Buying a home is one of the most stressful things many people face. Good homes often don’t come cheap nowadays, so most resort to home loans. That’s another thing that confuses a lot of people. How does the home loan process even work?
Some guides cover the basics but often skip the details buyers are curious about. Here’s a clear walkthrough of how the process unfolds and what happens behind the scenes.
How Does Pre-Approval Work?
Pre-approval is the first step in getting a home loan. It’s the maximum loan amount a mortgage lender will let you borrow.
You can also get a pre-approval through a mortgage lender, but they must check beyond your income and credit score. The depth of a pre-approval can influence an offer. You need proof of steady employment, a healthy savings record, and sometimes an explanation for large account deposits.
Some people equate pre-approval with pre-qualification, which is not the case. Pre-qualification looks at basic details, while pre-approval requires lenders to review actual documents. Some sellers and real estate agents treat pre-approvals far more seriously.
A reputable lender will make this first step in the home loan process less challenging for you. They may offer benefits, like access to financing that makes buying homes more affordable or loan customization. More loan options can make it easier to reach your homeownership goal.
Which Type of Home Loan Should I Choose?
Home loans come in different forms. The one you opt for should best fit your financial situation. Here are some types you’ll encounter and may want to consider:
FHA Loan
This government-backed loan is designed for first-time buyers. Even if it’s your second time buying a home, it may be fitting if you have a lower credit score.
Conventional Loan
This loan has stricter standards and is more suitable for borrowers with excellent credit. Private lenders fund this loan type and, when necessary, insure it with private mortgage insurance companies.
USDA Loan
A USDA loan offers zero down payment for rural properties and some eligible towns. Most USDA loans come from partner lenders, but the Department of Agriculture can issue them directly.
VA Loan
This type is ideal for active-duty military staff, veterans, and select surviving spouses. It’s guaranteed by the United States Department of Veterans Affairs.
How do you pick the best loan if you’re eligible for more than one? The answer typically depends on your credit reports and score.
What Documents Do Lenders Ask For, and Why?
Loan processing is more detailed than you may realize. Lenders usually request documents that give them your financial picture. Documents you may have to provide are tax returns, pay stubs, bank statements, and debt details. Freelancers must hand several years of tax returns, proof of active contracts, or extra reserves.
One thing some home buyers overlook is the letter of explanation. The lender may ask for a short written explanation for the following:
- A gift of cash from family
Your letter of explanation doesn’t have to be elaborate, but it needs to clear up doubts. And don’t assume the lender won’t loan you any money if they ask for this letter. They just need clarification on your financial situation.
Transparency from the start of the home loan process makes the succeeding steps smoother. Hiding debts or skipping financial obligations can create bigger problems later in underwriting.
What If the Appraisal Doesn’t Match the Offer Price?
Once your loan application is moving, shift priorities to the home. Buyers or mortgage lenders arrange real estate appraisers to conduct property inspections. Expect your lender to request a home appraisal to confirm the property’s value.
Appraisers consider neighborhood trends, nearby comparable homes, and the property’s state. The appraisal process is often more complicated for historic homes, rural properties, or custom builds.
Some buyers may ask what happens if the appraisal exceeds the agreed price. They can negotiate, cover the difference in cash, or challenge the appraisal with stronger comparable sales. Your available options have trade-offs, but ignoring a low appraisal isn’t possible if a loan is involved.
Why Does Underwriting Take So Long?
After the home inspection, mortgage underwriters will give the final approval. Underwriters perform a detailed loan application assessment to check if you can repay the loan. They may request more documents, clarify inconsistencies, or question unusual account activity.
Many buyers are surprised to learn that underwriters recheck credit history before closing. New debts, such as financing furniture or a car, could delay or derail approval. Delays also happen when paperwork doesn’t align with what the lender expects.
The wait feels frustrating, but it’s the lender’s safeguard before releasing a large sum of money. To speed up the process, send the important documents completely and accurately as soon as possible.
What Am I Paying for at Closing Day?
You’ve finally reached the last step of the home loan process, a step that shocks many buyers. Closing costs often range from 2% to 5% of the purchase price, and they cover much more than most expect.
The final bill includes prepaid taxes, title fees, escrow deposits, and recording charges. The total amount is the ‘cash to close.’ It’s often confused with the down payment, but the two aren’t the same. Cash to close bundles the down payment with all additional fees, which can add several thousand dollars.
If closing costs are higher than the first estimate, ask your lender for clarification immediately. After reviewing and paying, you can accept the mortgage and receive the keys to your new home.
Conclusion
Going through the home loan process can be intimidating if you’re unsure what to do. Hopefully, this guide has given you the essential details and confidence to buy your own home.
Be proactive and prepare ahead of time. Careful preparation helps the process move faster, which is beneficial in today’s real estate market.
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