The home buying process can feel a lot like a roller coaster.
It starts long before you buy a home too. The journey begins when you’re thinking about buying a home – typically 6 to 12 months before you buy it.
The earlier you start preparing to buy a home, the easier it will be.
Here’s what to expect on your journey to buying a home.
Getting Pre-Qualified
If you’re thinking about buying a house, you should get pre-qualified.
There’s nothing binding about talking to a lender to see where you stand.
Think of it like checking up on your credit, income, and ability to buy a home.
There’s a lot that goes into a mortgage approval, and if you don’t check all the boxes, you might not get approved.
Getting pre-qualified tells you how much you can borrow, at what terms, and what conditions lenders will require you to clear.
This is a good starting point because you learn what you can afford.
Read: How to Know What You’re Qualified For When Buying a Home
It might be more or less than you thought. If it’s less, figure out what you must change, whether it’s your down payment or if you need to make more money.
If you qualify for more than you want, don’t feel obligated to take the full loan amount. Instead, stick to what you are comfortable affording.
Keep in mind a pre-qualification isn’t an approval. It’s just a verbal estimate of what you can afford.
Loan officers will ask you questions, including:
- What’s your estimated credit score?
- How much do you make each month?
- How much money will you put down?
- How much monthly debt do you have?
These answers help them determine how much you can afford.
Read: Prepare for These 5 Questions When Applying for a Home Loan
Saving Money and Getting your Credit Ready
After you get pre-qualified, it’s time to solidify your down payment and credit.
If you have room for improvement in your credit, work on it now.
You can pull a free copy of your credit report here. If you have any late payments, credit lines extended more than 30% of your credit line, collections, or other negative information, try to correct it now.
Your credit score changes monthly, so you can improve it a little at a time and see changes before you apply for a mortgage.
The key is to have as much money saved for a down payment and get your credit scores as high as possible, so you get the best rates and terms.
Are you Ready to Buy a Home?
Before you move forward, ask yourself if you’re ready. How do you know? Here are some questions to ask yourself
- Is your job stable? You need stable employment to qualify for a mortgage. Lenders like at least a 2-year stable employment history. But ask yourself, is this your career, or are you still trying to find what you want to do with the rest of your life? Ensure you have employment stability before applying for a mortgage.
- Are you ready to stay put? Buying a home is a big investment. You don’t want to buy a house only to want to move in a year. Renters can move each year, but homeowners typically stay put for at least a few years, so the purchase makes financial sense.
- Do you have little (or no) debt? If you have too much debt, you could be in over your head adding a mortgage. Make sure you can comfortably afford a mortgage payment and won’t have to sacrifice in other areas of your life.
- Are you ready for the responsibility? A mortgage uses your house as collateral. If you don’t make your payments, you could lose your home. As a homeowner, you must cover the home’s maintenance and repairs, property taxes, home insurance, and mortgage. Make sure your budget and mind are ready for this.
Getting Pre-Approved
If you’re ready to buy a home, get pre-approved by a lender. A pre-approval is different from a pre-qualification.
Whereas the pre-qualification was an estimate of what you can afford, the pre-approval is the ‘real deal.’ This is when a loan officer reviews your documents and determines if you qualify for a loan.
To get pre-approved, you must provide:
- Paystubs for the most recent month
- Two years of W-2s
- Two years of tax returns if you work for yourself
- Bank statements to prove you have your down payment and closing costs funds
- An ID like a drivers license, or passport.
If a loan officer approves your documentation, they’ll provide you with a pre-approval letter. This letter states how much you can borrow, at what rate and terms, and the conditions you must clear to close the loan.
The pre-approval letter is what sellers and real estate agents want before you can see the home. They don’t want to waste time on unqualified buyers. So the letter is your foot in the door and your chance to have your offer accepted when you find the right home.
The pre-approval letter also helps you shop within your budget so you don’t bid on a home you can’t afford.
Shopping for a Home
With your pre-approval letter, you’re free to shop for a house. But, before you head out, list priorities or features you want in the house that are important to you.
You can also include a list of desired features that would be nice to have but that you can live without.
Having a list helps you keep your wits about you when looking at homes. It’s easy to impulsively bid on a home and forget about the features you wanted.
Having a checklist, you can ensure you only bid on the homes that fit your criteria.
Making an Offer and Signing the Contract
Once you find a home, you make a bid and wait for the seller’s response. Sometimes they accept your offer as-is, but they often counter it.
You and the seller may negotiate for a while until you work out the contract terms.
This includes the sales price, closing date, and contingencies or things you want in the contract.
For example, you can add an inspection contingency if you want to pay for an inspection and don’t want to finalize the contract until the inspection report comes back.
Loan Processing
Once you finalize the contract, you’ll send it to the loan officer along with any outstanding conditions you can clear.
The loan officer will submit the purchase contract to underwriting – an underwriter will review your documentation, provide a loan approval and finalize your loan.
If you have any leftover documents to gather, move fast because the clock starts ticking the minute you sign the sales contract.
Related: What is Mortgage Underwriting?
The Appraisal and Title Work
The lender will order an appraisal and title work on the property during this time.
The appraisal determines if the home is worth enough.
Lenders base your loan amount on the appraisal, not the sales price. So if the appraised value comes in lower than the sales price, it could affect your loan amount.
The lender orders a title search to ensure the home is free of liens. It also determines if the seller has the right to sell the property and that there aren’t any problems with the chain of ownership.
If the title comes back clear, you must buy title insurance that protects the lender should anyone claim they have ownership of the property or a lien on it.
The insurance covers the lender’s legal costs to solve the issue. You may also buy owner’s title insurance to protect yourself.
Read: The appraisal process
Closing on the Loan
Once you’ve cleared the conditions and the title and appraisal are approved, you’re ready to close on your loan.
During this time, though, the lender will pull your credit once more to ensure you didn’t take on any new debts or get behind on your debts.
They’ll also verify your employment before closing to ensure you’re still employed.
Three days before your closing, your lender will provide your Closing Disclosure. This document breaks down the costs to close the loan, your loan amount, term, and the cash needed to close.
You have three days to go over the CD, ask questions, and request any changes if something isn’t accurate.
Once you sign and approve the Closing Disclosure, you’ll head to the closing. You’ll sign a stack of documents at the closing, including your mortgage deed and the mortgage note. You’ll also sign disclosure statements and bring funds in a cashier’s check or wire.
Once all documents are signed and funds exchange hands, you’ll receive the keys to your new home!
Final Thoughts
The homebuying journey can be fun when you understand what to expect. The key is to start with getting pre-qualified and then pre-approved before looking at homes.
With the legwork out of the way before you look at homes, you can enjoy finding the perfect house and not worrying about your financing.
After you are pre-approved and found a home, you can finalize your financing and close on your new home!
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