Understanding the Home Loan Process

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There’s nothing quite like the thrill of having a home you call your own. Purchasing a home is an exciting adventure and one of life’s biggest milestones. However, if you’re like most people, finding your dream property is only part of the process. Unless you have enough cash to buy your home outright, you’ll need a home loan to turn your dream into a reality.   

Qualifying for a mortgage may seem daunting at first, but it doesn’t have to be overwhelming. Once you understand the essential phases and requirements, the process starts to feel more structured and manageable. The following guide explains each step in detail, so you’ll know exactly what to expect as you navigate your way to homeownership.

Step 1: Assess Your Finances

Before you start searching for your dream home, take some time to make sure you have a solid understanding of your current financial situation. This will help you determine a realistic price range for your new home and ensure you’re ready to present yourself in the best possible light when it’s time to apply for a mortgage.  

Begin the assessment by estimating your monthly expenses, savings, and income, so you can find a comfortable budget for your home purchase. Don’t forget to factor in potential homeownership costs like: 

  • Insurance and property taxes
  • Maintenance costs
  • The cost of relocating
  • Any homeowners association (HOA) fees

Remember that a home that stretches your budget too far can quickly become a financial burden.

It’s also helpful to understand the information that mortgage lenders evaluate during the underwriting process. If any of the following are potentially problematic, begin working on improving them as soon as possible. Taking control of your finances early in your homebuying journey may help increase the chances of loan approval.

  • Credit Score: While each lender varies, generally, a score of 620 or higher is required for a conventional loan. Check your credit report for errors and report any discrepancies right away. If your credit score is less-than-ideal, consider actions to improve it, such as paying off outstanding debts.
  • Verifiable Income:  Lenders want proof of consistent income to ensure you can make your monthly mortgage payments consistently and on time. This includes your regular wages as well as any other stable earnings, like bonuses, investment income, or rental revenue.
  • Debt-to-Income Ratio: Your debt-to-income (DTI) ratio is a measure of the total amount you owe in monthly debt payments compared to your gross monthly income. Generally, lenders like to see a DTI ratio under 43%. If your ratio is higher, consider paying off some of your smaller debts before applying for a home loan.
  • Down Payment: The amount you can afford to put down on your home may affect your loan terms. Many conventional mortgages require a minimum of 3%, but putting 20% down can save you from paying private mortgage insurance (PMI).
  • Total Assets: Having additional assets like savings and investments can help you demonstrate financial stability to lenders. This shows that you have a financial cushion that you could tap into if unexpected expenses arise.

Step 2: Choose the Right Lender and Loan Type

Once you have your finances in order, it’s time to decide which type of home loan is right for your needs and choose your lender. Begin by considering the following factors.

Conventional vs. Government-Backed Loans

Conventional mortgages come from traditional banks and typically require better credit scores and higher down payments. Government-backed loans like FHA, USDA, or VA loans can be more forgiving on credit and down payment requirements.

Shorter vs. Longer-Term Loans

A shorter loan term, like 15 or 20 years, will save on interest but increase monthly payments. A 30-year loan spreads payments out, making them more affordable, but you’ll pay more in interest in the long run.

Fixed vs. Variable Interest Rates

A fixed-rate loan keeps your payment stable and guarantees you won’t have to deal with fluctuations. A variable rate might offer lower initial payments but could increase over time.

Down Payment Considerations

Conventional loans typically require a minimum of 3% down. Some government-backed loans may have lower or no down payment requirements.

Choose the Right Lender

There are many different types of mortgage lenders to choose from, ranging from traditional banks to online lenders. Depending on your needs, you may also consider lenders that focus on specific loans, like VA loans for military borrowers, or that offer special services, like down payment assistance.

Step 3: Get Preapproved for a Loan

While this step technically is optional, getting pre-approved for a mortgage loan can help ensure the homebuying process goes smoothly. A pre-approval letter not only outlines how much you can finance, but also shows sellers that you’re a serious buyer with the financial means to back up your offer. During the preapproval process, you’ll also be notified if there are any potential problems with your finances, giving you the chance to proactively make adjustments as needed.  

Step 4: Complete Your Loan Application

Lenders require a significant amount of documentation during the underwriting process, so it’s a good idea to gather the items you’ll need before you submit your application. This includes:

  • Income verification: Tax returns, W-2 forms, pay stubs, or self-employment records.
  • Proof of assets: Bank statements for checking, savings, retirement, and other accounts.
  • List of liabilities: Documentation related to outstanding debts like credit cards or loans.
  • Additional paperwork: This may include rent checks, gift letters, or sale documentation for assets.

Even if preapproved, you’ll need to submit the most recent financial information when you formally apply for the loan. Having these documents ready will help you quickly and thoroughly complete your mortgage application. Be sure to answer each application thoroughly and honestly to avoid delays in processing. 

Step 5: Loan Approval and Processing

During the approval and processing stage, the underwriter meticulously examines your finances and property details, including ordering an appraisal and verifying the home’s title. This is often the most nerve-racking part of the mortgage process and can take anywhere from a few days to several weeks.

While you’re going through underwriting, it’s crucial to avoid financial changes such as a major purchase or switching jobs, as this can affect your credit score and could even jeopardize your loan qualification.

Step 6: Loan Closing

Once your loan is approved, it’s time for the final step – closing on your loan. During the closing meeting, you’ll ask any last-minute questions, sign the necessary documents, and provide your down payment and payment for your closing costs.

Prior to closing, it’s essential to review your loan details, complete a final walk-through of the home, and ensure you have the required funds available. You’ll also need to purchase homeowner’s insurance and lender’s title insurance.

When you’ve finished signing all of the forms, you’re officially a homeowner!

Turn Your Home Ownership Dreams into a Reality

Your dream home is within reach, and understanding the home loan process is the key to unlocking the door. At Keller Home Loans, we’re passionate about turning your home ownership dreams into a reality.

We understand that every home buyer has unique needs, and our team of experts is here to help you find the right mortgage product to help you reach your goals. Contact us today to get started.

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