Getting a Mortgage: Step-By-Step

Unlike owning a car, owning a home changes your entire life. It also changes your outlook on life. Being a homeowner makes you a person of consequence, a steady and more respected individual, and can bolster your self-respect as well.

Whereas it usually takes four years to pay off a car, it takes thirty years to pay for a home. Many people never actually live in their home long enough to pay it off. Instead, they buy several homes in their lifetime. But that doesn’t mean they become experts. Many home-buyers make the same mistakes over and over again.

If you are buying a home or considering buying a home, there are steps you should take to insure that you will not be one of those sorry consumers stuck with a foreclosure on your record. Here is the mortgage step-by-step:

Step 1: Take a Home Buying Class
There are organizations in just about every area of the country that take you through the process of buying a home. Nothing beats these classes, and they are often free or very cheap. Do an Internet search and find a class in your area. These classes are for anyone of any income bracket, but especially appropriate for low-income, first-time home buyers. The staff at a non-profit housing organization can clue you in on a large number of services and programs available to low-income home buyers that will get you into a house faster and more affordably.

Step 2: Analyze your Financial Situation
You do not have to be rich to own a home, but you do have to have a steady income. Lenders will look for a consistent job for at least two years and a low debt-to-income ratio (DTI). Your DTI is your monthly debt (not bills) divided by your monthly income. This DTI will tell the lender how much house you can afford.

When you are considering buying a house, it is wise to stop spending money on credit cards, and avoid buying anything new on credit. If your old car is still running, stick with it for a while longer. If you find you are not financially in a position to buy a house right now, don’t give up. It doesn’t take long to get there. Make a spending plan, eliminate unnecessary spending, take a financial fitness class, and work at eliminating some or all of your debt.

Step 3: Check Your Own Credit Report and Score
You don’t want any weird surprises when the bank pulls your credit. You should know what’s on your credit report and you should check all three of the major credit reports for accuracy. You can get a free credit report from each reporting agency once per year. To get your credit score, you will need to pay a fee and choose which reporting agency you want to get it from. Or you can pay all three and get all three credit scores. This is what the bank will get when you apply for a mortgage. Your credit score should be well into the 600’s for mortgage approval and the best loan rates.

Step 4: Shop For a Lender
Lenders are not all alike. In fact, it’s amazing how different they are. They all have different fees and different rates. Your first step is to compare lenders. Banks are not the only lenders. Credit unions, mortgage companies, nonprofit community development organizations, and the government are also in the mortgage business. A local nonprofit housing organization will be able to tell you about many of the alternatives to banks in your area. The links below will give you additional aids in research.

When you go to a lender, they will want to get some information from you. Not so fast! You will need to sell yourself to them soon enough. First it’s time for them to sell themselves to you. If you have a house in mind, tell them the address and the asking price and ask for an estimate of costs. If you don’t have a particular house in mind, then give them your price range and how much you expect to pay in property taxes for the neighborhood you are looking at. They can give you a worksheet that is a rough estimate of what fees their bank will charge for a loan and the current interest rates available. They will usually also include costs not associated with the loan for your reference, like the title charges, and other closing costs. This is not a guarantee, but it does tell you a little bit about their bank. Do this with at least three lenders to compare their estimates.

Don’t just look at the total cost at closing. Analyze the individual charges to see where you are saving and where you are getting charged more. This will still give you quite a bit of information about the lender and will also tell you how responsive they are to your questions. If the fees seems high, tell the lender just that. Lenders have the freedom to negotiate some of their fees and often do. While you are investigating, ask about other charges like pre-payment penalties, rate lock-in and the duration of the lock-in available. The estimates will also give you a very rough idea of your closing costs.

Some of the fees lenders charge are:

Application fee, could be anywhere from $50 to an outrageous $500. This is the fee the bank charges just for taking your application.

Credit report fee is usually between $20 and $80. The lender gets a report from all three reporting agencies, but it does not cost them $80 to get it, so the higher the fee, the more the lender is padding their fees on this one.

Appraisal fee pays for an appraisal report from an appraiser and is usually between $300 and $500. The lender is the one who picks the appraiser, but you pay for this non-refundable fee even if you don’t end up approved for the loan.

Loan origination fee is for the lender’s administrative costs in preparing and processing your loan and vary widely among lenders. It is typical for a lender to charge one percent of the loan amount, but it could be more. Sometimes the loan origination fee is a lump sum that includes many other fees on this list.

Processing fee is more administrative costs and seems redundant because it is. Keep an eye out for lenders who pack on the fees. $100-$300 is not uncommon.

Underwriting fee is a fee charged for the underwriter to specifically review and approve your loan. $100 is typical. This is another redundant fee.

Document preparation fee is also about $100 and is a charge so that a computer somewhere can spit out your loan paperwork. Another one of those fees that is annoying in its redundancy. This particular fee should be challenged. After all, without the documents, there could hardly be a loan. We don’t see our grocery store charging a “receipt printing fee.”

Rate lock-in fee might be charged if the bank approves you for a loan and locks in an interest rate for a particular period of time. Before locking in a rate, you should ask the bank if they charge a fee for this. Since you would hardly expect your loan rate to go up while you’re signing paperwork and having your inspections done in a timely manner, it is only reasonable to expect the bank to offer a 30 to 45-day locked-in rate at no charge.

Broker fee is charged by the broker, if you have one.
A note about mortgage brokers: Mortgage brokers are not lenders, but “loan finders.” They can be useful for finding you a good interest rate and getting all your paperwork gathered. However, they cost an additional fee. Usually they will charge one percent of the loan, so you must decide whether this personal service is worth more than $1000 to have.

Shopping for a lender also includes shopping for the loan. If the lender you like doesn’t have a loan you like, it won’t do you any good to stick with him. There are several different types of loans, but the most common are fixed-rate and adjustable-rate loans. Fixed-rate loans mean that the interest rate stays the same over the life of the loan. These loans are a relatively safe bet since you know what your house payment will be for the entire time that you own your home.

Adjustable-rate mortgages (ARM) start out with a rate that is usually lower than the fixed-rate loan, but later, the rate will go up based on the current financial conditions. These are not usually a good idea for first-time home-buyers unless they plan to trade up relatively quickly. Although there is a cap on the rate, it is usually pretty high and your house payment can actually double from one year to the next leaving you with a big surprise. There are a few other types of mortgages which can fit people with special circumstances. Do your homework to find the type of loan that fits your needs.

The real point is to make sure you will always be able to meet your obligations and, if necessary, get out of the house quickly without going broke or ruining your credit.

Don’t hesitate to seek advice from the housing agency where you took the class. They can help you through the process and are usually willing to give you sound advice about the paperwork you are getting.

Step 5: Apply for the Loan
Once you choose a lender and a loan, you will go through the actual loan process. Some lenders have a pre-approval process, but there is not much difference between the two. You will send all the necessary paperwork to show your income. This includes two years of tax returns, pay stubs, bank statements, the mortgage application, proof of address, employment verification, evidence of other income that you wish to have the lender consider, and creditor information for each debt. The lender will then send you a letter of pre-approval including the amount you are pre-approved for. Take this letter with you to your real estate agent so that he or she can copy it and send it in with your offer on a home. Many homeowners will not accept offers without pre-approval, so, ideally, you should have your pre-approval before you start making offers.

After you apply for the loan, the lender will give you two things-A Truth-in-Lending statement and a Good Faith Estimate. The Truth-in-Lending statement is a summary of your total costs of credit expressed as a yearly rate or APR. The Truth-In-Lending statement includes the total finance charge, schedule of payments, and total amount of all payments. It will also tell you, in writing, what pre-payment penalties, if any, the bank charges. The Good Faith Estimate is a detailed statement of every fee you are going to pay at closing. The bank tries to be very accurate with these, so it is most likely going to be exactly the same as your actual closing costs, but is still is only an estimate. You can rely on it to give you a very good idea of your closing costs.

Step 6: Pay for the Appraisal
You will need to pay for the Appraisal after you have an accepted offer on a home. If the appraisal value is lower than the loan amount you have requested, the loan will be denied. You can ask the seller to take a lower price, but there is no obligation on the seller’s part to do so. If the seller agrees, the lender will write the loan for the lower amount. If the seller declines, you are out the cost of the appraisal and will have to start again. This is where a good real estate agent can help with giving you sound advice about what prices are unrealistic so that you can avoid making an offer on a house that will not appraise well.

Step 7: Meet With the Lender and Close
After the lender processes, underwrites, and approves your loan, and all the inspections and other necessary work is done with the house, you go to the closing usually held at the title company. The lender has certain conditions under which the loan is approved. These include mortgage insurance if you have not put twenty percent down on the home, hazard insurance, and clean inspection reports. These are all taken care of before closing. Most home loans set up a way to take your house payment and also a payment that goes into an escrow account for taxes and insurance so that you are only making one payment each month for all of this. Before closing, you will meet with your lender one last time to sign final loan documents and ask any questions you have. Read everything and ask all your questions. You can also take the paperwork with you and have a lawyer or your teachers from the home-owner class review the documents.

At closing, you and the seller get a copy of the settlement statement which details all the costs of the sale and who pays for each of them. It will tell you exactly how much money you need to close. Get a cashier’s check for that exact amount and take it with you to the closing. At this meeting, you will be signing many contracts. Make sure you know what you are signing and have read everything carefully. Some of the documents give the lender rights to the property if you default on the loan. Some of your closing costs will include money required by the lender for the escrow account to pay taxes and insurance that will come due later in the year.

Avoid Borrowing Mistakes
We’ve heard much talk about bank failures and bailouts. This has a lot to do with bad lending practices in the mortgage market. Those bad lending practices translate into bad borrowing practices of many consumers, which is why there are so many foreclosures on the market these days. To be a wise consumer there are a number of mistakes borrowers must avoid.

Don’t Rush to Borrow
A lender should be willing to sit down with you and discuss all their loan products and options with you. If you have done your research, you should know about the products that are out there also. If the lender doesn’t seem knowledgeable about certain programs available to you, consider moving on to someone who is. Don’t ever be taken in by someone who says the rates won’t last or you’ve got to move fast on this. There are always plenty of homes and plenty of loans. While interest rates do fluctuate, it’s more dangerous to rush into something you are not familiar with than to pay a bit more in interest on your mortgage.

Don’t Borrow More Than You Can Afford
This seems like a no-brainer, but it’s amazing how many people have done it. Ask yourself, what happens if I’m laid off? Can I still make the house payment on unemployment or a lower-paying job? You don’t have to buy a house at the top of your borrowing limit just because you’ve been approved for that much. Be reasonable. Buy at the price that is comfortable for you and work your way up as you can afford it. Don’t ever borrow more than a house is worth. This practice is responsible for a number of recent bank failures and a large number of foreclosures and short sales. Borrow as if the economy will tank any minute.

Educate Yourself
Don’t just trust the lender to tell you what’s available. Lenders are only familiar with the products they offer. They will not tell you what else is out there and they especially won’t tell you what their competition is offering. Do your research, get educated, find the best programs for you. When you do get into a home, you should feel that it was the right decision one, two, and five years into the future.

This is by no means an exhaustive list of what you will do when buying a home or even finding a mortgage. Although the home-buying process from offer to closing generally takes between thirty and forty-five days, the research and education should take you much longer. With a little patience and diligent study, you will find the mortgage that suits you and a home that will change your life.

Non-Profit Lenders
Neighborhood Works Organizations — A network of 235 independent, community-based nonprofit organizations serving more than 4,500 communities nationwide. Their main focus is helping low-income families live in safe affordable housing. They have educational and home-buying training for everyone. Loan programs vary depending on the organization.

HUD-Approved Agencies — A network of local nonprofits that offer home-buyer education and counseling as well as low-interest loans for low-income home-buyers.

USDA Rural Development — Offers a government guaranteed loan program and a direct loan program with a subsidized interest rate for low-income rural families. These loans have no or low down payments and rehabilitation options for houses in need of repairs.

Other References
mbaa.org — publishes national mortgage rates weekly
myfico.com — one place to get your credit score