How to buy a house
Looking to buy a house this year? ConsumerAffairs has 12 steps to help you land your dream home in 2021. See our guide for more information.
Brandi Marcene
Step-by-step process for getting a mortgage
Ready to roll out the welcome mat and call a place your own? Buying a home requires a lot of time and paperwork, but the moment the keys hit your hand, it all feels worth it.
“It all started with a dream of home ownership as I started a new job in the other half of the state. Times were looking bleak with the market [not] looking great and rates going up,” said one ConsumerAffairs reviewer in Virginia. “[My mortgage] team put in a lot of work and help me through the first time home buyers process.”
If you are ready to make your similar homeownership dreams a reality, this guide will help you figure out how to get a mortgage with as little stress as possible.
Lenders look at four main things before approving a mortgage application: income, credit, debt and down payment.
The underwriting process for a mortgage requires a lot of paperwork. Expect to go back and forth several times with the underwriter to get them all of the financial documents needed to successfully get your loan to funding. Here are some of the documents you will need:
The first step of how to get a mortgage is auditing your financial situation. How much house you can afford depends on your finances and the mortgage’s upfront and ongoing costs. Often, the total cost ends up higher than you think.
When considering buying a home, you should:
First, go over your credit report for accuracy and check your credit score. Ideally, you want to apply for a home with good to excellent credit — a score of 670 and up.
If you’re not quite there, consider ways to build your credit (or, if you’ve had a few hiccups, fix it) before applying for a home loan. Even if you have enough cash on hand for the down payment, you might not get approved if you have bad credit or tax problems.
From July 2020 to June 2021, homebuyers put down a median down payment of 13%, according to an NAR survey.
At the beginning of the mortgage disclosure process, borrowers also have to submit an authorization for verification of employment history. Since the start of COVID, with so many people getting furloughed early on in the pandemic, lenders have taken the income verification step quite seriously. You can’t always count bonuses as income, and it’s more difficult to get approved if you’re self-employed.
Take a look at your savings account, and think about how much you can put down. Keep in mind that if you get a conventional loan and put less than 20% down, you will have to pay for private mortgage insurance.
Don’t forget to factor in origination fees, closing costs, the home appraisal and inspections (due at closing). As you calculate your mortgage budget, include monthly payments, home insurance and any recurring homeowner association (HOA) fees.
How you get a mortgage depends a lot on the type of loan you can qualify for. The main types of home loans are government-backed and conventional loans. Jumbo mortgages are a type of conventional loan. Your finances and personal situation will likely determine the loan option that’s best for you.
Government-backed mortgages are guaranteed by government agencies such as the Federal Housing Administration (popular with first-time homebuyers), the U.S. Department of Agriculture (great for those purchasing in rural areas) and the U.S. Department of Veterans Affairs (for former and active members of the military).
Conventional mortgages are not part of a government program. You generally need a credit score above 620 and a down payment typically between 3% and 20% to qualify.
Jumbo mortgages, which are nonconforming loans, are for home loans above the maximum loan limit set by the government for purchase by government-sponsored enterprises (Fannie Mae and Freddie Mac). To qualify, you need to meet stricter guidelines, such as having a higher credit score.
» MORE: Conventional mortgage vs. FHA
Government-insured | Good for | Learn more | |
---|---|---|---|
FHA | Lower credit scores; smaller down payments | Compare lenders | |
VA | Current or former military members (or spouses) | Compare lenders | |
USDA | Buying homes in rural areas | Compare lenders | |
Conventional | Traditional buyers with good credit | Compare lenders | |
Jumbo (nonconforming) | Buying homes priced above the conforming loan limit | Compare lenders |
Additional factors to help you decide the right type of mortgage include:
Once you know the type of loan you’re looking for, it’s time to decide where you want to get pre-qualified. You might already have a local bank or credit union that you trust, or you might be better off with a dedicated lender or broker.
“Make sure you are working with a lender who understands your market,” said Sarah Alvarez, vice-president of mortgage banking at William Raveis Mortgage. “For example, in New York, there are many nuances with financing in different buildings and different apartment types, and you will want someone who is hyperaware of how this might impact your loan.”
Here are some tips for comparing your options:
Not sure whether to go with a direct lender or broker? “One of the biggest advantages to working with a mortgage broker as opposed to a banker is that we are able to shop the entire market for our clients,” said Alvarez. “If, for whatever reason, there is an issue that comes up, we are able to quickly pivot to a different lender without having to start the process over from square one. This can save major time and headaches during what can already be a very stressful time.”
When deciding on your loan application, lenders look at your credit score, income, debt, assets, employment history and other factors. The loan-to-value (LTV) ratio, which measures the loan amount against the property's actual value, is also important when lenders assess risk before approving or denying the application.
Once you have your preapproval letter, share it with your real estate agent. Your agent can include it with any offer to show the seller that you have the financial backing to make the purchase.
After you're preapproved, it's time to search for a house in your price range. A licensed real estate agent can help you make an offer on a home you love and avoid any costly missteps.
Once a seller accepts your offer, you’ll work with your lender (and agent) to finalize the transaction.
When the seller accepts the contract, your loan officer starts working on a mortgage disclosure agreement. This is also when you’ll have to put down earnest money, which works like a deposit. The funds are credited back to you at closing.
Next, you will most likely get a list from your loan officer outlining any action items (updating a pay stub, for example).
It can take up to 60 days to get a mortgage contract ready. You will most likely need to update some documentation you submitted earlier, including pay stubs, bank statements and credit reports, for your lender to officially approve the loan and move forward.
If it takes you longer to find a home, the lender will need to pull your credit report again. If you’ve collected debt during this time, it will be reflected in your new score. (That’s why it’s not a good idea to open any new accounts while you’re trying to get a mortgage — a drop in your credit score could lead to you not getting a rate that you thought was locked in.)
The steps to complete a mortgage application are similar to those in the preapproval process, but this time it really counts. It’s always a good idea to verify your credit report and score again.
After you've been officially approved for the loan to get the house you want, you're in the home stretch, when a few things happen:
You have at least three days to review the Closing Disclosure before closing.
Finally, on closing day, you’ll sign all your paperwork and pay your closing costs (including any origination fees).
It usually takes at least a month to close on a house, but some lenders offer ways to speed up the closing process. If you’re in a time crunch, find lenders that can minimize the time from mortgage approval to closing.
The answer depends on your financial situation and your area. For many, buying a home is an investment. For those who live in high-rent areas, a mortgage can be more affordable than monthly rent bills. However, if a mortgage leads you to financial difficulties, it is better to wait to buy a home.
Government-backed loans have different requirements from conventional loans. These loans are a wonderful alternative for first-time homebuyers, military-connected buyers and lower-income buyers.
Some government-backed mortgages have flexible credit score requirements. If you still do not qualify for a home with your current credit score, it is worth spending time improving it. You can improve your score by decreasing your debt and making regular, on-time payments. A better credit score is ideal for locking in the best rates and saving money on your home purchase.
Going through the mortgage process allows you to purchase the house or property you want. The process is similar if you are buying your dream home or a second home for rental income. It can feel like you are jumping through a lot of hoops to get pre-qualified and funded, but your home will now be considered your investment.
Looking to buy a house this year? ConsumerAffairs has 12 steps to help you land your dream home in 2021. See our guide for more information.
Brandi Marcene
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