While we briefly touched on the mortgage process in the Buy a Home how-to guide, this procedure needs a deeper dive. After all, you’ll likely be paying on your mortgage for decades. Buying a house is one of the largest purchases you’ll ever make, so it’s important to understand the terminology and processes involved. In this guide, we’ll go through the entire financing process and hopefully answer many of your questions along the way. First, let’s review some of the basics.
How Long Does It Take to Finance and Close on a Home?
The typical finance process for your home, from contract to close, can take anywhere from 30 to 45 days, not including the prequalification process. In some cases, it could take up to 60 days. If issues arise after the application is submitted, there might be an additional delay. Usually, though, the timeline from contract to closing looks something like this:
- 1 to 5 days for negotiating and submitting an offer
- 1 to 3 days for signing the sales contract
- 21 to 30 days for securing the financing
- 7 to 10 days for the home inspection to be completed
Mortgage Terminology and Acronyms
You’ll hear a lot of jargon when you’re financing your new home. Understanding these terms may help you feel less overwhelmed by the process. Your real estate agent will be able to explain all this terminology and anything else that comes up, but here are a few of the terms you might encounter:
- Capped Rate: The mortgage rate can’t go higher than this interest rate percentage. If, for example, your mortgage is capped at four percent, the interest rate can fluctuate with the market, but it won’t go above this percentage.
- APR: This acronym stands for “Annual Percentage Rate.” This is the yearly cost of the loan for you, the buyer, and it includes interest and fees. You can use this rate to compare mortgage offers.
- LTV: This stands for “Loan-to-Value.” It’s a ratio that shows the amount of your mortgage compared to the total appraised value of the property. The bank will use this ratio to determine whether to give you the loan. If there’s a high LTV, it means you’ve requested a loan for an amount that is at or very close to the appraised value. Since there’s very little equity in the property, the lender could be at risk of losing money if the home goes into foreclosure.
- PMI: This stands for “Private Mortgage Insurance.” If your down payment is less than 20 percent of the home’s purchase price, the lender may require you to have this insurance.
- Mortgage Term: This is the length of your mortgage. Most conventional mortgages have a term of about 30 years.
- DTI: The debt-to-income ratio, or DTI, is your total monthly debt divided by your gross monthly income. Lenders use this ratio to determine if you’ll be able to pay back the mortgage.
- Amortization: This is simply the process of spreading out your loan into monthly payments.
- ERP: Believe it or not, most lenders don’t want you paying off your mortgage early. If you do, they lose all the interest fees that were included in the loan. If you do pay your loan off early, the lender might charge you an early repayment penalty, or ERP.
- Redemption Statement: This document shows you exactly how much you’ll need to pay the mortgage lender to fully repay your home loan.
- PITI: PITI stands for “Principal, Interest, Taxes, Insurance.” It’s the different elements of your mortgage payment.
Advice for First-Time Mortgage Applicants
Buying a home is overwhelming even for those who’ve been through it before, but it can be especially confusing for first-time home buyers. If this is your first mortgage, these tips might help you avoid many of the home buying pitfalls.
Know the full monthly cost of your new home.
Home buyers can be led astray by some online real estate websites. These sites provide detailed information about properties, but they also include the average monthly mortgage amounts for the homes. This information can be misleading because home buyers often use that figure to determine if the home is within their budget. However, the numbers these sites are providing don’t take into consideration all the other costs of owning the home. To truly understand how much the house will cost, you’ll want to factor in property taxes, insurance, utilities, maintenance, and anything else you’ll pay monthly to maintain the home.
Research area selling prices.
Some sellers may slash the asking price for their home if it needs a lot of work. Other sellers will price their home too high in the hope they can get more than it’s worth. To make sure the house you’re interested in is priced accurately, you’ll want to compare other homes that have sold in the area. By looking at houses that are similar in style and size to the one you’re interested in, you’ll be able to see if the house is worth its asking price. These comparisons are often called “comps.” Your real estate agent can help you pull this information, as well.
Review your credit history.
Even if you think you have good credit, you’ll want to obtain a copy of your credit report from AnnualCreditReport.com, a site authorized by Federal law to provide credit reports for free. Look for any errors or negative marks on your report. This report doesn’t give you a credit score, but you can obtain that with an app or from your bank or credit card company. There are three credit reporting agencies (Trans Union, Equifax, and Experian), and they all calculate your score differently. You’ll want to check your credit report at least three months before you apply for a loan. This will give you time to dispute any incorrect information and get it fixed so your report will be as good as it can be when you apply for your loan.
Gather all the required documents before applying for a loan.
Have you ever been convinced you knew exactly where something was, but when you went to look, it wasn’t there? Save yourself from panic searching! Get all documents together before you go apply for a loan. If one document is missing, it could delay the processing of your loan. While you may need more or different items, here’s a general list of what you might need:
- Pay stubs
- Bank account statements
- Last two tax returns
- Loan and credit line statements (if any)
- Names and addresses of all former landlords for the last two years
Get prequalified for a mortgage loan.
The prequalification letter is a strong negotiating tool, especially if you’re a first-time home buyer. It shows the seller that you’re serious. It might also help you get a better idea of what you can afford.
Don’t give up.
If conventional lenders deny your loan request, don’t give up hope! There are other ways to get a mortgage. For example, FHA loans have more relaxed qualifications than conventional loans, and they don’t require as much money down (usually only 3.5 percent, compared to 20 or 30 percent). If you’re active military or a veteran, look for a VA-approved lender. In many cases, VA loans can be obtained with no money down and competitive rates.
The Home Financing Process
In this how-to guide, we’ll focus on the lengthy and complex financing process. While it can be a rather dry topic, the better you understand the process, the easier it will be. We’ll answer questions like, should you lock in an interest rate? What’s the difference between a lender and a broker? What’s a “jumbo mortgage?”
But first, it’s time to prepare. Get your home financing checklist and more in step two.