might have with your application, and give you time to fix these flaws so you’re in great shape to make an offer once your dream home does come along.
Step No. 2: Get mortgage pre-approval
The goal of meeting with a mortgage lender is to get pre-approved for a mortgage. During this process, the lender will probe your financial past and check out your income, debts, and other factors that help it determine whether or not to give you a home loan—and how much money you can borrow.
Getting pre-approval is critical if you want your home-buying efforts to succeed. Why? Because a pre-approval letter from a lender shows home sellers that you’ve got the financial backup necessary to buy their home. Without it, sellers have no guarantee you can afford their place and, in many cases, won’t take you seriously.
Don’t confuse pre-approval with pre-qualification, which is basically a conversation with a lender about your finances where you don’t need to provide any paperwork.
“A pre-qualification can be drafted on a piece of loose-leaf paper,” says Ray Rodriguez, regional mortgage sales manager at TD Bank. “It often holds no value.”
To apply for pre-approval, you’ll need to provide a lender with the following:
- Pay stubs from the past 30 days showing your year-to-date income
- Two years of federal tax returns
- Two years of W-2 forms from your employer
- 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
- Any other current real estate holdings
- Residential history for the past two years, including landlord contact information if you rented
- Proof of funds for the down payment, such as a bank account statement. If the cash is a gift from your parents, “you need to provide a letter that clearly states that the money is a gift and not a loan,” says Rodriguez.
Step No. 3: Get a home appraisal
After you’ve made an offer on a home and signed a sales contract, most lenders will want to check out what you’re buying with their money—and size it up for themselves with a home appraisal. This means a home appraiser will assess the market value of the house using comparable homes, or comps, much like you and your real estate agent did when coming up with how much to offer on the home.
Most times, the appraiser’s price will end up approximately the same as your own—in which case all is good, says Rick Phillips, an appraiser and real estate agent in Vienna, VA. And if the appraisal comes in higher than what you’re paying, you’re getting a good deal. For example, if you’re paying $700,000 for a home and the appraiser says it’s worth $710,000, you’ve instantly gained $10,000 in home equity.
However, if the appraisal comes in lower than what you’ve agreed to pay for the home, that can be trouble, because lenders will loan you only as much money as the assessment says it’s worth. That means you’ll have to pay the difference—or persuade the seller to lower the sales price to what the lender thinks is fair. Another option is to challenge the appraisal by either filing an appeal or ordering a second appraisal. In most cases this all works out—and if it doesn’t, keep in mind your lender is essentially keeping you from overpaying for a dud.
Step No. 4: Clear the property title and close the deal
When you buy a home, you “take title” of the property—meaning you become the rightful owner. And your lender wants proof! As such, it’ll ask for a title search, which involves paying a title company to search public records for any heirs insisting the property is theirs, liens (from contractors who worked on the home but were never paid), or other problems. Hopefully all goes well, but in case not, this extra step could save you from a seriously scary situation where you’re fighting for ownership, or responsible for paying back old liens yourself.
Once the title is cleared, you can close the deal. That’s where buyer, seller, a lender representative, and any others involved in this process meet to sign all the paperwork, transfer all money owed, pass along the keys, and move on with their lives!
Sure, the whole process of getting a mortgage may sound time-consuming and complicated, but rest assured its purpose is to protect all parties, including you, from making costly mistakes.