When buying a home, there are two big decisions to be made. One is, of course, which home to buy. The other is, how you are going to pay for it. Finding mortgage financing is often the most stressful decision of the two, but it doesn't have to be. With our mortgage guide for buying a home, we take the stress out of getting a mortgage so you can focus all your attention on buying the perfect home.
It's best to start the mortgage process before you ever go looking for a new home, but even if you've already found your new house it's not too late to get the best mortgage available to meet your needs. Just read through the guide, figure out where you are in the process, and you'll be able to rest easy knowing that you're in control.
No matter where you go for your mortgage, they will all need certain information from you to verify employment, identification, credit and residential payment histories, etc.
You'll need to have:
last two years of W-2s (or tax returns if self-employed).
Last 30 days of paystubs
Documents showing other sources of income, which could include second jobs, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony, and child support
These documents show the lender your ability to repay the loan. What lenders would like ideally is a stable to growing income (even if you've changed jobs) within the same career field. If you've changed careers or became self-employed within the last two years, this will likely affect the mortgage options available to you.
Social Security Number
This is used both to identify you and to obtain your credit history. Without a social security number, the lender cannot pull your credit and will not be able to provide you with an accurate quote.
A complete list of your creditors, such as credit cards, student loans, car loans and child support payments, along with minimum monthly payments and balances
This will be checked against your credit report to help lenders determine your ability to repay the mortgage. Typically if the total of your monthly credit obligations plus your new mortgage payment total more than 40% of your monthly income, your mortgage options may be affected.
Investment records including mutual fund statements, 401(k) plan, real estate and automobile titles, stock certificates and records of any other investments or assets
Borrowers who have assets such as 401(k) plans, etc. can often obtain better terms than those without any because the lender knows you have reserves in the case of an emergency. For marginal borrowers, it can often mean the difference between a "yes" and a "no," so be sure to document any and all assets.
If you rent: cancelled rent checks if you rent from a private owner or the name and name of your landlord if you rent from a company
If you own a home: a recent mortgage statement or stub
To a lender, your rental or mortgage history over the last two years is one of the most important factors in determining your eligibility because it is the single best indicator of how you will pay your new mortgage. Even if your credit card or other debt payments have been late, if you have kept your rental/mortgage payments up to date, you can often qualify for good interest rates.
Step Two: Check Your Credit
It's a step that may seem obvious, but it's often surprising how few people actually take the basic step of checking their credit prior to applying for a mortgage.
Though you may have never missed a payment in your life, your credit report may not be perfect. Between reporting errors and today's threat of identity theft, you do not want to find out about mistakes on your credit report after you lose out on your perfect home because you were denied financing.
Even if your credit isn't perfect, you can often improve your credit score by challenging items which appear on your credit report. Some credit reports contain duplicate items so that you are being penalized twice for a single late payment. Many creditors will also work with you to remove past negative items from your report if you have been a good payer since those late payments.
What if you can't improve your credit score? You'll have more realistic expectations for your financing options. If you know what challenges exist on your credit report, then you can select the lenders that specialize in working with people in your situation and together you'll be able to address those challenges right from the beginning rather than trying to scramble at the last minute after you've already signed a purchase contract.
To get a copy of your credit report, we have found several options for you. Just go to our Credit Reports Section (link opens in new window) and select one.
Step Three: Do the Math
If you are paying rent or already have a mortgage, you probably have a good idea of what you think you can afford for a monthly mortgage payment. The question is: is your idea of an affordable payment the same as the one lenders have?
Most lenders require a total debt-to-income ratio of 40% or less. That means that your monthly payments [child support, alimony, credit cards; auto, student and personal loans; and home expenses (payment, insurance and taxes)] should be less than 40% of your monthly gross (before taxes and deductions) income.
If your debt-to-income ratio is higher, then your mortgage options are more limited than those whose ratios are lower but that doesn't mean that you won't be able to get a mortgage. If this is the case, you'll need to let your lender know upfront that this is something which needs to addressed in order to avoid unpleasant surprises later on in the process.
In order to calculate an appropriate mortgage payment, you'll probably want to use a mortgage calculator. You can also try our Total Mortgage Calculator which will help you take into account moving expenses and monthly utility bills as well. (Clicking on these links will open new windows, so you don't lose your place here.)
Step Four: Get Pre-Approved
Armed with your paperwork and an idea of how much you can afford for a monthly payment, you're ready to get pre-approved. Getting a pre-approval consists of contacting lenders who will perform an initial review of your paperwork and your credit. They will then provide you with a letter stating that you've been pre-approved to buy a home within a certain price range.
There are a number of mortgage options from adjustable-rate mortgages to interest-only mortgages that can reduce your initial monthly payments well below what you would otherwise pay for a standard 30-year fixed rate mortgage. Depending on your situation, these types of mortgages may make sense for you and allow you to purchase a better home than you would otherwise be able to afford. This is when finding the right lender can make all the difference in the homebuying process.
A quality lender will discuss with you the entirety of your situation including such factors as how long you plan on living in your home, your current credit situation, and your other financial obligations to assist you in selecting the type of mortgage that fits your needs. If they're not willing to take the time to do this with you, then they're not the lender that you want to be working with.
You'll probably want to check out more than one lender because one may have financing options that the others don't or you may find that you are more comfortable with one particular loan officer. In order to find the perfect solution, it usually takes talking to more than one before you find it. It's one of the biggest decisions of your life, so it's worth being patient and exploring your options first.
It can be difficult and time-consuming to find a quality lender, so we've given you a headstart by assembling a list of the finest mortgage pre-approval quote providers we could find (link opens in new window). They will be able to find multiple pre-screened lenders who are specifically set up to help through the pre-approval process. Simply fill out the short application and, instead of you having to look for them, they will contact you to talk about your mortgage needs.
Step Five: Find the Perfect Home
Strictly speaking, you don't need a lender during this step. However, you'll find that being able to talk to a lender while you're shopping for homes can be an invaluable part of the process. What if the home you fall in love with is priced a little above the amount for which you've been pre-approved? What if you were pre-approved for a townhouse but now are looking at a condominium?
These sorts of things and others may have a significant impact on your eventual monthly payment or even the availability of financing. You'll want to be able to make a phone call and get those answers right away before you place a bid instead of crossing your fingers and hoping things will work themselves out before you go to closing.
(If you need help finding a real estate agent to guide you through this part of the process, check out our Real Estate Agents section for hand-selected referral sources.)
Step Six: Notify Your Lender
As soon as your bid has been accepted, you'll need to notify your lender right away. There's a lot of work to be done before you go to closing, and the more time you give your lender the better the odds that your mortgage will be ready to go as plannned on the day of closing.
[If you haven't already selected a lender by comparing them during the pre-approval process, if you're unsatisfied with the lender you chose, or if you just want to make sure that you're getting the best possible mortgage; then you should seek mortgage purchase quotes as soon as possible after your bid is accepted. The more quickly you seek quotes after your bid is accepted, the faster they will be able to respond and the lender that you select will be able to get to work.]
You will need to provide a copy of the purchase contract to the lender as it will inform them about any special considerations as well as specify the date that the sale must be closed. Provide the contact information for your real estate agent to your lender and vice versa. Although you will need to keep on top of the process to make sure that things are progressing smoothly, your lender and real estate agent can do much of it without you having to lift a finger if there is an open line of communication between them.
Before you go to closing, there will need to be an appraisal performed so that your lender can verify the property value, a home inspection will need to be performed to make sure that there are no major defects, and the mortgage will need to be underwritten by the lender. Your real estate agent and lender can help you find appraisers and home inspectors or may even take care of finding them and setting appointments on their own. The better the agent and the lender, the more likely that these matters will be handled without your involvement - yet another reason to make sure that you've selected quality lenders and agents to be on your side throughout the process.
During underwriting, the lender will verify your income and credit history, verify the appraised value, and perform the final checks needed to sign off on your loan. Underwriters may require additional information during this time such as letters of explanation, additional statements, etc. Make sure that if your lender notifies you that the underwriter needs any of these things, you respond immediately as any delays could cause you to miss your closing date.
Step Seven: Go to Closing!
If you've been diligent about responding to any requests for additional information from your lender and have been making sure that the needed appraisal and home inspection have been performed in a timely manner, then you should be ready for closing day. By remaining in regular contact with your lender, you'll know where you are in the approval process at all times and will be able to rest easy knowing that you'll soon be sleeping in your new home as soon as closing day arrives.
The day before closing the lender will send you a copy of the HUD-1 Settlement Sheet. This is required by law and details all the costs associated with your mortgage. It is the same sheet which you will actually be signing at the closing table. Check it over to make sure that it is accurate and the charges are what you agreed to with your lender. If there are any errors or discrepancies, make sure you notify your lender right away so that they can be corrected before closing. You do not want to be in a situation where you are being surprised by extra fees or incorrect mortgage amounts while you're sitting across the table from the seller, so make sure that you've set aside time the day before closing to go over this document carefully.
If everything looks fine (and if all has gone well, there's no reason it shouldn't), then you're ready for closing the next day. If you're going to need to bring a certified or cashier's check, make sure that you've had it drawn rather than waiting until hours before you're scheduled to sit down at the table. Better to anticipate delays and prepare for them ahead of time, rather than waiting for the last minute and hoping all goes well. In order to make closing day a happy one rather than a stressful one, the more preparation you put into it the more smoothly it will go.
Bring your lender's contact information with you to closing. If any clarifications need to be made, errors corrected or explanations made, you'll be able to do so on the spot without holding up the closing. If everything goes smoothly, give your lender a call after you leave to let them know that all the documents have been signed and the purchase finalized. (The phone call isn't a requirement, but most lenders like to hear that their clients have successfully completed closing and enjoy being the first to congratulate you on your new home purchase!)
When buying a home, there are two big decisions to be made. One is, of course, which home to buy. The other is, how you are going to pay for it. Finding mortgage financing is often the most stressful decision of the two, but it doesn't have to be. With our mortgage guide for buying a home, we take the stress out of getting a mortgage so you can focus all your attention on buying the perfect home.