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You’ve decided to buy a home. Hooray! Now you need a mortgage. Take a big breath — it’s not every day you apply for a loan with that many zeros.
Preparation is key, because after your purchase offer is accepted, the clock is ticking. Closing a mortgage transaction takes about 45 days on average.
“If you enter into the process without [the proper] information, it could slow you down,” says Randy Hopper, a vice president at Navy Federal Credit Union.
Prepare to submit a mortgage application
Key steps to take before applying for a mortgage:
» MORE: How much house can you afford?
6 steps to applying for a mortgage
If you're confused about how to apply for a mortgage, this step-by-step guide will walk you through the process, showing what you will do and what the lender does at each stage — with an estimated time to complete each task:
Step 1. Fill out a mortgage application
Time: 45-60 minutes
You’ve already researched lenders and gotten one or more preapprovals for a potential mortgage. Now that you’ve made an offer on a house, it’s time to choose the finalist that you will actually borrow the money from. Start by phoning lenders (three, at minimum), visiting their offices or filling out their mortgage applications online. Easiest of all: Ask a representative to fill out the form while you supply information by phone or in person, says Carlos Miramontez, vice president of mortgage lending at Orange County’s Credit Union in California.
“If you want to start online, and you get to the point where you need more information ... or just want to talk with a live human being, the vast majority of lenders are set up to where you can channel switch.”Mark Burrage, USAA
“If you want to start online, and you get to the point where you need more information ... or just want to talk with a live human being, the vast majority of lenders are set up to where you can channel switch,” says Mark Burrage, an executive director for USAA.
Mortgage applications roughly follow the format of this Uniform Residential Loan Application, with its five pages of questions regarding your finances, debts, assets, employment, the loan and the property. And your credit score won’t suffer from submitting multiple applications as long as you submit them all within a 45-day window. You should always submit multiple applications so you can compare offers later.
It's a good idea to hire a home inspector to assess the property’s condition immediately, even though lenders don't require it. This way, you won’t lose much time if the inspector uncovers a problem that requires you to back out, Burrage says. This will cost around $300 to $500.
The lenders ask permission to pull your credit. By law, a lender has three business days after receiving your application to give you a Loan Estimate form, a detailed disclosure showing the loan amount, type, interest rate and all costs of the mortgage, including hazard insurance, mortgage insurance, closing costs and property tax.
Step 2: Review your Loan Estimates
Time: 1 hour to several hours
Applying to more than one lender has given you options. Now use your Loan Estimate forms to compare terms and costs.
At the upper right corner of the first page you’ll see expiration dates for the interest rate — find out if it's “locked” — and closing costs. Ask the lender to explain anything you don’t understand.
If the numbers seem dizzying, “Don’t focus too much on rate,” Burrage says. Instead, look at the four numbers in the Estimate’s “Comparisons” section, on page 3. These will allow you to easily compare offers:
Total cost in five years. This is all charges — including interest, principal and mortgage insurance — that you'll incur within the mortgage's first five years.
Principal paid in five years. This is the amount of principal you’ll have paid off in the first five years.
APR. Also known as its annual percentage rate.
Percent paid in interest. This is the percentage of the loan paid in interest over the entire life of the mortgage. It's not the same as the interest rate.
The lender’s job is to answer all your questions. If you can’t get good answers, keep shopping.
Step 3: Choose a lender and commit
Time: 5 minutes
You’ve compared lenders’ rates and fees. Now assess their responsiveness and trustworthiness. Think twice about anyone who makes you feel pressured, Burrage says. His advice: “Go with someone you can trust.”
Then contact the lender of your choice to say you’re ready to proceed.
Most lenders will request money for a credit report (roughly $12 for a single report or $26 for a joint report, according to Miramontez) and an appraisal ($400 to $500).
Step 4: Loan processing takes over
Time: 2-3 weeks
Every statement you made on your mortgage application goes under the microscope in this stage. Brace for questions and document requests. Responding promptly keeps everything moving forward.
You said you make $50,000 per year at Acme Software? The processor looks at your pay stubs and calls Acme’s HR department to verify. You said your self-employment brings in $65,000 per year? The processor pulls your tax records to confirm.
Step 5: Underwriting
Time: 24-48 hours
Your job now is to sit tight. If you’re needed at all, it will be to answer more questions and produce more documents.
The underwriter’s job is to judge the risk of lending money to you on this property. What’s your loan-to-value ratio? Do you have the cash flow to make the monthly payments? How about your “credit character”? What’s your history of making payments on time? Is the home valued correctly, the condition good and title clear? Is it in a flood zone?
Time: 24 hours or less
In this final step, the lender must act before the borrower can move forward.
With time to spare (hopefully) before your closing date, you hear from the lender with happy news: “You're cleared to close!”
The lender must send you another federally required form, the Closing Disclosure, three business days before your scheduled closing date. It shows the detailed and final costs of your mortgage.
“Examine the Closing Disclosure carefully to compare it against the Loan Estimate form to see if any of the quoted fees or numbers have changed. If they have, ask the lender to explain.”
Compare the Closing Disclosure with your Loan Estimate to see if any of the quoted fees or numbers have changed. If they have, ask the lender to explain.
This is the moment to decide if you want to go ahead. If you do, you’re on to your closing, with, yes, one last mountain of paperwork to sign. But it’ll soon be over. You’ve finished the mortgage application marathon and claimed your shiny new loan. Well done.