STEP 1: LEARN WHAT TO EXPECT
PURCHASING A HOME
Whether you’re a first-time homebuyer or an experienced homeowner, the process of getting a mortgage loan is straightforward. It’s true that there are many steps from start to finish, but the better prepared you are before you begin looking for a home or property, the more efficient and relaxed your buying experience will be.
We’ve compiled the following overview of what you can expect as a homebuyer and how you can be ready to take advantage of the best opportunities. If you have any questions along the way, please feel free to contact one of our mortgage experts or visit the Learning Center on our website.
Up-front costs, processing fees, appraisals and inspections, insurance and additional miscellaneous expenses
Interest rate and Annual Percentage Rate (APR)
Post-purchase expenses such as remodeling, property
taxes, and home insurance policies
Most of the expenses listed above depend upon your income, monthly expenses and any debt you now carry. Learn more about the math behind the Housing and Debt Ratio.
In addition, the house you choose and the neighborhood where the house is located will change the amount of house you can afford.
Decide how much you can afford
Also getting prequalified for a loan is a quick way to determine what type of home or property is within your price range. Knowing this helps your real estate agent determine which properties to show you, and it helps you make the best use of your time. Prequalification is based on income and debt information provided verbally to a mortgage professional, and is not a commitment to borrow or lend money.
Getting preapproved for a loan represents a commitment from a lender that they will grant you a mortgage loan. Receiving a preapproval letter involves verification of your financial position including credit, income, assets and liabilities. Taking this step can help facilitate the purchasing process by reducing the length of time it takes to close the transaction, and has the potential benefit of putting you in a stronger negotiation position with the seller.
But remember, your lender decides what you can borrow but you decide what you can afford.
Learn About Available Loans
A variety of loans are available, so it’s important to select one that’s perfectly tailored to your circumstances and goals. Following is a brief overview of mortgage loan types. To learn more about each of these options, visit the Learning Center on our website or contact a Cobalt Mortgage expert.
Fixed-rate mortgages feature a fixed percentage rate and loan amount, so the monthly payment is the same every month for the entire length of the loan. Because of the loan’s stability, this is the most common type of mortgage for first-time homebuyers.
Adjustable-rate mortgages (ARMs) have a variable interest rate and monthly payments that are recalculated on a regular basis to reflect changes in the market interest rate.
The initial rate on an ARM is fixed for a specified period. The shorter the initial fixed period, the lower the initial rate can be. The lower rate reflects the fact that the lender assumes less risk of potential increases in the market interest rate, and the borrower isn’t paying for interest rate protection that he or she doesn’t need. This translates into a lower monthly payment than for a similar-term fixed-rate mortgage.
The Federal Housing Administration (FHA) offers FHA-backed loans that are designed to help increase home ownership by low- and moderate-income families and first-time homebuyers. Because the FHA insures the loan, the lender can offer greater flexibility in lending guidelines. Available for single- and multi-family homes, FHA loan financing options include traditional fixed-rate products, adjustable-rate mortgages and temporary interest rate buy-downs.
The U.S. Department of Veterans Affairs (VA) offers VA-backed loans to veterans, active-duty personnel, reservists/National Guard members and some surviving spouses. When the loan is approved, the VA will guarantee part of it. The amount of the VA’s guarantee usually depends on the size of the loan.
U.S. Department of Agriculture (USDA) mortgage loans are offered in rural areas to help lower-income households gain access to home loans at reasonable mortgage rates. Eligibility requirements for USDA loans vary depending on property location, and these loans are offered only to individuals whose income is below rural development county limits based on the number of members in the household.
A conforming mortgage loan, often called a conventional loan, is a mortgage that is equal to or less than the loan limit set annually by Fannie Mae or Freddie Mac, the government-sponsored agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders. The current conforming loan limit for a single-family home or condominium in most areas of the country is $417,000, with higher limits allowed for designated high-priced markets.
Jumbo mortgage loans, often called nonconforming loans, are designed for homebuyers who need to finance especially large purchases. A loan is considered jumbo if it exceeds the conforming loan limit, which in most areas of the country is $417,000, as defined annually by the government-sponsored agencies Fannie Mae and Freddie Mac. A variety of jumbo loan options are available, such as 30-year fixed mortgages, adjustable-rate mortgages, VA loans and FHA loans.
A reverse mortgage enables homeowners age 62 and older to convert part of the equity in their primary residence into tax-free cash without having to sell their home or give up title. It is a low-interest loan that uses a home’s equity as collateral. It is called a reverse mortgage because rather than make monthly payments to a lender, the lender makes monthly payments to the homeowner.
Applying for a loan
When you’ve chosen your home, made an offer, and completed the purchase and sale agreement, you’re ready to apply for a loan. It is important to work with a mortgage provider who is dedicated to keeping you informed and on the right track, every step of the way. The loan application process has two primary stages: completing a loan application and providing your lender with copies of all required documentation.
Completing a loan application can be done using ourconvenient and secure online form, or you can talk with one of our experienced mortgage specialists to provide your information over the phone, in person or by mail. If you’ve received a preapproval letter, you will have already provided some of the application information and will be familiar with the process.
Gathering copies of your personal financial documents in one file will help make the process of securing a loan more convenient and efficient. Your lender will require in-depth information about your financial background to proceed to the loan-processing stage.
Determine what items you’ll need for your mortgage application. It is important to note that you and your spouse need to provide full financial background information, as do any co-borrowers.
Loan Processing and Underwritting
Loan processing and underwriting is a team effort, and we will keep you up to date during every step of the process. Following is an overview of what to expect.
Once your loan application has been completed, your loan officer will work with a dedicated loan processor who organizes all of the paperwork into one file. Your loan processor will make sure that the required documentation is in good order. If there are any missing documents, or any other information needs to be verified, your loan processor will contact you so everything can proceed smoothly.
You decide when to lock in your interest rate. This “rate lock” is an interest rate guarantee the lender makes to you for an agreed-upon time in order to protect you against interest rate fluctuations.
A real estate appraisal will be ordered when the home or property will be used as collateral for a loan. This professional written analysis of the fair market value of the home or property provides an estimate of the likely price the asset would bring if sold in a competitive real estate market.
A home inspection is recommended to evaluate the general quality of the home, such as its structural condition and remaining life of major components including the roof, plumbing, heating and electrical wiring. The buyer can often use the inspector’s findings to negotiate the final purchase price or other terms with the seller.
A title report is ordered. This important review of the property deed and other government records is done by a professional title company to determine whether the seller has a legitimate saleable interest in the property. It also summarizes whether any restrictions or allowances pertain to the use of the land, outlines the status of property taxes and other public or private assessments, and identifies whether any judgments or liens exist on the property that must be satisfied before the home or property can be sold.
Underwriting is initiated when the loan processor has verified that all paperwork has been completed. The team’s underwriter checks to make sure that the facts in the applicant’s loan file correspond with the guidelines of the loan being offered. The underwriter also reviews details such as income, credit score, source of down payment and the appraised value of the home or property. If any information is missing, the underwriter may conditionally approve the loan with the stipulation that the information must be attained and approved before the loan can be funded.
The loan processor resumes oversight of the loan file to track the receipt and condition of any pending documents, and works with the title company to get all of the paperwork in order for the loan settlement.
Certain types of insurance will be required. Title insurance is needed to protect the lender’s financial interest in the property if there are defects in property title, liens or other matters. Homeowners insurance is necessary to cover physical damage to the property. Depending on the home’s location, the buyer may also need to secure flood and/or earthquake insurance. If the down payment is less than 20% of the purchase price or appraised value, private mortgage insurance (PMI) may be required.
Loan Closing and Funding
When the loan is approved by the underwriter and all final documentation has been secured, the loan is ready to close.
The loan money is placed in an escrow account by the lender so that it is available for the settlement. An escrow account is a special third-party account that holds money safely while the title is being transferred from the seller to the buyer.
A final good faith estimate of settlement costs is provided by the lender to the borrower to make sure there is full understanding of the various settlement costs associated with the loan. Closing costs often include such items as loan origination fees, credit reports, appraisal fees, inspection fees, title insurance, prepaid tax and insurance payments, discount points and recording fees.
At the time of settlement the escrow company presents all of the loan closing documents for the borrowers to sign, which is often done in the presence of a notary public. If a down payment or closing cost payment is required, the buyer will bring a cashier’s check. This settlement process, called closing, is the final step before the transfer of money and keys occurs. The loan will normally close shortly after the loan documents have been signed. When this happens, you officially own your new home or property.