There are numerous mortgage steps that are involved before a lender is ready to issue a home loan. Buyers could miss something during the process. Here, Realtor.com offers five essentials that many people don’t realize they need to obtain a mortgage.
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Pre-approval
This is a commitment from a lender to provide you with a home loan of up to a certain amount. Not only will this help you set your home-buying budget, but it also will show sellers that you’re serious about buying. In fact, many sellers will only accept offers from pre-approved buyers. While mortgage pre-qualification is based on verbal information you give a lender about your income and savings to show how much you could potentially borrow, pre-approval means the lender already has done its due diligence and is willing to loan you the money.
To get pre-approved, you’ll have to provide a mortgage lender with a lot of paperwork that typically includes:
- Pay stubs from the past 30 days showing year-to-date income
- Two years of federal tax returns
- Two years of W-2 forms from your employer
- 60 days or a quarterly statement of all of your asset accounts, including your checking and savings accounts, as well as any investment accounts, such as CDs, IRAs, and other stocks or bonds
- Any other current real estate holdings
- Residential history for the past two years, including landlord contact information if you rented
- Proof of funds for the down payment, such as a bank account statement. (If the cash is a gift from your parents, you need to provide a letter that states that the money is a gift and not a loan.)
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Home appraisal
This step is required before a lender will issue a loan, because the home you’re buying will serve as collateral. If you are unable to make your mortgage payments, the lender will foreclose on your home and then sell the property to recoup costs. That means it’s important to make sure the property is worth the amount of money you’re paying for it. If the home’s appraised value is the same as what you’ve agreed to pay, you’ve passed the appraisal. If the appraisal is a higher figure than what you’re paying, you’re all set and have even garnered instant equity. If the appraisal comes in lower than what you’ve agreed to pay, however, you have a problem. A lender won’t loan more than a home’s appraised value, which means you could have to cover the difference. If you’re unwilling or unable to do that, you have some options:
- Negotiate with the seller. The seller may agree to lower the sales price so the appraisal will pass, but this might require some negotiating by your real estate agent.
- Appeal the appraisal.In this case, your loan officer and agent will work together to find better comparable market data to justify a higher valuation. If you file an appeal, the appraiser will review the information and then decide whether or not to adjust the info.
- Order a second appraisal.If you believe the initial appraisal is off base, you can order a second appraisal. You’ll have to pay for the additional appraisal, which could range between a few hundred dollars and $1,000, depending on the area.
- Walk away. Although this isn’t an ideal situation, overpaying for a home might not be worth it.
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Stable credit score
The minimum credit score needed to purchase a home varies depending on the loan program, lender and applicant’s specific credit history. While lenders’ requirements vary, the minimum could be as low as 580 for a Federal Housing Administration (FHA) loan, or as high as 660 for a conventional loan. However, your credit score must remain stable while you’re under contract on a house because final clearance and loan commitment are subject to a last-minute credit check (and other verifications) shortly before closing. To avoid jeopardizing your final loan approval:
- Don’t open new credit accounts.Applying for a new credit card can hurt your score because it results in a hard inquiry on your credit report. Buying a car, boat or any other item that has to be financed also can ding your score.
- Don’t close old credit accounts.Closing an old account can negatively affect your debt-to-credit utilization ratio. This is how much debt you’ve accumulated on your credit card accounts divided by the credit limit on the sum of your accounts, and it comprises 30 percent of your credit score. By closing a credit card account, you reduce your available credit and make it more difficult to keep your debt-to-credit utilization ratio below the recommended percentage.
- Don’t miss a credit payment.Even one late payment can cause as much as a 90- to 110-point drop on a FICO score of 780 or higher, according to Credit.com.
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Review the closing disclosure form
Lenders must provide borrowers with a closing disclosure (CD) at least three business days before closing. Essentially, the CD is the official follow-up to a more preliminary document you received when you first applied for your loan, called the loan estimate (LE). While the LE outlines the approximate fees you will be expected to pay if you move forward with a lender to close on a home, the CD specifies the exact amount of fees you’ll pay at settlement. You should scrutinize the CD carefully because it could contain errors. Ask your real estate agent to sit down with you and compare the CD with the LE.
Here’s a list of things to triple-check:
- The spelling of your name
- Loan term
- Loan type
- Interest rate
- Cash to close amount (down payment and closing costs)
- Closing costs (fees paid to third parties)
- Loan amount
- Estimated total monthly payment
- Estimated taxes, insurance, and other payments
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Pass the underwriting process
Before the lender issues final loan approval, your mortgage has to pass through the underwriting process. It’s their job to ensure that you have represented yourself and your finances truthfully, and that you haven’t made any false or misleading claims on your loan application. Underwriters will pull your credit score from the three major credit bureaus—Experian, Equifax, and TransUnion—to make sure it hasn’t changed since you were pre-approved. They also will review the appraisal of your prospective home to make sure its value matches the size of the loan you’re requesting and check to see if you’ve taken on any new debts. Many underwriters also will contact your employer to verify the job and salary that you listed on your loan application. Assuming you’ve been diligent about keeping your credit score, job status and debts stable, you’ll pass with flying colors. If the underwriter has a question, the best thing you can do is respond with prompt and complete information. Your agent also is there to help troubleshoot any issues.
