Ready to Buy a Home?
Choose a good mortgage consultant, and you’ll have support throughout your loan application journey. You’ll probably get a lot of phone calls along the way, but it’s all to help you and your real estate agent prepare to head to the closing table.
Knowing what’s coming will help you stay calm and focused. Here are some thoughts on how to navigate the journey in style.
Find Your Consultant; Know the Plan
Using local recommendations, you can find a mortgage consultant who can help you get the loan that fits your financial situation best.
First, you’ll want to be pre-approved for a loan amount so you know your maximum buying power. It begins with a loan application, backed up by your credit strength, down payment, and income. The mortgage consultant will organize the information and assess:
- Your spending and saving style, which indicates your capacity to repay a loan.
- Your available cash reserves and your income.
- The asset (meaning the selected house)!
The application and underwriting process can take several weeks from start to closing. If you believe your path ahead is pretty straightforward, you can also apply online. Whichever way you approach the process, here’s what to expect.
Here’s What You’ll Need
To get your ducks in a row before meeting with the mortgage consultant, be sure to:
- Line up statements showing all income over the past 2+ years, whether through Social Security, investment income, or employment.
- Have your bank, investment, and retirement account statements from the past three months.
- Have the names and full contact information for companies you’ve worked for over the last two years. You’ll need to describe the business type, job title, and your time in the profession and in your particular job.
- Have W-2s from those tax years ready, together with pay stubs or the most recent two months. You’ll sign a form allowing your lender to access your tax returns to verify your income.
What if, instead of W-2 income, you rely on contract income or are self-employed? You might be able to help your mortgage specialist make a case to the loan underwriter that your work so far is tantamount to two years, and promises future stability. Whatever your job may be, do your best to keep it stable while you go through the loan approval process.
Lenders love stability. Everything you submit is meant to show you have the financial stability to pay off your loan on schedule.
Here’s How You’ll Complete the Application
The Uniform Residential Loan Application serves as a model for the typical application, so there are predictable parts. Be ready to say whether you are applying for the popular 30-year, fixed-rate mortgage, or something else. In times of low interest rates, fixed rates make good sense. When you get a rate, it’ll be locked in for a certain period between 30 days and 60 days. It’s best to ensure that your interest rate is locked in for enough time to let you get to closing.
Should you get a conventional loan? Should you go with an FHA or other government-sponsored loan? How much will you need to borrow? Sit down with your mortgage consultant for expertise and guidance.
Know how your property will be titled. What name(s) will go on the title as owning the home? If there are co-owners, how will they vest their ownership?
There will also be a section for you to give information about the borrower and co-borrower, including Social Security numbers, relationship status, current and former home addresses, and properties currently owned. Borrowers and co-borrowers need to detail their monthly income from every source, as well as all current expenses. A mortgage approval depends on the ratio of your monthly payments (debt) to the money you earn (gross monthly income). Debts are typically calculated based on your monthly payments to credit card companies, any childcare or alimony obligations, and any loans you currently have. Your projected new mortgage payments will be counted as debt. Is your debt-to-income ratio under 43 percent? If not, you’ll want to lower those projected mortgage payments by picking a lower-priced home.
You’ll be declaring any past defaults or bankruptcies, pending legal actions, and outstanding judgments against you. You’ll plug in the price and other details of the actual transaction as soon as you know which house you plan to buy.
Your signature on the loan documents binds you to their terms. By signing, you promise truth and accuracy in the information you have submitted, and allow it to be verified.
How to Have the Underwriter in Your Corner
To succeed at borrowing, be responsive to your mortgage specialist — who is working with the underwriter. Your communication line is critical. Once you have selected your mortgage specialist and put the new contact in your phone list, set an alert on your phone so you don’t miss calls. Answering every question quickly will move your process along.
If an underwriter isn’t ready to approve your loan — but will likely do so upon receiving some piece of information — you might get a conditional approval. Concentrate on getting that information.
☛ For a good chance of approval with the easiest interest rates, you need to have cultivated a good credit score. Here’s what a good credit score means.
Keep diverse credit accounts open. Request raises in your credit limits. This will help your credit utilization profile. Avoid maxing out any line of credit; keep balances low (under 30% of your total available credit lines). Pay on time, of course.
Never blindside an underwriter with a sudden, large deposit. What does this mean? Say you’re pre-approved, and you make a large cash deposit. The underwriter will wonder: Where’s this coming from? Is it a gift of money?
If it’s a gift, you need a gift letter. If not, it’s a loan, and the lender has to count it in your debt. This could throw your approval off.
On the other side of the coin, it’s an easy mistake to slip up and make a big withdrawal before closing. This slip-up could derail a loan application — especially for the borrower with a very tight debt-to-income ratio margin.
Consider Asking for a Commitment Letter
Some mortgage brokerages have in-house underwriters. Does yours? Here’s why it might matter.
Most mortgage specialists focus on getting you pre-approved. A pre-approval letter states the maximum amount you are qualified to borrow. This is not a promise that a lender will underwrite the particular home you select. “Pre-underwriting” is.
Brokerages with in-house underwriters might underwrite you personally, clearing your financial documentation even before you select a home. If so, you’ll get a letter of commitment. You can offer this letter together with your bids when are looking at houses. With this commitment in hand, you can waive the financing contingency in your purchase agreement. Because your offer isn’t contingent on financing (the lender has already committed), you can compete with cash buyers. When you sign the purchase contract, you’ll need to get through the title search, the appraisal and the house inspection, but financing won’t be a question mark.
For some mortgage companies, there are home buyers — such as self-employed, commission-based, or contract workers — who are always underwritten before they are given a pre-approval letter. But for applicants who easily check all the boxes, a commitment letter isn’t needed. They will get final approval. Even then, some brokers recommend pre-underwriting for buyers in a competitive market.
If At First You Don’t Succeed…
If you’ve had a loan application turned down, ask for clarity. Do you need to pay down debts? Build up credit? Ask your mortgage broker for advice on the most impactful credits cards you can get.
Or you might need more income. You might need to stay at the same job a little longer. These are items you can work on as you prepare to jump back into the arena.
Another way to keep going is to recruit a co-buyer, or use the home you’re buying as a source of income as well as a home.
The main thing? If you have a dream of homeownership, don’t let it go. If you’re like most people, debt-to-income ratio is the biggest hurdle in the journey. So, keep putting aside money for the down payment, and keep your debt low. The good news is that it’s never too late to buy a home.
Supporting References
MyHome by FreddieMac.com: Buying, Step 5: Working With Your Lender.
Jennifer Bradley Franklin for Bankrate.com: Mortgage Application: Questions to Prepare For (Feb. 28, 2022).
Sidney Richardson for Rocket Mortgage®: Why Loans Are Denied In Underwriting And What To Do Next (May 11, 2021).
Tara Mastroeni for Forbes.com: Is Pre-Underwriting Worth The Effort? (Aug. 13, 2018).
Photo credits: RODNAE Productions and Diva Plavalaguna, via Pexels.