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How Do I Start the Home Loan Process?
The mortgage process can be both intimidating and confusing to a first-time borrower. With so many steps in the process, where do you even begin? This article is a roadmap to get you pointed in the right direction. It explains the first few steps in the home loan process.
Start the Mortgage Process with Yourself
I always tell people to start this process by looking inward, instead of outward. In other words, you should review your own financial situation before you start talking to mortgage lenders about what they can offer.
Establishing a monthly housing budget is a great place to start. Review your recurring monthly debts and compare it to your income. This will help you determine how much you can afford to put toward a mortgage payment each month.
Subtract your monthly debts from your net income (take-home pay), and then use only a portion of the remainder for your house payments. You don't want to use the entire remainder, because that wouldn't leave you with any emergency funds.
Checking Your Credit
You should also review your credit reports and scores before you start a home loan process. The first thing to understand is that credit reports and scores are two different things. Many first-time buyers think they are the same, but they are not.
Your credit report is basically a document that shows your history of borrowing and repaying the money over the years. Your credit score is a numerical "grade" that's based on the information compiled within your report. On top of that, you have three of each, because there are three credit-reporting companies within the United States.
Before you start the home loan process, you should get copies of all three of your credit reports and check them for accuracy. If there are mistakes on these documents (such as a credit account that's not actually yours), it can lower your score. This can hurt your chances of getting approved for a home loan.
When checking the score itself, you're trying to make sure that it's high enough for mortgage approval. These days, lenders typically want to see a score of 600 or higher for loan approval (though that number is not set in stone).
Saving Money for Home Loan Expenses
We talked about two important things you should do when you start the home loan process. We talked about establishing a budget and checking your credit. Here's one more thing to put on the list. You should start saving as much money as possible to cover your home-buying expenses.
You will be required to make a down payment of some kind on the loan, and you also need money to cover your closing costs. The lender will give you an estimate of your closing costs in advance, shortly after you apply for a home loan. But it's fairly common for the actual costs to exceed the estimated amount. So the more money you can save, the better off you'll be on the closing day.
Once you have these preliminary steps completed, you can move on to the next step of the process. You can get pre-approved for a mortgage loan by sitting down with the lender. This is not the final approval, but it's a good place to start. This will give you an idea of how much a particular lender is willing to give you.
So, if you follow the recommended steps up to this point...
* You'll have a monthly housing budget established.
* You will have reviewed your credit reports and scores.
* You'll be saving your cash.
* You will have been pre-approved for a loan.
The next step is to start house hunting and find a home that meets your needs. Once you do that, you could go back to the original lender who pre-approved you to get a final approval and close the deal.