Getting a mortgage is a big step for anyone. It means that you will have a greater sense of financial responsibility and having a lot more responsibility can be daunting. There are several steps that you need to take in order to make this transaction go as smoothly as possible:
- Choosing the best mortgage for you
- Closing your mortgage
- Own your home
By educating yourself on these topics, not only will you better prepare yourself, but you won’t have any surprises and you’ll be able to close your mortgage faster.
Choosing the Best Mortgage For You
The first and most important step in getting a mortgage is to pick the mortgage that fits you the best. You can easily read up on the different types of mortgages and see which one looks the best on paper. Sometimes, what is best on paper isn’t the best for you. You are going to have to ask yourself to define the term “affordable”, since it means different things to everyone. Will a mortgage payment take priority over your other financial goals? Is a larger monthly payment with half the years in debt or is financial breathing room more important? Since your lender only looks to see if you can pay your mortgage payments, it is entirely up to you to decide how comfortable you will be financially.
Preparing Your Finances
Preparing your finances is a big part of the mortgage application process as your lender will be investigating to see how financially prepared you are for home ownership. In addition to a credit report, you will also have to prepare all sources of income, your job history, and tax returns for the past two years if you are self-employed. If you are planning on purchasing a home with your spouse or a partner, they will also have to provide documentation of their financial history. Lenders are looking for a strong credit score to see if you are able to continue making payments on your mortgage. Having credit history is important since it shows the lender that you are able to make payments in a timely manner. If you have no credit history, you won’t be able to get a loan since providing a credit history is required. A score of 800 (nearly perfect) isn’t necessary, but a score of 620 is considered strong. FHA and VA Loans have more lenient qualifying credit scores because they are government insured. If your credit score could use some improvement, continue paying your bills on time for 6+ months and your score will increase. While credit score is very important for the mortgage, your credit score isn’t the determining factor in whether or not you get approved for your loan.
IMPORTANT! Debt to Income Ratio
The most important part of getting approved for a mortgage is your debt to income ratio (DTI). Your debt to income ratio is calculated by adding up all of your monthly payments and dividing that by your gross monthly income (your monthly income BEFORE taxes are deducted). This shows the lender your debt against your income. Having a DTI ratio as low as possible is the best, but 43% is the highest ratio a borrower can have while still being able to get a loan. This is a more accurate way of showing your lender if you can actually make the payments on your mortgage. Someone could be in a mountain of debt, but because they are paying their bills on time their credit score is very high and they look great on paper. In this type of situation, having a high credit score is deceiving because this person may seem like a great candidate, but in reality paying off their existing debt won’t be easy. If this person were to get a mortgage in addition to their debt, it would make it even more difficult for them to pay off their debt and it would seem too risky for the lender.
WARNING! Mortgage Fraud
When applying for your mortgage it is incredibly important that you are 100% honest on your loan application. Lying on your application in order to get approved or to get a larger loan amount is considered mortgage fraud. It is a serious offense that can result in fines up to $1 million dollars and 30 years in prison. If your lender persuades you to lie on your application, this is a major red flag and you need to find a new lender as soon as possible. Even if your lender is advising you to do so, it is still considered mortgage fraud and because your name will be on the mortgage application, you are going to be the one who is liable. Long story short, no matter what anyone tells you… do not lie on your mortgage application or enhance any answers. The consequences aren’t worth the short term results.
What does “In Escrow” Mean?
“In escrow” formally means transferring a piece of property, such as personal valuables or real estate, to another person via a third party. This simply means that you are now in the legal part of obtaining your home, which could take as little as 3 weeks and up to several months. Once you’ve entered the legal portion of your mortgage you are now “in escrow.” Once you’ve reached this part, you get to decide when you should close. Think carefully about when you want this to happen and be sure to plan around big trips and important meetings and holidays. If you’re paying cash for your home, closing should be faster but if you’re refinancing, give yourself some more time and breathing room. 30-45 days is the recommended time frame if you are financing your home. Even though you would want this part to go by as quickly as possible, you will be required to sign and present documents and they must happen in person. Not consulting your calendar and choosing a closing date while you’re on vacation or on a business trip could lose you your home. Within three business days of turning in your mortgage application, you should receive a Good Faith Estimate (GFE), which will outline closing costs and what exactly those closing costs cover such as your legal fees (with the escrow company), appraisal, home inspection, etc. An appraisal takes place to ensure the lender that your purchase is worth the money they will be lending you. The appraiser checks to see the neighborhood and the value of nearby homes while a home inspection checks to the see the actual structure and quality of the home.
Your Rights as a Buyer
As a buyer, you have rights. While you are dealing with the lender and also the seller, you also have to keep your best interests in mind. You want to make sure you’re not getting ripped off and buying a home for way more than it is worth. Both the appraisal and the home inspection will protect you from this. If during the appraisal and the home inspection there are some red flags, you have every right to back out of the sale. The appraiser and the home inspector will tell you in great detail why these are issues, so you will have full transparency if these issues will be a long term problem if not taken care of. If you’re set on the house, you can also work with the seller and come to an agreement on how to get these issues fixed. Because you’re already in escrow and this is the legal process, your agreement with the seller will be on the record. Just because you’ve made it this far into the home buying process does not mean you’re obligated to go through with it. You don’t want to get stuck with a house with faulty equipment in a neighborhood where the home value isn’t increasing year after year. If you have a legal reason to back out of the sale, you can with no consequences and you will also get your money back. If you back out of the sale without a legal reason, you will get a partial refund since you will have to pay for the appraisal and home inspection services and the legal services involved up until the deciding point.
Own Your Home
If you decide that you’re still set on getting your loan, the lender will then get everything for underwriting. The mortgage underwriter is basically the gate keeper to your loan. They will look over all of the documents that you’ve provided and evaluate them. Once the underwriter approves your loan, all you have to do is pay for your closing costs (which were outlined in your GFE), review the terms of your loan, and do a final walk through of the home. During the closing meeting that you scheduled, you’ll have to review a lot of documents and review them carefully before signing. Once everything is signed, the loan is yours!