If you are considering buying a home or refinancing your current mortgage and have not done so in several years, you may be surprised at how the process has changed. Even though most borrowers are well aware of the crisis that has occurred in recent years in the real estate and mortgage industry, many still don’t realize the extent to which documentation requirements have changed.
Whether you’re a first-time homebuyer or considering refinancing your existing loan, understanding what to expect during the mortgage application process is crucial. This article will walk you through the various stages of securing a mortgage and providing essential tips to ensure a smooth and successful application journey.
Prepare to Apply for a Mortgage
Applying for a mortgage is a crucial step in the homebuying process. Preparing to apply for a mortgage involves several key actions and considerations to ensure that you are in the best possible financial shape when you begin the application process.
Check Your Credit Score
Before you start the application process, checking your credit report and credit score is a good idea. Review your credit report for any inaccuracies and work on improving your credit score if necessary. A higher credit score can help you qualify for better mortgage terms.
Determine Your Budget
Assess your monthly expenses and create a budget that considers your estimated mortgage payment, property taxes, insurance, and other homeownership costs.
Also, it is crucial to budget for potential additional costs that may arise. Be aware of the upfront costs of buying a home, such as closing costs, appraisal fees, and inspection costs. Budget for these expenses in addition to your down payment.
Save for a Down Payment
Determine how much of a down payment you can afford. While some loans allow for low down payments, having a larger down payment can reduce your monthly mortgage payments and potentially eliminate the need for private mortgage insurance (PMI).
Research Mortgage Options
Explore different mortgage types (e.g., fixed-rate, adjustable-rate, FHA, VA, etc.) to determine which aligns best with your financial situation and homeownership goals.
Lenders typically prefer borrowers with stable employment history. Avoid changing jobs shortly before applying for a mortgage, as it can raise concerns about your income stability.
Manage Your Debts
Reduce high-interest debts like credit card balances and personal loans. Lenders will assess your debt-to-income ratio, so having lower outstanding debts can improve your chances of approval.
Get Pre-Approved for a Mortgage
While it is not required, you can get pre-approved for a mortgage before house hunting. Pre-approval provides a clear idea of the loan amount you’re eligible for and can make you a more attractive buyer to sellers.
Shop for Lenders
Compare mortgage lenders to find one that offers favorable terms, including interest rates and fees. Don’t hesitate to negotiate with lenders to secure the best deal. You can work with banks, credit unions, online lenders, or mortgage brokers.
By preparing for a mortgage application, you can increase your chances of securing a loan with favorable terms and ultimately achieve your homeownership goals. It’s important to approach the process with careful planning and financial responsibility to set yourself up for success.
Complete a Mortgage Application
Be prepared to provide information on your residency and employment for at least the last two years and your current liquid assets. You must also list details of any other properties you own. There are also questions to determine whether you have been a party to any foreclosures, bankruptcies, lawsuits, judgments, etc.
In the past, borrowers with excellent credit often got away with providing little to no documentation to support what was listed on the application. Now, you should expect to provide documentation to support all of the information on the application, regardless of your credit score, down payment, etc.
Our checklist for borrowers typically includes the following:
- A complete signed application with all disclosures, which we will provide you.
- Pay stubs covering the most recent 30 days.
- W-2s and tax returns for the last two years – must include all pages and be signed (Business taxes and K-1 for self-employed borrowers).
- Bank statements for each account for the most recent two months – including documentation/explanation for any large deposits made (“large” varies based on income).
- Mortgage statements for existing mortgages.
- Evidence of taxes, insurance, and homeowners association dues for properties owned.
- Driver’s licenses.
- A letter of explanation for each time your credit was pulled in the last 90 days indicating whether you incurred any new debt.
- When refinancing your existing owner’s title policy, ensure you get a discount on the new policy.
- When buying, a quote from the homeowner’s insurance company you intend to use.
- When buying, your signed contract has all addendums and seller disclosures.
Completing a mortgage application can be a detailed and time-consuming process, but it’s crucial to securing a mortgage for your home purchase or refinancing needs. Being organized and thorough in providing the required information and documents can help streamline the application process and increase your chances of approval.
Submission to Underwriter
Once the documentation is complete, we will submit the file to the underwriter. Typically, their review is completed within 2 days. As a result there may be additional documentation requests (“conditions”), but they should be minimal. At this point, you will receive an “approval with conditions”. Your loan has been approved, as long as the “conditions” noted are successfully cleared.
During this time we will also order the appraisal, title work, and certificate of insurance from the insurance company you have chosen. These items are then submitted for a second review.
After the second review, there should be very little left to complete. Once the underwriter has approved all of the documents, you will receive a “clear to close” and should be able to close within the next few days. By following this process we typically are able to close loans in less than 30 days. In some cases, as quickly as two weeks.
Common things that will delay the loan process:
- Delays in getting signed purchase contract from the seller and/or missing addendums.
- Problems encountered during the home inspection that delay ordering the appraisal.
- Delays in getting all documentation from the borrower (borrowers going out of town).
- Problems encountered during the appraisal that must be corrected before the appraisal can be approved.
- Delays in obtaining title work and surveys from the title company.
- Problems found in either the home inspection or appraisal that delay obtaining homeowners insurance.
- Delays in having tax returns verified by the IRS which is required for all loans (this occurs frequently on applications soon after April 15th when tax returns have been recently filed).
- Discovery of information that the borrower did not disclose upfront.
Don’t Argue with Lenders
While the process can be stressful, you need to trust your lender. Arguing with them about the necessity of providing requested documents is unlikely to cause them to change their mind and only causes further delays. If you don’t understand why something is being requested of you, of course you should feel free to ask your lender to explain it to you. All of their requests may not make sense to you. Most lenders are following the guidelines of Fannie Mae and Freddie Mac and the underwriters are merely doing their job to ensure that they comply with these guidelines. Don’t take it as a personal attack – the rules are the same for everyone!
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients to lower their monthly mortgage payments.