After you have made an offer on a home and had that offer accepted, the next step in purchasing real estate is to go through the mortgage loan approval process. Most people finance it over a period of as long as 30. To obtain this financing, you will need to get a bank or mortgage lender to determine you are credit worthy. The process of doing this involves submitting a formal loan application and having it reviewed by someone called an “underwriter.”
Submitting a Loan Application
Once you have found a home you are interested in buying, you will need to start the financing process by deciding what type of mortgage to apply for. Most people should apply for a 30-year conventional mortgage so they will have the same guaranteed payment over a period of 30 years with no surprises. However, those who want to pay off their mortgage faster may opt for a 15-year loan.
No matter what type of mortgage you apply for, you’ll need to submit financial information so the bank or mortgage lender can decide if you are credit worthy. Tax returns and pay stubs typically are necessary to support your earnings. Typically, banks prefer to see at least two-years of income history, especially from those who are self-employed. They also prefer to lend to people who have been employed with their current employer for a year or more, as a recent job change may indicate a lack of financial stability.
You will also have to give the lender your social security number so that a credit check can be performed. Other financial documents are also required, including bank statements, and an asset statement showing exactly how much money you have available to you. The bank will obtain information on your current debt balance from your credit report, so they can compare your income and assets to your debts.
Information on the House
The bank also needs to make sure that the house will serve as sufficient collateral to guarantee the loan. They will require information on the house itself, including an appraisal to determine the fair market value. A survey and inspection may be necessary, but are typically good to have for your own purposes even if the bank doesn’t require it.
The bank will also typically require proof of insurance on the home in order to provide a loan for it, so you’ll need to speak with an insurance agent as you move forward through the loan process.
The Underwriting Process
Once all of the information is in order, a mortgage loan will review the paperwork and to make sure the loan is sound. You may even be asked to provide more information if there is a question of where your income comes from or if there are any other issues with the information provided. You’ll also need to show that you have the cash available for a down payment and closing costs.
As the loan goes through the underwriting process, the underwriter will make sure that your debt to income ratio does not exceed maximum acceptable levels. They will make sure the total amount of your monthly payments, including your mortgage and all other debt, doesn’t exceed a certain percentage of your income. The bank will also look for red flags that might indicate that you won’t be able to repay the loan.
Provided that the house appraises for enough, your credit scores are good and your finances are sound, you should obtain formal loan approval from the lender. At that point, all that is left to do is close on the loan, move into your dream home and begin to repay your mortgage balance over time.
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