Buying a home is exciting, but it can easily be the largest or most complex purchase of your life. As you gear up to apply for a mortgage, it pays to know what to expect. Each mortgage will have its own timeline, but from start to finish, the process may stretch from about three to five months.
When you're searching for the right home, understand the timeline of the mortgage process:
1. Understand the mortgage you can afford: two weeks
2. Find a home and make an offer: three to eight weeks
3. Secure a mortgage lender, home inspection and appraisal: five to six weeks
4. Complete mortgage underwriting and closing: two to four weeks
Step 1: Understand the Mortgage You Can Afford (two weeks)
During this part of the timeline, you'll define the type of mortgage you're looking for, check your credit and get a feel for how much you can afford for a monthly payment. Give yourself about a week for this step so you can take your time. Allow another week for getting a preapproval letter and finding a housing counselor.
Check your credit. Your credit history and credit scores play a major part in your mortgage terms, including the annual percentage rate, the fees you pay and the amount you can borrow. Mortgage lenders typically look for a credit score in the mid-700s or above for the best offers, so checking your credit reports early in the process can help you catch any errors and see if you need to improve your score before applying for the mortgage.
[Read: Best FHA Loans.]
Create a budget. This will be influenced by the type of mortgage you choose, which all have different credit and down payment requirements. After you figure out what kind of mortgage you want, determine whether you prefer a fixed or variable APR and calculate how much you can comfortably put toward a mortgage payment each month. Some consumer advocates suggest you spend 28% or less of your total monthly income on your mortgage. That includes costs such as home insurance, taxes and homeowners association fees. A lender may say you can borrow more based on your financial situation, but only you will know what you're comfortable paying every month while still meeting your other obligations.
"The biggest mistake is spending what you're fully qualified for instead of what your budget allows," says Nicole E. Rueth, producing branch manager with the Rueth Team of Fairway Independent Mortgage Corp. in Englewood, Colorado. "I've seen a lot of first-time homebuyers overspend."
A housing counselor can provide independent advice on buying a home, fixing credit issues and more -- typically at little or no cost. These specialists are approved by the U.S. Department of Housing and Urban Development.
Once you know how much you plan to spend, shop around and get prequalified with potential lenders. Prequalification has no impact on your credit rating and can give you an idea of what you can qualify for. It's the best way to compare lenders head to head based on what your actual loan terms are likely to be.
After you've identified a lender you'd like to work with, get a preapproval letter. In preapproval, a lender will check your credit and review information about your income, debts and assets. If you're preapproved, the lender will give you a letter that states how much you can borrow and your estimated interest rate. Having a preapproval letter in hand puts you ahead of other buyers because the seller knows you already have buying power.
Even after you're preapproved, keep tabs on your credit throughout the mortgage process, Rueth suggests. The lender may do a credit refresh during the loan underwriting process. It'll check whether you still qualify for the mortgage based on your credit, income and other factors. If your credit score dropped since you received a preapproval letter, it may hurt your chances of closing on the mortgage. Try not to take out new credit while you go through the mortgage timeline and keep your credit card balances low.
Step 2: Find a Home and Make an Offer (three to eight weeks)
This step is all about finding a house in your price range and negotiating with the seller. The time frame can vary greatly depending on how quickly you and a real estate agent find a home and can sign a purchase agreement.
"We go through the process of figuring out your needs versus your wants, versus your budget," says Allison DePesa, a licensed real estate agent with Berkshire Hathaway HomeServices in Somerville, Massachusetts.
After identifying the right home, your real estate agent will help you come up with an offer and submit it to the seller's agent. The offer will include a price, a suggested closing time frame (typically 30 to 90 days from the accepted offer), and conditions that allow you to cancel or renegotiate the contract. For example, you might make the offer contingent on securing a loan and receiving a satisfactory inspection. Once you and the seller agree on a final price and the terms, you'll both sign a purchase agreement.
Step 3: Secure a Mortgage Lender, Home Inspection and Appraisal (five to six weeks)
Now you're ready to finalize mortgage offers and get loan estimates. This will take about a week. The inspection will add about another week, and the appraisal may take about three or four weeks.
Choose a mortgage. You should have rate quotes from at least three lenders, which could be a mix of credit unions, community banks, big banks and online lenders. Ask for a loan estimate from each and provide the same details to each lender: loan type, rate type, loan term, down payment amount, loan amount, points and credits. The lenders should provide you with loan estimates within three days.
Keep in mind that you'll only get a loan estimate with an official application. While it's important to compare loan estimates, be aware of the potential impact of multiple mortgage applications. If you apply for multiple mortgages within a 45-day window, they'll be treated as a single hard credit inquiry on your credit report. Applications outside of this window could have a small negative effect on your credit.
Compare the total monthly mortgage payment, the APR, costs of taxes and insurance, and other costs such as appraisal and title fees. Once you've found the best fit, tell the loan officer you'd like to move forward with the mortgage application. This is called your "intent to proceed."
Order a home inspection. Before you head to loan underwriting and closing, schedule a home inspection to determine the condition of the home.
"A home inspection is so critical to understanding what you're buying," Rueth says. "They are getting in the crawlspaces and up in the attic and the roof, and looking at the electrical panels. They are really looking at the bones of that home." Based on that walk-through, the inspector will create a report that lists any significant damage and necessary repairs.
Depending on the terms in your contract, you may be able to walk away from the purchase if the report reveals significant damage that you don't want to deal with.
Get a home appraisal and title search. Your lender will schedule a home appraisal to validate the home's value, based on its condition and the selling price of similar homes in the area.
If the appraised value of the home is higher than the selling price, that means you've found a good deal. A title company will then research the home's legal history to make sure there are no pending legal actions on the property, such as a tax lien.
But if the value is lower than the selling price, it could create problems because the bank won't lend more than the appraised value of a property. In these cases, you have a few options. You can:
-- Pay the difference in price yourself, although it may be risky if the home isn't worth the selling price.
-- Negotiate with the seller to lower the home price.
-- Walk away from the deal, depending on the terms in your contract.
Step 4: Complete Mortgage Underwriting and Closing (two to four weeks)
Once you've submitted your intent to proceed and the appraisal is complete, your mortgage lender will verify your income, assets, debt and home value details. The lender may ask you for additional documents during this step, such as a letter that explains the source of a large bank deposit. This could take about two weeks.
Once you're cleared to close, the lender will provide a closing disclosure, which is a five-page document that sums up the terms of your loan and what you'll pay at closing. You'll have at least three days to review this document. Compare the numbers to the loan estimate, as the lender can't make significant changes between these two documents unless there's a legitimate reason or you've already agreed to certain changes.
[Read: Best Home Equity Loans.]
You'll be responsible for choosing a closing agent to gather the legal documents necessary for your loan and handle the money for the purchase. Once you schedule the closing, ask your closing agent about what to bring. This usually includes a valid ID and your cash to close payment, typically in the form of a cashier's check. At the closing, you'll sign the final sale contract.
After Closing on the Mortgage
The next step is to get settled into your home. Now you're on a new timeline: making mortgage payments for the life of the loan. To protect against future financial problems, Rueth suggests stashing away about six months' worth of mortgage payments in a savings account.
"When you're late on your mortgage," Rueth says, "it can really affect your credit score for a long time." It can also potentially lead to foreclosure if you can't fix any underlying problems or get the mortgage up to date.
If you fall behind on mortgage payments, contact your loan servicer to discuss options for avoiding foreclosure. A HUD-approved counselor may also be able to help.
DePesa also recommends keeping track of home prices in your neighborhood going forward. "Get a sense of what things are selling for, and keep an eye on interest rates," she says. "It's always good to keep the thought of refinancing your mortgage in the back of your mind."