Finding and securing a mortgage to finance your new home can seem like a daunting process, especially if you’re a first-time buyer. But it doesn’t have to be that way.
By using this checklist (and by reviewing the other recommended articles below) you can break the home loan process down into much simpler and easier tasks and stay on schedule to complete each action item.
This step-by-step overview will help you be prepared for the paperwork and disclosures involved. You’ll know what to expect regarding loan fees and settlement charges and be better equipped to find the lowest cost home loan available.
Finally, this list is designed to help make sure you don’t miss any steps that are crucial. Let’s get started with the first four steps; these are best done well in advance, before you begin actively shopping for a loan.
First, Review Your Overall Your Financial Picture
Take a detailed look at your overall financial picture. Understand and be prepared to document your monthly income, your current costs of living, and the savings on hand or equity from a prior home that you plan to use for a down payment. Ask yourself, what can I really afford to pay for a mortgage? As a rough estimate, calculate your overall debt-to-income (DTI) ratio, that is, the portion of your total gross monthly income that now goes to pay debts for credit cards, auto loans, student loans and other expenses. See the link to my article, “How Much Home Can You Really Afford?” for more resources and information on this step.
Check Your Credit Reports
Order all three of your national credit bureau files (Equifax, Experian, Trans Union) at least two months in advance of shopping for a loan. They are each free once a year from www.annualcreditreport.com. If you see errors, omissions or outdated information, demand corrections from creditors immediately. It’s your legal right under federal statute.
Check Your FICO Scores
Your FICO Score is the only credit score that matters. See the article below, “Understanding Your Credit Score” for more information. After reviewing and correcting your credit files, order your FICO scores from one or more of the three major credit bureaus or through www.myfico.com. As a general rule, you’ll need a FICO score of at least 680 to qualify for most loans, and a score of 740 or above to earn the lowest mortgage rates and fees.
Compare Mortgage Types
30-year mortgages offer lower monthly payments than 15 year loans, but shorter mortgage terms enable you to pay off your debt much faster. FHA, VA and Rural Housing loans offer the lowest down payments and require the lowest FICO scores. Hybrid adjustable-rate loans give you fixed payments for an initial term of years (say 5 or 7) but then turn into annually-adjusting rates, exposing you to higher payments if interest rates rise. Conventional (Fannie Mae, Freddie Mac) loans often offer the best deal if you can make a 20 percent down payment.
Start Shopping for a Mortgage
Get an overview of prevailing rates for different loan types and payment terms among multiple lenders online and offline. Be aware, however, that without pulling your credit information and a formal application from you, lenders’ or loan officers’ quotes are not binding.
Compare key features of loan offerings from competing lenders
The cost of mortgage money is basically the same — or in a very narrow band — nationwide on any given day. Beware of exceptionally low interest rate quotes; the key differences are usually the result of differences in fees and loan origination charges.
These are the extra fees the lender charges as part of its compensation for making a loan at a particular interest rate, given the perceived credit risk of the borrower. They can either be paid at the time of closing financed over the full term of the loan. As a general rule, if you intend to stay in the house you are buying for just a few years, it is better to pay less on points, even if the quoted rate is slightly higher. If you intend to stay in the loan for many years, opt for a lower interest rate and slightly higher points.
Annual Percentage Rate or APR
Check to see what the annual percentage rate is for each mortgage you consider. This is the effective interest rate you will pay with points and loan origination charges included. This will always be different from the published rate alone.
Rate Lock Costs
How much will it cost to “lock” the quoted interest rate – guarantee it, no matter what happens in the money marketplace – beyond 30 days? 45 days? 60 days?
Debt-to-Income Limits (DTI)
Can the lender accept the DTI you calculated above without charging you more in rate or fees for the type of loan you want?
Based on the information you have provided, what size loan will the lender consider?
How long will the whole process take from application to closing? What is the lender’s average turnaround time?
Ask competing lenders what they charge for origination, processing, doc prep, courier and application fees. These have traditionally been areas where lenders pad on dubious extra charges. Add up each lender’s total estimated loan fees to see how they stack up against competitors.
Some online mortgage sites featuring multiple lenders also include borrower ratings by borrowers regarding service, efficiency, accuracy and the like. Check them out before submitting your application.
Pick the Best Lender
Select the loan that best meets your objectives and financial situation, with the lowest total cost package.
Request a Pre-Approval Letter
This will state a maximum loan amount from the lender you expect to use. This will greatly help you shop for a house, since it will tell a builder or home seller that you are financially qualified.
Select the Home You Want to Purchase and Sign a Contract to Buy It
A copy of this contract will need to be part of your loan application.
Now It’s Time to Formally Apply for the Loan You Identified Earlier
Be sure to review the Truth in Lending and Good Faith Estimates lenders are required to provide you within 3 business days of application. If you have questions about any fees, get them answered early in the process. Confirm closing/settlement date and location.
Check the Status of Your Mortgage During Processing:
Did the appraisal come in at the amount needed for the loan? Do underwriters need additional documentation? Any problems that could delay – or derail – the closing? Request copy of the appraisal after it is completed.
Request a Copy of the Settlement Sheet (HUD-1) Three Days in Advance of Closing
Compare line by line with earlier estimates. Ask for explanations or corrections of any discrepancies or higher than expected charges.
Closing Day Arrives:
Now it’s time to sign the closing documents. Congratulations, that new home is now yours!
Kenneth Harney is a nationally syndicated columnist on real estate for the Washington Post Writers Group. His column, the “Nation’s Housing,” appears in cities across the country and has received numerous professional awards, including multiple Best Column-All Media awards from the National Association of Real Estate Editors and the Consumer Federation of America’s Consumer Media Service Award for “invaluable and unique contributions to the advancement of consumer housing interests.”