There are few things in life as important as purchasing a new home. Owning property is a crucial step to building wealth and establishing a long-term place in a community. It is imperative to understand the home loan underwriting process to create the stability that makes you an acceptable risk for lenders. Few people have the money to purchase a home outright, and so securing a home loan is a necessary step for the vast majority of the population.
Home Loan Process Approval in Ten Steps
You can follow these ten simple steps when beginning the home loan approval process. Keep in mind that home loans most often refer to initial loans secured to purchase a new home, but these steps (minus a few obvious steps, such as home shopping) may also be applied to the home equity loan process. Home equity loans are given to a homeowner, using the equity built in their home as credit. These are most often used for major expenses like education, medical bills, or home repair.
Determine How Much You Can Afford
First and foremost, decide what you can afford to buy. This requires a deep dive into your yearly and monthly budget, understanding what amount is feasible to pay for a mortgage. Remember that when you own a home, emergency repairs and unexpected expenses will arise. Be sure that you also have a budget for these eventualities when calculating costs.
Secure Pre-approved Loan
Once you have your financial house in order, you can find out from your bank whether you qualify for a pre-approved loan. You may receive, fill out, and submit a loan application from the lender’s branch office, website, or mobile app. VA loans are an option available to veterans, active military, and surviving military spouses. While the VA home loan process is similar to that of the conventional home loan process, there are many benefits for those who qualify, such as lower interest rates and a lower income-to-debt ratio.
Go House Shopping
There are a couple of ways you can look for your ideal house. You can look on your own, shop around on local websites, attend open houses, or drive through neighborhoods you like hoping to see ‘For Sale’ signs. Far more common and more straightforward is hiring a licensed real estate agent to do the legwork. Using a real estate agent makes a lot of sense, as they are professionals who understand all the ins and outs of homebuying. You tell them your price range and your requirements, and they can pinpoint options for your perusal. They have access to “comps” (comparable pricing in neighborhoods) and will have a far better idea of what a property might appraise for—saving headaches later on in the process.
Make an Offer
Be thoughtful when making an offer on a home. It can be tempting to overreach when you find the home of your dreams, especially if caught in a bidding war with another buyer or two. However, refrain from offering the full amount of your pre-approved loan. This may damage your credibility. Experienced sellers and agents look askance at this practice. It can eliminate wiggle room in negotiations, not to mention that you may no longer qualify if interest rates rise and you have to back out of the deal. Likewise, do not offer a lowball offer. It’s not an auction, and you’ll get easily priced out. Working with a real estate agent can help you avoid pitfalls in offer negotiation.
Home Loan Underwriting Process
Underwriting is simply defined as a lender verifying your financial details and the property details to give final approval for your loan. These include your debts, assets, income, and financials on the property. While underwriting happens behind the scenes, they may require input from you, such as proof of additional assets or further documentation on the previously submitted information.
Get Homeowners Insurance
Before your loan receives final approval, your lender will require proof of insurance. You should shop around early in the process for home insurance rates as they can vary significantly from one company to another. Make sure that you know if the home you’re purchasing is in a flood zone and that you acquire this additional insurance if it is.
Schedule Home Inspection
A home inspection must be conducted by a third-party professional who follows a strict checklist to check for the house’s structural and cosmetic integrity for sale. If they find a hidden issue, you may want to negotiate for repairs or for a price cut to accommodate.
Agree on the Rate
At this point, you will lock in the rate of your mortgage loan agreement. This rate determines the amount of interest that you will pay on the money you borrow. You may choose either a fixed rate or a variable rate. A variable-rate may pay off if interest rates remain low, though this is not going to be a likely scenario, especially throughout a 30-year mortgage. Generally, a fixed rate is safer as it is not subject to fluctuations in the market. This allows you to know exactly how much you will pay for your house each month.
Documents and Down Payment
There are loans available for zero down payment, but this is comparatively rare and requires excellent credit and DTI ratio. More typical is a 3 to 3.5% of the house sale. Most sellers and lenders will require you to have a down payment, and having one also provides instant equity. In anticipation of the final sale, all documents will be prepared for the final closing at this point.
Closing is the final step in the home buying process. This is when all documents are reviewed and signed by the parties. Be sure to ask any questions you may have about anything written in the contract or other paperwork. Once signed, the deal is done, and you are the new homeowner.
Purchasing a home is an enormous life decision and investment. While the home buying process can be overwhelming, it can be broken down into manageable parts. By referencing this list and working with local home buying experts and professionals, the process can be less a mystery and more a set of actionable steps.