Real talk: buying a house can be intimidating. So we created the first-time homebuyer series to take the mystery and anxiety out of the house-hunting process. Dive into our complete guide which covers every step of the process: why you should buy a house, how to get pre-approved for a loan, how to find an agent, what to look for in a house, how to make an offer (and negotiate!), how an inspection works and how to close once you find the dream home. Don’t worry we spell it all out for you so that if this is your first time (or third) you’ll have all of the information you need for a successful purchase right at your fingertips. Read the entire series here.
What’s the first thing you should do when you’re ready to start house hunting? Most people would probably say find a real estate agent. Actually, no! If you are ready to buy a house or just starting to do some research about the homebuying process, the first step is to talk to a lender. A good agent will send you to a lender before showing you a single house. It’s essential you find out what kind of home loan you are eligible for, what your monthly payments will look like and what your purchasing power is.
You can’t start looking for a home before you know what you can afford!
This guide to home loans and mortgages will:
- Walk you through the loan approval process
- List the different types of lenders you can work with
- Explain the different types of home loans available
- Share what questions you should ask your lender
- Clarify what not to do during the home buying process
- Reveal what lenders wished you knew already
If you’d like to jump to a certain section of the guide, just hit the links above.
Let’s dive in!
Meet the Experts
Finances are a complicated topic, especially when it comes to buying a house! So, we turned to two experts in the field of home loans:
What is Home Loan Pre-Approval?
Why should you talk to a lender before a real estate agent? Well, most of us aren’t carrying around hundreds of thousands of dollars in cash and have to take out a loan in order to purchase a home.
When you buy a house, you’ll make a downpayment on the sale price of the house and then you’ll take out a home loan with a lender. Even though the terms ‘mortgage’ and ‘home loan’ are often used interchangeably, they don’t mean the same thing.
Home loan- the loan you take out to finance the purchase of a home
Downpayment– the initial cash payment you make on a large purchase
Mortgage– a document that secures the house as collateral for the lender on the home loan
A mortgage is essentially a lien on your property. If you default on loan payments, the lender has the right to sell the house to recover payment (a foreclosure). You also can’t sell the house without settling any outstanding loan debt.
You’ll meet with a lender to find out what kind of home loans you are eligible for and ideally, the lender will pre-approve you for a loan. There are three levels of the pre-approval process: pre-qualification, pre-approval and commitment.
Home Loan Pre-Qualification
A pre-qualification is the most basic level of evaluating your purchasing power with a lender. The loan officer will sit down with you and have a general discussion about your income, assets and credit. You could fill out an application, but the loan officer won’t pull a credit report or verify the information you give- which means you are not technically pre-approved. “A pre-qualification is not a super helpful or efficient use of time because there is no credit inquiry,” explained Swanson. “But that’s why clients will ask for it.”
If something later appears on your credit report that you weren’t aware of or the source of your downpayment is considered unacceptable, it will prevent you from getting pre-approval. “This can easily get someone in trouble if they think they’re approved, but after verifications, something is returned as not what was initially presented,” said Swanson. “For example, if income isn’t accurate or someone is earning an income that is not qualified, such as a commission, overtime, or bonus pay for less than two years or were only employed part-time for less than two years.”
Home Loan Pre-Approval
A pre-approval is a conditional confirmation that you’re eligible for a loan. The loan officer will take your application, review your credit report, take your income and asset statements and will review your employment history. A pre-approval does require the loan officer to make credit inquiries at all three of the major credit bureaus, which is why you may be hesitant to take this step if you are shopping around for the best rates and asking multiple lenders to pull your credit. There’s good news!
“If you are doing multiple pre-approvals with different lenders within a 14-day span, the inquiries will be bundled as one if the lenders are registered as official mortgage lenders with the credit bureaus,” said Swanson. Not every mortgage lender is considered an official lender, so you should check with the credit bureaus first.
If you are asking for multiple pre-approvals, you will have to provide a letter of explanation to the credit bureaus explaining that you are searching for a lender and looking for the best rate. Some lenders can do a “soft pull” which only checks your credit with one credit bureau and won’t show as a credit inquiry on your record. You would have to specially request this and not all lenders have the ability to do this. A soft pull minimizes the number of inquiries on your record, but it doesn’t give a lender the full picture of your financial state.
If you are pre-approved for a home loan, the lender will give you a letter of pre-approval. You’ll hold onto this letter while you house hunt and would pass it on to the seller’s agent if you found a home you were interested in buying. The letter is good for 90 days before your credit report expires. If after 90 days, you haven’t found a house that you want to buy, that’s okay! A new letter can be generated very quickly by your lender, if there have been no big changes in your credit.
Home Loan Commitment
A home loan commitment is one of the final steps of buying a home. You’ll commit to your loan around the time you actually close on a house- once the inspection, offer and appraisals have all been completed.
What Information Do I Provide a Lender?
The pre-approval process requires a lot of legwork from you upfront. There are a lot of documents you need to provide a lender so they can get a thorough picture of your financial history and state.
“For a smoother loan process, it is recommended that a borrower share income and asset documentation upfront and have it reviewed by an underwriter to get a hard conditional credit approval,” said Terry Gearhart. “It’s well worth the extra time upfront.”
This is what a loan officer will need from you to determine pre-approval eligibility:
- Federal tax returns from the last 2 years
- If self-employed, business tax returns and K-1s from the last 2 years
- Verification of any other income source
- Last two W-2s
- Last two 1099s, if applicable
- Pay stubs from the last 30 days
- Student loan statements showing current and future payments
- Social Security/disability income award letters
- Pension/retirement income documentation
- 401(k) statements and summary
- Statements and summaries of money market, IRAs and any other assets
- Checking and savings accounts and copies of 2 most recent statements
Other Documents Needed
- Copy of driver’s license, Social Security card and/or green card
- Copy of any documents relating to divorce, bankruptcy, collection, judgments or pending lawsuits
- Name and contact of your landlord if currently renting
- Name and contact of your homeowner’s insurance agent (if you have one at this point)
It will take time to gather these documents, but you’ll need all of them so it’s best to just get these collected right away so you can move through meetings with lenders fairly quickly. “If someone goes into a meeting with the lender and has all the paperwork ready, they can walk out of the office with a pre-approval letter,” said Swanson.
Many bankers can work completely electronically now, so you may be able to send these to a lender and get your pre-approval without ever having to meet in person.
Are These 4 Common Mortgage Myths True?
The financial aspect of buying a house can be the most confusing, and most stressful, part of the process. There are a lot of misconceptions about mortgages, loans and downpayments. Let’s debunk a few common myths before diving into different loan types and lenders.
Myth #1: You have to put down a 20% downpayment.
A lot of first-time homebuyers think they need to have at least 20 percent of the purchase price of the house saved up for the downpayment. This is not true! Most lenders will tell you that nowadays the minimum downpayment you’d need is 3 percent of the house’s purchase price. That’s a big difference! Some loans, like a VA loan, can waive the downpayment completely.
“Specialty lenders, like the NFC, require 3 percent of your own money then you can use 2 percent from a qualified gift or downpayment assistance funds. That’s only a minimum 5 percent downpayment,” added Gearhart.
Keep in mind that some lenders will raise your interest rates if your downpayment is considered low. Ultimately, it will vary by financial situation. Your lender will help you determine how much you will need to put down.
Myth #2: Your credit score or debt will keep you from being approved.
This myth is what makes a lot of millennials and recent graduates with student loan debt or little savings think they won’t ever be able to afford a house. This is not always the case!
Lenders look at quite a few aspects of your finances. One of those is called a debt-to-income ratio- your gross income in a month versus your monthly debt payments. Not all debt is bad. In fact, making regular payments on any outstanding loans you may have while building your savings up establishes a credit history. You’re showing lenders you are capable of managing your finances and won’t miss a payment. They want to see that!
Your credit score will affect what kind of loan you could be eligible for. “Many lenders like to see a minimum of a 580 credit score for some of their more aggressive programs,” explained Swanson. “As your credit score increases, the risk for the lender decreases and the interest rates improve. A score of 740 and up will get you the A+ best-rate programs.”
“Credit scores are a predictive risk model of loan default,” added Gearhart. “The lower the credit score, the more the risk of default persists.”
Myth #3: Everyone has a 30-year fixed-rate loan.
“Many lenders are ‘order takers’ and assume that every single client wants a 30-year fixed rate,” said Swanson. “Clients think this too because that’s all anyone ever talks about. But it’s the lender’s job to have a discussion with the client to figure out what their financial position is.”
It’s true that the most common type of home loan is a 30-year fixed-rate loan- basically repaying the loan over 30 years with the same interest rate every year. This isn’t the perfect fit for everyone’s financial situation and long-term plans, however. Swanson offered an example of someone who may not need this type of loan: “If you are working with a corporate executive who is transferred every 3-4 years, a 30-year fixed-rate loan could be costing them more money when a 5-year adjustable-rate mortgage (ARM) may be priced more aggressively in the short term.”
It’s your lender’s job to review your financial state and future before working with you to find the best loan type for you.
Myth #4: Mortgage insurance is bad.
You’ve probably heard your parents warn you that you’d be stuck with mortgage insurance if you don’t have the savings for a 20 percent downpayment. It is true that the lender will require you to take out mortgage insurance if your downpayment is low. However, this is not necessarily a bad thing!
“Even though it’s not great, it does give someone the opportunity to purchase and start to build equity long before they may have been able to if they waited to save a full 20% downpayment,” explained Swanson. “The amount of equity they gain in the property will offset the cost of the mortgage insurance premiums.”
The 4 Different Types of Mortgage Lenders
You have options when it comes to who you work with on a home loan. The four main types of lenders are local credit unions, banks, independent contractors and national companies. “A majority of lenders are offering the same products backed by the Federal National Mortgage Association (also known as Fannie Mae), Federal Home Loan Mortgage Corporation (also known as Freddie Mac) and the U.S. Department of Housing and Urban Development (HUD),” explained Swanson. “The main difference comes down to what they classify as overlays.”
An overlay is a qualification requirement applied to you by a lender that goes beyond the basic requirements of loan eligibility. Basically, if a lender thinks you might be a risky loan, they may require you to meet an extra guideline in order to be considered eligible for a loan. The extra qualifications make it more certain they’ll be able to sell your loan to an organization like Freddie Mac.
“The easiest example here is your credit score,” said Swanson. “The VA doesn’t technically have a minimum credit score requirement. However, I don’t know of any lenders that will touch a file with less than a 580 score.” That lender’s overlay then is a minimum credit score requirement.
1. Local Credit Unions
Credit unions are going to do things a little differently when it comes to your home loan. Many of them do not sell your loan to the big agencies and instead hold onto it to keep the interest payments as funding. This means you’re paying off your loan with the same service provider through the life of the loan.
“Some local credit unions have the option of holding things in house, known as portfolio loans,” said Swanson. “This means they keep it serviced at the institution and will do things others can’t, however this usually comes at a cost in either fees, additional services you must obtain from that institution or an increased rate.”
A credit union (and a bank) will be able to finance a home equity loan or a home equity line of credit (HELOC) if you ever need one in the future.
If you already have checking and savings accounts, a car loan or a credit card with a bank, like Wells Fargo, U.S. Bank or Bank of America, you may find it easier to keep your mortgage with the same institution you already have a relationship with. Your bank already has most of your financial information and can look back at your history with them. This can sometimes make it easier to get approved for a loan. You also have the advantage of being able to walk into your local branch and sit down with your lender whenever you have questions or if issues arise.
However, a bank will sell your loan to an agency like Fannie Mae or Freddie Mac, so they don’t have the flexibility on rates or fees that a credit union might have.
3. Independent Mortgage Company
Both of our experts, Brian Swanson and Terry Gearhart, are independent mortgage lenders. Swanson is a mortgage banker with Inlanta Mortgage, a company with branches across the South and Midwest. Gearhart is a lender with a Des Moines-based nonprofit organization that offers loans to buyers moving to neighborhoods in need of revitalization.
“Mortgage bankers (like myself) have very few overlays as we are meeting guidelines for whatever agency we are selling the file to and that is it,” explained Swanson. “We don’t hold onto the ‘paper’, so the risk is minimal to us.”
Lenders at independent companies work with many different loan programs so they have the knowledge to really dive deep into your financial situation to find the best fit for you.
Independent companies can also package their loans to fit particular needs. For example, our expert, Terry Gearhart, works specifically on loans that are used on housing in areas in need of revitalization to incentivize and encourage homeowners to move to older neighborhoods in need of new life. The Neighborhood Finance Corporation offers subsidized forgivable loans, refinancing and home improvement loans but only for approved areas.
4. National Companies
You’ve probably seen a ton of commercials for companies like Rocket Mortgage, Quicken Loans or SoFi. These are big corporations that don’t have a local office nearby for you to meet with a lender. Instead, everything is done online or through a mobile app.
If you’re tech-savvy and prefer to work through the loan process independently, you may not mind going this route. Some of these companies do have teams of lenders you can talk to over the phone or chat with via an app. A bonus of working with such large companies is they’ll have customer service teams available seven days a week if you have questions.
Not every national company has the flexibility to offer different loan types or rates. You’ll still have to shop around to find a package that works for you. The home loan process can be complicated. You may find it more helpful to work with a local lender with an office you can visit. It’s easier to build a personal relationship that way and makes it easier for you when questions and issues arise.
The 5 Different Types of Home Loans
We said this guide to home loans would dive deep! Let’s break down what types of home loans are available to you.
1. Conventional Loans
A conventional loan is the most common type of home loan on the market. In fact, according to a 2019 survey by the U.S. Census and HUD, about 75 percent of new homes in 2019 were purchased with conventional loans. All home loans are either backed by the government or by a private lender, i.e. the company giving you the loan. A conventional loan falls in the latter category- it is not government-backed and comes right from the company you work with.
We mentioned above that the banks and independent companies you work with to get a mortgage will sell your loan to companies like Fannie Mae and Freddie Mac who set the guidelines (overlays) for determining if you are a safe risk for the lender. They’re also the ones who set additional terms like rates and mortgage insurance based on how big your downpayment will be. Conventional loans that are issued to those guidelines are called conforming loans.
How Much of a Downpayment Do You Need?
Most conventional loan lenders don’t require a 20 percent downpayment, but they will require mortgage insurance if your downpayment is less than 20 percent in order to protect their investment in you. “Mortgage insurance on these types of loans can be deleted at 80 percent equity position,” explained Swanson. “There are different types of insurance available: some you pay monthly, single premium, split premium and lender funded, which means paying a higher interest rate.”
Fixed vs. Adjustable Loans
You typically see conventional loans offered as a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage. A fixed-rate loan means your interest rate will be set when you commit to the loan and will never change over the next 15-30 years. Your monthly payments are predictable and easy to account for in your budget. However, you tend to pay out quite a bit of interest to your lender over the life of the loan.
You can also get an adjustable-rate mortgage (ARM). This means after a set period of time, your interest rate will change based on fluctuations in the market which means your monthly payments will go up and down. Many lenders will offer a starting interest rate that is lower than the fixed-rate loans as an enticement. You’ll see ARMs styled like a fraction: 5/1, 7/1 or 10/1. This naming tells you that the introductory interest rate is set for five, seven or 10 years and then after that, your interest rate will change every year based on the market. ARMs do have caps to limit how much your rate can change year-to-year and over the lifetime of the loan.
ARMs are also available for VA and FHA loans.
Should I get a fixed-rate loan or an adjustable loan?
You need to get answers to a few questions before deciding on the type of conventional loan you need:
- How long are you staying in the house? Swanson mentioned an example earlier that someone who moves a lot would benefit more from an ARM than a fixed-rate loan.
- How often will the interest rates change? After your initial period, your ARM will adjust. But you need to find out if it will change annually or monthly.
- What does the market look like? Do your research on the housing market, even if it’s not your favorite reading material. Are interest rates expected to stay low? What do market experts say?
- Can you afford your mortgage when the payment increases? ARMs can be enticing because of the initial period of low payments thanks to a low-interest rate. But think ahead to the worst-case scenario: if your payments double after your introductory period with an ARM, can you still afford the house or will it break the bank?
- What caps are in place for your ARM? Talk to your lender about the caps in place on the rates and payment amounts.
- Is your lender available throughout the life of your ARM? Mortgages are confusing enough, let alone one that will change every year on you. Are you okay reaching out to your lender every time the rates change and you need it explained again?
It’s important you discuss your options with your lender. A good lender will talk to you about your financial goals and your budget to give you a realistic picture of what kind of mortgage you can afford.
2. VA Loans
VA loans are offered through private lenders and guaranteed by the U.S. Department of Veteran Affairs. VA loans were first introduced in 1944 to help active duty service members find housing and have since expanded to include reservists, veterans and spouses.
Benefits of a VA Loan
A VA loan does not require a downpayment and offers low rates without adding on mortgage insurance. Funding fees can be applied to the loan and those go directly to the VA to pay for the loan.
“A VA loan is a great option for any veteran who qualifies,” said Swanson. “There’s no mortgage insurance involved and 100 percent financing. There is a funding fee for VA loans that will vary depending on if someone has used a VA loan before or if you were active duty or reserves. Fees can vary from 2.3-3.6 percent, depending. However, if a veteran is disabled due to being in the military, the funding fee is waived.”
A VA loan typically offers veteran homebuyers a significantly lower interest rate. “If you qualify for both a conventional loan and a VA loan, the VA loan will be better monetarily because of the lower interest rate, even with potential funding fees,” explained Swanson.
Who is Eligible for a VA Loan?
Eligible beneficiaries for a VA loan include active duty service members, reservists, veterans and surviving spouses of eligible military members. The VA requires different paperwork depending on your military or dependent status. For active duty and veterans, this includes statements of service and a certificate of eligibility. The VA lays out exactly what you’ll need on their site here.
3. FHA Loans
An FHA loan is backed by the Federal Housing Administration (FHA) and must be issued by an FHA-approved lender. FHA loans were created by the government during the Great Depression as a way to stimulate the housing market, make it easier for homebuyers to qualify for a loan and to reduce risk for lenders. Nowadays, FHA loans are most commonly issued to first-time homebuyers because of the reduced qualification requirements. They’re designed to make housing accessible for anyone who might not otherwise qualify for a conventional loan.
FHA loans are structured for anyone with high debt-to-income ratios and low credit scores. These loans generally require a minimum credit score of 580, but you may be able to qualify with a lower score if you are able to put down at least a 10 percent downpayment.
FHA Loan Mortgage Insurance
FHA loans will always have mortgage insurance because they’re designed for low-to-moderate-income borrowers. “If you’re putting down a 3.5-9.99 percent downpayment, mortgage insurance is on for the life of the loan and will never cancel,” said Swanson. “If you put down 10 percent or more, the insurance stays with the loan for a minimum of 11 years, no matter how fast you pay it down.”
An FHA loan requires two different mortgage premiums: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The UFMIP is 1.75 percent of the loan amount which is paid when you close on your house or you can bundle it with your loan payments. It’s essentially a funding fee. The MIP payments are actually due every month (the name is a misnomer) and the rates vary depending on your loan.
The mortgage insurance payments are put into an escrow account by the U.S. Treasury Department to be used in case the borrower defaults on the loan.
While other loans have restrictions on what the source of your downpayment funds can be, FHA loans allow more flexibility. Many borrowers who are first-time or low-income and can only qualify for an FHA loan may need financial assistance to make a downpayment.
A conventional loan limits the percentage of your downpayment that can be funded from a gift or a grant. However, 100 percent of your downpayment can be a gift with an FHA loan. Your lender can point you in the right direction for downpayment assistance if need be.
The Neighborhood Finance Corporation (NFC) is a good example of a non-profit that assists buyers with downpayments. “The NFC provides qualified buyers with closing costs and other forgivable or deferred downpayment assistance,” explained Gearhart.
The NFC targets areas in need of revitalization so you’d have to be purchasing a home in a pre-approved area. But this is a good example of the type of assistance you could receive with your loan.
“Buyers need to understand the benefits of grants they are eligible for prior to entering into a purchase agreement and before the property search,” said Gearhart.
4. USDA Loans
A USDA loan is backed by the U.S. Department of Agriculture and is issued to homebuyers in designated rural areas. Borrowers are not required to have a downpayment and must have a household income below the income limit set by the USDA. If you make more than the income limit, you won’t be considered eligible for a USDA loan. You can find the designated rural areas and your county’s income limit on the USDA site.
USDA loans are similar to FHA loans in that they’re structured to assist low-income buyers. The biggest difference is the borrower must be in a rural area as defined by the USDA.
USDA loans come with a unique set of fees. “There is a funding fee called a guarantee fee of 1 percent,” said Swanson. “But there is no mortgage insurance. Instead, they collect an annual fee of 0.35 percent of the loan amount. The fee is divided by 12 and you pay it every month.”
The USDA does not back adjustable-rate mortgages; all USDA loans are fixed-rate 15- or 30-year loans.
5. Unconventional/Nonconforming Loans
An unconventional loan (or a non-conforming loan) is any loan that doesn’t meet the conventional guidelines set by the Federal Housing Finance Agency (FHFA). The FHFA is the government agency that sets the monetary limits of conventional loans and regulates and supervises the government-sponsored companies that purchase mortgages, like Fannie Mae and Freddie Mac.
The most common types of non-conforming loans are jumbo loans and subprime loans.
As a first-time homebuyer, it’s unlikely you’ll use a jumbo loan. A jumbo loan exceeds the limits set by the FHFA at a loan amount of $510,400 and up, but the amount can vary by state depending on the housing market. Jumbo loans are high-risk for lenders and usually used by buyers of luxury and high-end real estate.
A subprime loan is one made to a buyer who doesn’t meet the credit score and/or the debt-to-income requirements set for a conventional loan. Does the phrase ‘subprime loan’ sound familiar? For anyone paying attention to the headlines in 2008, you may remember it as a major factor in the housing market crash and subsequent Great Recession. Subprime loans require larger downpayments and have higher interest rates because of the risk to the lender. Anyone who would be considered a subprime loan by conventional guidelines should likely consider applying for an FHA loan.
What Questions Should You Ask Your Lender?
We just gave you a ton of information. But if you don’t quite feel like an expert on home loans and mortgages yet, that’s okay! Your lender is! It’s beneficial to you to do your research and walk into your lender’s office ready to ask questions so that you can make the best financial decision.
Can you tell me exactly what I’m going to pay every month?
Once you’ve found a home you want to buy and have qualified for a loan, your lender can give you an estimated monthly payment called a PITI- which stands for principal, interest, taxes and insurance. Basically, your lender will break down everything you’ll pay toward your mortgage every month. “A lender can calculate a principal and interest payment at any point in the process based on the anticipated loan amount,” said Swanson. “Once a property has been identified, they can estimate a final with the taxes and home insurance.”
What if you haven’t found a home yet but want an estimate of what your payments will be? “A lender can estimate property taxes based on millage rates in the county the buyer is looking in,” explained Swanson.
Obviously, if you have an ARM, your lender won’t be able to tell you exactly what you’ll pay in 10 years. But they should be able to give you a projection of what interest rates will look like for the next year.
How much house can I afford?
Too many people think pre-approval for a big home loan means they should be house shopping at the top of their budget. Just because the lender would loan you $300,000 doesn’t mean you should buy a $300,000 house. Your lender is your best financial advisor throughout this process. They want you to work with a reasonable loan amount because it’s less risky for them- they don’t want you to default!
Sit down with your lender and talk about your PITI, your long-term plans, what happens if your financial situation changes and how your debt-to-income ratio will affect you.
What type of loan works best for me?
You know all about the most common loans on the market right now. A conventional loan is most common, but may not be the right type for you. Maybe you are thinking about buying a home in a rural area and didn’t even realize you could apply for a USDA loan. Your lender should work with you to figure out which loan type will get you into your dream home while staying within your financial means.
5 Things Lenders Wish You Knew
Our resident loan experts, Brian Swanson and Terry Gearhart, had a lot of great information to share about mortgages, lenders and the homebuying process. They’ve spent a lot of time with first-time homebuyers and have noticed a few common issues and questions they wish homebuyers would think about.
1. Understand Your Budget
“Keep housing affordable!” said Gearhart. “No more than 30 percent of your income should be used for housing expenses, including the mortgage, property taxes, home insurance and utilities.”
2. Build a Relationship with Your Lender
“I wish homebuyers would be more concerned about the person they are working with,” said Swanson. “Interest rates are important but letting the lender give you the wrong loan for a decrease of 0.125 percent is going to cost you a lot more money in the long run.
“Talk to the loan originator. Get to know and understand them as a person. Ask yourself, ‘Do I trust this person with the largest asset I’ve purchased? Do I feel they are going to look out for me not just now, but as the market changes?’”
3. Do Your Research
“Use homebuyer education to learn about the hidden costs of owning a home, like maintenance,” said Gearhart. “Understand your loan options and what you qualify for before you start the home search.”
4. Be Organized
“You’d be surprised how many people don’t actually know their exact income. Have all of your documents and information together,” said Swanson. Remember that long list of financial documents you have to provide a lender for them to do a pre-approval? He recommends having all of that ready before your very first meeting with a lender, even if it’s just an informational meeting.
5. Trust Your Lender
“Work with a lender you have confidence in,” said Swanson. “Don’t work with someone you don’t get along well with or don’t trust. It will only cause you to stress out and make the home buying process more difficult.”
You have options when it comes to who you work with. You don’t have to go with the first lender who pre-approves you. Shop around for the best rates and loan program for you and find a lender who takes the time to understand your financial goals, who works to find the best loan packages and who takes the time to thoroughly explain your options to you.
What Not to Do During the Homebuying Process
When we say home buying process, we mean from the moment you start saving to going to a lender for pre-approval and all the way to closing a house. As soon as you know you’re saving to buy a house, there are a few things you need to avoid doing.
- Don’t buy or lease a car, boat or anything with a motor. Remember, lenders are looking at your debt-to-income ratio. Adding a new monthly payment or using your savings to make a big purchase can prevent you from qualifying.
- Don’t move assets from one account to another. Transfers show up as new deposits which complicate the lender’s check of your accounts. You will have to disclose and document every transfer. Wait until after you’ve bought a house to consolidate accounts. If you make any large deposits or withdrawals, talk to your loan officer as you may need to document them.
- Don’t change jobs. This includes becoming self-employed. A new job may involve a probation period which must be fulfilled before your new income can be considered valid for loan qualification. Talk to your loan officer if you know a change in your employment is imminent.
- Don’t buy furniture or appliances. We know it’s exciting to start planning for a new house but if these purchases increase your debt, it might disqualify you. Even if you don’t use a credit card, you’ll still need that cash for closing costs.
- Don’t apply for any new credit! This should be a no-brainer! Do not apply for any new credit cards since these will show up as inquiries on your credit report.
- Don’t cosign any loans. Again, minimize your debt and don’t add more inquiries to your credit report!
- Don’t change banks. Make it as simple as possible for your loan officer to document your accounts.
- Don’t pack or ship important documents. Important paperwork like your W-2s, divorce decrees, bank statements, pay stubs and tax returns should not be packed up with your household goods. Duplicate copies can take weeks to get and will stall the loan process.
What Should You Be Doing?
So if you’re basically avoiding touching your bank accounts in any big way, what should you be doing during the homebuying process? Swanson had some good tips:
- Make a budget and stick to it
- Pay all your monthly bills on time
- Locate and keep your income statements, W-2s and tax returns together
- Get your bank and investment statements
- Save the money you need for closing costs
What if I’m Rejected for a Home Loan?
What happens if, after all this preparation and discussions with your lender, you are rejected for a home loan? It can feel devastating and you may start to wonder if you’ll ever be able to afford your own house. The good news is, there are a few steps you can take to improve your chances of being qualified for a loan down the road.
“There are so many options if you are rejected for a loan,” said Swanson. “The easiest place to start is to review the accuracy of the credit reports pulled by the lender. If there are late payments or collection accounts that just aren’t accurate, you can get those removed by the credit bureaus.”
“I always recommend homebuyer education,” said Gearhart. “Understand credit utilization. Obtain assistance to understand what is driving your credit scores and take the necessary steps to position yourself to qualify later on.”
Swanson also recommends holding off on opening any new credit accounts. New credit lines bring down your credit score for the first months before they start to increase it. “Keep the balance on your cards below 30 percent of the credit limit,” continued Swanson. “When you’re shopping for a loan again, tell the finance person you only want one or two lenders to pull your report to avoid unnecessary inquiries.”
Too many credit inquiries on your report tell lenders you’ve been shopping around for credit extensions which implies you might have open accounts that aren’t accounted for.
In a worst-case scenario, a lender can refer you to a credit repair company. “Ask your lender to refer you to someone reputable for bad situations like stolen identity or if reports were pulled for someone else with the same name,” said Swanson. “It’ll cost you money, but it’s worth it to get your credit record cleaned up.”
When Do I See My Lender Again?
If you’re pre-approved for a loan with a lender you trust to handle your finances, it’s time for you to officially start the house-hunting process! A good lender will stay in touch with you throughout the process, especially if anything changes in your credit or if you need new letters of approval.
You’ll work with your lender again when you’ve finally found your dream house and made an offer that’s accepted. Closing on your house is exciting but also requires a ton more paperwork (there’s always paperwork in home buying!). Your lender can be there at the closing with you and your agent to walk through the final documents and to answer any questions you may have. Not all loan officers do this, but a good one will.
“No one wants a mortgage, they want a house.”Brian Swanson
The financing aspect of buying a house is not the most exciting part of hunting for your dream home. The world of mortgages, home loans, lenders and interest rates can be intimidating. That’s why you need the right loan officer to walk you through the process so you know exactly what your purchasing power is.
Once you’ve gone through the pre-approval process, it’s time to find a real estate agent! Read on for the next step in the first-time homebuyers series.