Mortgage 101: Navigating the Loan Process
Mortgages are tricky. They are the most consequential financial commitment most people will make in their lifetime. No one taught us anything about them in school, though. Prior to showing up at a bank or a mortgage lender, the steps to getting one are a mystery to most young people. So, before you decide to begin searching for a home, it’s worth it to review these steps to getting a traditional mortgage.
Steps to getting a traditional mortgage
- Shop mortgages and lenders
When you begin your house hunting in earnest, your first instinct may be to look at homes before even considering a mortgage. Big mistake. It’s important to shop for mortgage lenders and types of mortgages before looking for the right home. Remember this will be the biggest financial decision of your life. Get to know the types of mortgages local lenders offer, what the term of the loans may be, and what the interest may be. Do you want to go with a fixed rate mortgage or take a chance on an adjustable rate mortgage? It may even be worth it to get a preapproval for a mortgage before you start house hunting in the first place, but more on that later. In the end, shop mortgage lenders and mortgages as you are beginning to look for houses. You don’t want to find your dream house and then encounter an unfriendly loan or realize you can’t afford it.
2. Decide which is better for you, a fixed rate mortgage or an adjustable rate mortgage
This is crucial. The most common mortgage in the United States is a 30-year fixed rate mortgage. The interest rate is fixed and you, the homeowner, wil pay back the balance of the loan and the interest over the next thirty years. The interest rate does not adjust and you may even be able to pay off the loan in fewer than thirty years. An adjustable rate mortgage, obviously, is different. Here, the interest rate will adjust after a given number of years. For example, a 5/5 Adjustable Rate Mortgage (ARM) will feature a fixed rate for the first five years. Then, that interest rate will adjust every five years, according to the proper index (LIBOR or 1-year Constant Maturity Treasury Index). Deciding which is better depends on your financial situation, but ARMs can adjust so dramatically at times that monthly payments can sometimes skyrocket.
3. Get a preapproval
In order to make an offer on a house, you need to know how much money you can spend. In order to know that, you need to know how much the lender is willing to loan you. This is why getting a preapproval is so vital. In order to get a preapproval, you, and your partner if you have one, will need to meet with the lender. Be sure to bring at least 2 years of W2’s, pay stubs, tax returns, bank statements, proof of funds for the down payment, and possibly your residential history and landlord contact information. A preapproval only shows the maximum of what you can borrow and is only good for 30–60 days. So if you’re house hunting for more than two months you may need another one.
4. Find a house and get it appraised
Now comes the fun part. If you read our last article about buying a home you know what you have to do. Be prepared to cut from your list because no house is perfect and pull the trigger if you like something. Once you have found a house, however, the bank will want to get it appraised before you return to the mortgage lender. You’ll pay for a third party to be hired to give a more exact estimate. Once that’s done, your agent can help you decide on an offer. You have to know the value of the home before you make an offer and get a loan.
You have the house, the preapproval, and the down payment. Time to go back to the mortgage broker for the underwriting process. The lender will decide if your down payment and supporting documents will be enough for the bank. After that, the bank will accept your application and underwrite the loan.