Understanding The Mortgage Loan Process Buying a Home
This blog will cover and discuss understanding the mortgage loan process when buying a home. We will go in-depth on home buying and understanding the mortgage loan process when buying a home. The team’s goal at Mortgage Lenders For Bad Credit, Inc. is for all first-time home buyers to be familiar with the home buying process and comfortable. Both buying a home and obtaining a mortgage can be viewed as a daunting process.
Steps To Understanding The Mortgage Loan Process When Buying a Home
Understanding the mortgage loan and overall process, you will avoid stress and have a rewarding and enjoyable experience. Buying a home is a large investment. Most homebuyers need a mortgage to buy a home. Marga Jurilla is the National Operations Manager at Mortgage Lenders For Bad Credit. Marga explains the mortgage loan process as follows:
Understanding the mortgage loan process should be a given and one goal to achieving the “American Dream” of owning a home. In the following paragraphs, we will cover understanding the mortgage loan process when buying a home.
Homebuyers often think about when is the right time to buy a home. They often have a goal to become homeowners as one of their biggest goals but when. The older you get, the faster time goes. As time pass, home prices keep on going up. The first thing to do is set your goal and start today.
How Much Money Do I Need To Buy a House?
Before shopping for a home, you must find out how much home you can afford. Ask yourself the following questions:
- How much are you paying for your rent?
- How much is the maximum housing payment you can afford?
- How much money do I need for a home purchase’s down payment and closing costs?
- How much money do I need to maintain the home I will be buying?
- How much money in reserves do I need?
- How much will my housing expenses go up, such as utilities, maintenance, and other expenses?
Remember that the first step to buying a home is understanding the mortgage loan process unless you buy the home with cash. Most people will need a mortgage. The first step is to feel comfortable in your financial situation once you have the confidence to proceed. Once you have evaluated your finances and determined a budget, it is time to get pre-approved.
Getting Pre-Approved By a Mortgage Lender
What does getting pre-approved mean, and how do you get pre-approved? First, it is imperative to research lenders and find one you are comfortable with. The lender of choice should be someone that can provide you with the best service and best interest rates and offer the right loan program for your needs. The Mortgage Lenders For Bad Credit, Inc. team will check all those boxes for virtually all consumers. Once you have chosen the lender, your initial discussion will allow the lender to evaluate your financial situation.
How Do Mortgage Lenders Look at Employment History?
The first is employment history; the key to this is they want to make sure you, as the applicant, have not had any gaps in employment. Gaps in employment will present a red flag that will cause a need for further discovery. It is standard for lenders to require two months’ worth of pay stubs as well. The pay stubs will help verify employment and provide the lender with a clear picture of your income, the second factor they look at.
Debt-To-Income Ratio Guidelines
Once you have provided the paystubs and the lender has verified your income, they will ask for a list of all your debts. Once all your debts have been confirmed, the lender will have the ability to determine what your debt-to-income ratio is. One of the most important factors lenders consider is the mortgage loan applicant’s debt-to-income ratio. Dale Elenteny, a senior loan officer at Mortgage Lenders For Bad Credit, explains debt-to-income ratios:
Debt to income ratio, or DTI, is simply dividing all of your outstanding monthly debts by your gross monthly income. Different loan programs will accommodate higher DTI, but the industry standard is roughly 36%. You will also have to fill out a credit application. Upon credit application submission, the lender will determine your FICO score and evaluate your credit history. Those are steps 5 and 6 of the process.
One of the first things a loan officer does during the mortgage loan process is calculated your debt-to-income ratio. There are two different types of debt-to-income ratios. The front-end debt-to-income ratio is often called your housing ratio and our back-end debt-to-income ratio. The debt-to-income ratio determines whether you qualify for a home loan. It measures your new housing payment versus your total aggregate monthly debt.
How Do You Calculate Your Front-End Debt-To-Income Ratio For a Mortgage?
Your front-end debt-to-income ratio is calculated by taking your proposed housing payment, including your principal, interest, tax, and homeowners insurance (PITI), divided by your monthly gross income. The following are the debt-to-income ratio caps on the individual mortgage loan programs:
- FHA Loans has a front-end debt-to-income ratio of 46.9% and a 56.9% back-end debt-to-income ratio
- VA Loans does not have a maximum front-end debt-to-income ratio or back-end debt-to-income ratio
- USDA Loans has a front-end debt-to-income ratio of 29% and a 41% back-end debt-to-income ratio
- Conventional loans do not have a front-end debt-to-income but a 50% back-end debt-to-income ratio.
- Non-QM lenders and jumbo mortgage lenders have their own independent debt-to-income ratio caps.
How Mortgage Underwriters Calculate Back-End-Debt-To-Income Ratio
The back-end debt-to-income ratio is calculated by taking the sum of all of your existing minimum monthly payments, including your proposed mortgage payment which is your principal, interest, taxes, and homeowners insurance divided by your monthly gross income. Every loan program has its debt-to-income ratio cap.
What Is The Lowest Credit Score I Need To Buy a House?
Again, there are numerous loan programs to provide flexibility for your FICO score. Most often, people will be told that a minimum score of 620 is required, but some lenders, like Mortgage Lenders For Bad Credit, Inc., can work with credit scores as low as 500. You can qualify for an FHA and VA loan with credit scores down to 500 FICO. Mortgage Lenders For Bad Credit, Inc. is one of the nation’s best mortgage lenders for bad credit.
How Is The Loan-To-Value Calculated During The Mortgage Loan Process?
The final step in the pre-approval process is determining the loan-to-value ratio or LTV. The LTV compares your financed amount to the appraised value. To determine the LTV, you take the loan amount and divide it by the appraised value. For example, if your mortgage is for $150k and the appraised value is $200k ($150k/$200K), your LTV is 75%. The loan-to-value helps lenders evaluate the risk of your loan. After the lender has reviewed your financials, he will issue a pre-approval.
Shopping For a Home After Being Pre-Approved
Once pre-approved, the next step is to find a realtor to help you find your new home. There are agents known as “Buyer Agents” who work primarily with people in the market to buy a new home. However, if you call the listing agent of a property you have seen, they, too, will be able to assist you.
The most typical relationship again is a buyer represented by their own agent. It is rare, but sometimes people buy the first house they see. However, it is very common for a buyer to look at several houses before they find the right home. Whatever way you decide, the most important thing to remember is to choose someone that is willing to put in the time and effort to make you feel comfortable and find you the right home.
Once you have found the perfect fit for you in terms of a realtor, it is time to start house hunting. It is common for consumers to search the internet to see homes listed on the market. The most popular sites visited online are Zillow and Realtor.com. Both sites will allow you to filter through many options and
Finding Your Dream Home and Entering Into a Purchase Contract
Congratulations!!! Now let’s discuss the next step toward making you a homeowner. It’s time to make an offer! With the help of your dedicated real estate agent, you will have to know the market to ensure your offer is fair for you, your family, and the seller. Alex Carlucci, a senior loan officer at Mortgage Lenders For Bad Credit, explains buyers’ and sellers’ housing markets as follows:
If the market you are interested in is in high demand, it will generally be referred to as a Seller’s Market. However, if homes are not selling fast and inventory is abundant, it will be considered a Buyers Market.
Simply put, you will be able to be more reserved with an offer in a buyer’s market and will most likely have to be very aggressive in a seller’s market. When analyzing the market of interest, looking at ‘comps” when establishing your offer is important. Comps are recent transactions in and around your area based on similar home attributes as the home you are interested in.
What Is The Minimum Down Payment on a House?
The down payment required depends on the type of loan you select. There is no law or rule for a universal minimum down payment, but the more you pay upfront, the lower your monthly mortgage payments, the lower the interest rate you qualify for, and the less likely you will have to pay mortgage insurance and other fees. Generally, however, 3%-5% would be the absolute minimum and only for certain borrowers.
Once you have determined your offer, it’s time to formally submit it. At this point, you should also reach out to your lender and let them know you found a home. They will ask to verify 6 key items in order to start the application process.
Once they receive your full name, social security number, the property’s address, the property value, the loan amount, and your income, the application can be processed. So realistically, most first-time home buyers need at least 3% down for a conventional loan or 3.5% for an FHA loan. For a first-time home buyer down payment, you’d need to save around $10,500 to $12,250 to buy a $350,000 home.
What is The Loan Estimate?
Once you have completed a fully online mortgage loan application, you will receive a loan estimate within three business days. A loan estimate is a form presented to you that will include your interest rate, monthly payment, and necessary funds for closing. Marga Jurilla of Mortgage Lenders For Bad Credit explains the Loan Estimate:
It is important to know that the information on the loan estimate is what the lender expects to offer you, as you have not yet officially received approval. At this time, you will be able to determine if this home is within your budget and whether or not you want to proceed.
Depending on the loan program you choose, your down payment will vary. For instance, if you decide to go with an FHA loan, the down payment could be as low as 3.5%, or if you go with a conventional loan, it could be as much as 20%. Let’s say you decide to go FHA and qualify for the 3.5% because that best fits your budget. If you purchase a home for $200k, your down payment would be $7k.
What Is The Earnest Money Deposit When Buying a House
When you meet with your realtor to submit your offer, they will ask how much earnest money you will put down. That good faith deposit will be deducted from your down payment at closing. For simple mathematical calculations, if you put $3k in escrow as earnest money, the balance for the down payment will be $4k.
Earnest money is essentially a deposit a buyer makes on a home they want to purchase. A contract is written up during the exchange of the earnest money that outlines the conditions for refunding the amount. Earnest money deposits can be anywhere from 1–10% of the sales price, depending mostly on market interest.
What Does Going Into Escrow Mean When Buying a House?
At this point, many people will ask, “what is escrow”? Escrow refers to funds held by a third party on behalf of transacting parties. In this case, either the real estate broker or an attorney would be the ones to hold the earnest money.
A house that has yet to be transferred from seller to buyer is considered “in escrow.” When the seller of a property accepts an offer from a buyer, the process of escrow begins.
Submitting Real Estate Purchase Offer With Contingencies
In the offer you submit, would you want to include any contingencies? Examples of contingencies may include but are not limited to selling a previous home or your specific request for the seller. Once the Seller receives your offer, they usually have 24 hours to respond. At this time, they will either accept, decline, or counter your offer with a different amount. Mike Gracz of Mortgage Lenders For Bad Credit Explains what contingencies mean as follows:
Common contingencies in real estate include an appraisal contingency, inspection contingency, sale contingency, or funding contingency. When a property is marked as contingent, it means that the buyer has made an offer and the seller has accepted that offer.
Home Inspection and Appraisal During The Mortgage Loan Process
After agreeing to terms with the buyer and submitting your application to the lender, you have two additional tasks to take care of before closing. The first would be a home inspection. Now, you can waive the inspection, although that is not recommended. Ronda Butts, a dually licensed loan officer, and real estate agent, explains the home inspection and appraisal process as follows:
To protect yourself and accurately gauge the home’s condition in great detail, we strongly recommend you have a home inspection done. Some individuals are licensed to inspect homes, and you can choose who performs the inspection as long as they are licensed; that is the only prerequisite.
While you are searching for your inspector of choice, the lender will put your file together so it can be sent to his processor. He must ensure you have provided him with all the investor-required documentation. In a typical FHA loan process, you will be asked to provide bank statements showing your reserve for funds to close, bank statements, assets such as 401k or investments, and a contact for someone at your place of employment, which the process can verify with.
The Role of the Processor During The Mortgage Process
Once your loan officer has the file, it’s off to the processor. At that time, the processor will double-check to ensure everything is in order and complete. If there is any additional information or documents needed, they will reach out for it. They will also order the appraisal of the property and the title. Angie Torres, the National Operations Director at Mortgage Lenders For Bad Credit explains the appraisal process during the mortgage loan process as follows:
A contracted third-party appraiser does the appraisal. They, too, are licensed and will perform the task to make sure the market value of the home is sufficient according to investor guidelines. Typically the appraiser will find three comparable properties sold within the last year that are in the area and similar to the home you are purchasing.
The home appraiser will take the average amount of those properties to determine the value of the appraised home. There are other appraisal forms, but generally, this is the standard appraisal used in residential real estate. Once the home inspection and appraisal are complete and the processor has verified that all is good, the file is sent to underwriting.
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The Role of the Underwriter During The Mortgage Loans Process
The underwriting process is the last step before closing. Underwriting is when the file is checked to ensure all documents are included, and the consumer has truthfully represented themselves. Angie Torres of Mortgage Lenders For Bad Credit explains what happens during the mortgage underwriting process:
Underwriting simply means that your lender verifies your income, assets, debt, and property details in order to issue final approval for your loan.
Understanding The Mortgage Loan Process Leading To CTC
The clear to close, often called the CTC, is when the mortgage underwriter clears all conditions. A clear-to-close means the lender has signed off the loan and issued a full commitment. Again, Angie Torres explains what clear to close means the what happens after the CTC:
Clear to close means the underwriter has approved the loan documents, and the bank will fund the mortgage if your employment status or credit hasn’t changed. If you haven’t taken on new loans, gotten fired, or started a new job, clear to close means you’re approved.
Scheduling The Home Closing After The Clear To Close
Once the borrower has been issued a clear to close by the mortgage underwriter, the title company will draft your closing disclosure and schedule your closing. Angie Torres is the national operations director at Mortgage Lenders For Bad Credit. Angie explains what happens after the clear to close and how the road to closing happens:
The lender’s closing department will coordinate with the title company to review the final numbers. The docs will be sent to the title company. By law, the closing can be no sooner than three days after issuing the closing disclosure. While this happens, your lender will wire funds to your closing officer. This person will confirm receipt and record the loan with the county.
When the closing day finally arrives, you’ll either be sent to the title company or a closing agent will come to your attorney’s office to sign your documents. The last and most important step- RECEIVE THE KEYS TO YOUR NEW HOME!!
