Understanding the Mortgage Process

If you are buying your first home, you may be nervous about getting financing. This guide will help you understand how the mortgage process works.

Finding a Lender

The first step in the process is to find a lender. Most mortgages last 20 to 30 years, so you want to choose a company that you feel comfortable working with and that you know will be around for the long haul. Reading online reviews can help you get a feel for what kind of experiences previous customers have had. You may also want to look up news stories that indicate whether the company is in a strong financial position and whether they are the subject of any ongoing investigations.

You may also want to look up the company's Better Business Bureau page to see what kind of complaints it has had and how it responded. In addition to the reputation of the company, compare the interest rates, fees and closing costs with other lenders you are considering. Whichever company you work with, be prepared to provide information, such as identity proofing, as part of the application process.

Apply for a Preapproval

One of the most nerve-wracking aspects of buying a home for many people is waiting around to see if the mortgage company will approve them for financing after they have had an offer accepted on a home. You can avoid this stress by getting preapproved before you start looking for a home. 

During the preapproval process, the lender may evaluate your credit score, income and debts to determine if you qualify for a loan and how much the company is willing to lend you. If you are preapproved, the lender will provide you with a preapproval letter that you can show to sellers. This helps you establish your price range for your home search and makes sellers more willing to work with you because they know you can get financing.

Make an Offer

When you have found a home you want to buy, you need to make an offer to the seller. Before you make your offer, research what similar homes in the area are selling for. It may also help to gauge how motivated the seller is to sell and whether you are operating in a buyer's or a seller's market. If the house has been on the market for longer than 90 days, the seller may be more willing to come down on the price, than if it was just listed. Your real estate agent should be able to help you determine a fair offer and negotiate with the seller on your behalf. If the buyer accepts your offer, a purchase contract will be drafted. 

Finalize Your Loan

Return to your lender and apply for a mortgage. The lender will assess your ability to pay back the loan by reviewing your credit score, assets, income and debts again. You may be asked to submit documentation, such as pay stubs, bank statements, W-2 forms, tax returns, proof of insurance and proof of other income. In some cases, the lender may request additional documentation to prove your income or to explain situations such as a divorce, childcare expenses, source of your down payment funds and proof that you have enough money to pay your first few mortgage payments.

The lender will also have a professional appraise your home to make sure its value is close to the sales price you are paying. This is to protect the lender in case you don't repay your loan and it must foreclose on the property. If you are approved, you will go through the closing process. The interest rate the lender offers is based on your creditworthiness and current market conditions. You may want to check mortgage refinance rates if your credit improves or interest rates decline after you get your mortgage.

The mortgage process can be a bit intimidating. However, knowing what to expect before you start will help you feel more comfortable.