Buying one's first dream home is an experience filled with emotions for all home buyers — the excitement of shopping, finding a place to call home for the foreseeable future, closing on the purchase, renovations and moving in, all providing moments to remember for life.
At first glance, arranging the mortgage financing for the first time may appear as a whirlwind experience. It doesn't have to be that way, if we are well prepared.
Here we cover some of the key steps to keep in mind as you navigate the house purchase journey:
- Pre-approval application
- Sharing supporting documents
- Credit check
- Mortgage pre-approval
- Purchase agreement
- Intent to proceed with mortgage financing
- Underwriter application review
- Appraisal scheduling & completion
- Underwriter conditions resolution
- Rate locking
- Securing homeowner's insurance policy effective target closing date
- Title search clearance
- Lender's Clear to Close
- Purchase Closing
The Pre-approval Application is usually your first step in the home buying journey. In this step, the objective is to find how much house you can comfortably afford? Work with your mortgage broker to secure the Pre-approval Letter that you can share with the real estate agent so that your house search is in budget.
As a Precursor to the pre-approval application, regularly monitoring your credit report is a valuable exercise — keeping track of all accounts on record at credit reporting agencies and contacting them in the event you see an erroneous account that might be linked to your profile, because that'll likely be impacting your credit scores.
Sharing supporting documents (optional)
A typical full documentation purchase mortgage application needs the following set of documents for mortgage application underwriting:
- Asset Statements: IRA, Retirement accounts – Most recent 2 months & all pages even if they are blank.
- Bank Statements – Last 2 Months – All bank statements for all accounts from the last 2 months. Including all numbered pages of all bank statements
- Copy of Lease – Current lease agreement if renting current residence.
- Photo ID or Driver's License – Legible state-issued driver's license.
- Federal Tax Returns – Last 2 Years – Last 2 years of federal tax returns to prove income, include all schedules.
- Pay Stubs – Received in Last 2 Months – Last 2 months of pay stubs to prove income.
- W-2s – Last 2 Years – Last 2 years of W-2s to prove income.
In addition, online mortgage platforms may also request (i) An e-consent to communicate electronically; and (ii) Credit Authorization to fetch your credit reports.
Note however, that sharing supporting documents is not required for receiving a loan estimate.Keep track of all accounts on record at credit reporting agencies and contacting them in the event you see an erroneous account that might be linked to your profile, impacting your credit scores. Click To Tweet
In the Credit check step, the mortgage broker helps fetch the tri-merge credit reports, i.e. credit reports from all three bureaus: Equifax, Experian and TransUnion, to be included in your mortgage application.
Utilizing automated underwriting technologies, like Fannie Mae's Desktop Underwriter® and Freddie Mac's Loan Product Advisor®, mortgage brokers will help generate a conditional pre-approval letter. This pre-approval letter typically is communicated with the real estate agent, so that you only see houses in your target budget.
Mortgage platforms, including Stem Lending, also provide a Loan Estimate and initial disclosures as soon as the following six pieces of information are identified, constituting a mortgage application:
- Consumer’s name
- Social security number (to obtain a credit report)
- Property’s address
- An estimate of property’s value; and
- The loan amount sought.
Once you've seen ample number of houses with assistance from your real estate agent, an offer you made on your dream home may get acceptance from the sellers. Once the house sale contract is signed by all parties, it's a good time to go back to your mortgage broker to help generate an updated loan estimate corresponding to this house.
Intent to proceed with mortgage financing
After the loan estimate with the new property address is received, and the loan terms are acceptable, you communicate your Intent to Proceed typically by electronically signing the intent to proceed with your mortgage broker. Note that you may choose to lock the rate at this stage or keep it “floating” i.e. unlocked. It's a good time to consult with your mortgage broker about the merits of rate locking then (till your target closing date) or keeping it unlocked for the moment and locking the rate in the coming weeks.
Depending on the subject property state, an attorney review may be performed at this stage. You would likely also perform a house inspection to evaluate the condition of the property.
Underwriter application review
Once your mortgage broker presents your e-signed intent to proceed to a wholesale lender, the underwriter application review begins. At this stage, the lender's underwriting team gets to review all the facts presented in your mortgage application. Typically, the underwriting team reverts back with a set of approval conditions that must be met before the mortgage can be approved. Your mortgage broker assists you once again in addressing these conditions in a timely manner. A key condition that underwriters will typically add at this stage is the Appraisal Report, which a third party appraisal management company helps complete.
Appraisal scheduling & completion
In this step, an independent appraisal management company helps schedule the appraisal inspection, coordinating with the seller's real estate agent. Appraisals are typically the first cost out of pocket for home buyers. A licensed appraiser inspects the property, and utilizing recent sales data of similar properties in the area, an appraised property value is assigned.
For ensuring compliance with Appraisal Independence Requirements, home buyers shouldn't communicate the identity of the appraiser with the mortgage broker at this stage. Once the appraisal report is checked for factual quality control by the appraisal management company, it's released to the mortgage broker and lender. A lower appraised property value than what was initially estimated has the potential to derail the mortgage application, even making it ineligible under all programs with the new lower appraised property value. So keep a close eye on appraisal and consult with your real estate agent regarding any appraisal contingencies that might be put in place in your purchase contract well in advance.
Note also that an appraisal is different from home inspection. Appraisal's goal is to ascertain the market value of the property, while the home inspection's goal is to find any structural issues with the property that might raise a cause of concern. An appraisal is typically required by the mortgage lender while the house inspection isn't. Nevertheless, home buyers may benefit from concurrently conducting a house inspection with the help of a licensed house inspector to uncover potential issues they should be aware of.
Underwriter conditions resolution
In this step, you essentially share supporting documents addressing all of the conditions needed for mortgage application approval. The appraisal report is typically directly communicated by Appraisal Management Company. However, homeowners insurance effective target closing date and Closing Protection Letter with the right mortgagee clause, property tax certification and closing agent's wire instructions are typically communicated by your respective chosen homeowners' insurance agency and title agency to your mortgage broker.
Rate locking on your mortgage application is a key decision. It's influenced by prevailing market conditions. Mortgage lenders typically update rates at least once a day. In the events of large movements in Mortgage Backed Securities and US Treasury instruments' prices, lenders can often update their offered rates several times a day.
Unless the rate on your mortgage application is locked, it's subject to change. Longer duration rate locks can cost more than shorter duration rate locks. Keep these in mind as you decide on rate locking or keeping it floating/unlocked.
Homeowner's insurance effective target closing date
As homeowner's insurance is a recurring expense for home buyers, it's good to shop for homeowner's insurance quotes. Ask your mortgage brokers for different portals you could use to shop for insurance costs and also do research online. The homeowner's insurance agencies would typically need the Mortgagee Clause and Loan Number from the lender to correctly set the beneficiary of the hazard insurance coverage. Your mortgage broker can get that over to you.
Title search clearance
Once the title agency has access to county records for title history of the house, and ascertained there are no liens on the property prohibiting the seller to sell it to you, they will share the title report with your mortgage broker, clearing out the title search step.
At this stage, title agencies typically also issue the Closing Protection Letter with the mortgagee clause corresponding to the lender, referencing the loan number and communicating their wire instructions to the mortgage broker. Once the tax certification is complete, that's also relayed to your mortgage broker.
Lender's Clear to Close
Clear to Close is a key step in mortgage financing for home buyers. That indicates satisfaction of all underwriting conditions, and a Closing Disclosure is issued at this stage. The settlement agent gets access to the lender's Settlement Agent Portal and gets to match the buyer side of the transaction with the seller side and the exact fees for tax prorations based on your target closing date and other settlement services you shopped for.
Home buyers purchase closing
Purchase Closing is the settlement step when both home buyers and sellers' transactions are completed, typically in the settlement agent's office. Once the mortgage documents are signed and purchase closing is complete, you get the keys to your new house.
As you can see, with methodical planning and key information in your hand, purchasing a house can be a delightful experience. Working with a mortgage broker can help you shop across different mortgage lenders, giving individual attention you deserve and help clarify different steps relevant to your mortgage financing.
To learn more about how you can shop wholesale lenders to save on mortgage, feel free to apply for a pre-approval today.