This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Not everyone fits into the typical 30 year (or 15 year) fixed rate mortgage.  There are other options out there for you to explore that could be better for your finances and your budget. While interest rates are pretty much set. This is good news for many home buyers!

However, you do need to do your homework first and get all the necessary documents together so your mortgage application can go through the process with as few snags as possible. The lending environment can be complex and complicated due to the regulations that are in place. Lenders, underwriters, and mortgage insurers must all complete certain steps to ensure they are in compliance before they can have your financing in place.

To keep things moving smoothly, there are some steps you can take in advance. Being aware of what will be required of you and being prepared with the information your lender will need will go along way to getting your mortgage.  The more you know the less likely you and your lender will be surprised by something unexpected!

Once your mortgage situation is all set, you’ll be in a much better position to negotiate with the sellers and move forward on a purchase. Here’s what you need to keep in mind:

1. Evaluate your affordability and don’t forget about monthly budget.

Do you truly know how much mortgage you can afford and how lenders determine it?

Lenders and mortgage insurers look at a variety of factors, one of the key factors is your “debt-to-income” (DTI) ratio.  There are two ratios the bank takes into consideration. 

1. The first is your housing DTI – this is calculated by taking the monthly mortgage payment (which includes your Principal, Interest, Taxes, and home Insurance sometimes called PITI) plus any HOA (or maintenance) fees and dividing it by your gross monthly income.
2. The second is your total DTI – this is calculated by taking your mortgage and HOA fees and adding any car loan/leases, student loans, minimum monthly payment due on credit cards, and any other fixed financial commitments you have and dividing that by your gross monthly income.  

But wait, let’s take a second and ask: How much are you comfortable spending on a mortgage payment each month?  Note that the total DTI does not include things like utilities (heat and electric), cable, cell phone and other monthly expenses. You may want to take these into consideration before committing to a monthly mortgage amount.

 A better way to determine what you can (or really want) to afford is to look at your budget and determine how much you want to spend each month for housing aka a mortgage. Just because you can qualify for say a $600,000 mortgage doesn’t mean you want to.

This is a much better way to determine your affordability.  It’s better to determine what your monthly budget is for housing, NOT just the purchase price that your lender will approve you for!

Many of you will want your monthly housing expenses to be much lower than what a lender is willing to lend you. This topic was covered in detail in Do the Math – A Mortgage You Can Afford, the fourth article in this series. Go back and review if you need a refresher.

This article takes you through the process of determining how much you want to spend each month on housing so you can keep the lifestyle you currently have, or deliberately decide what you are willing to change to afford a home. Your lender can use your budget number to get to a home price that will fit your budget requirements.

2. Shop around and interview lenders to find the best fit for your needs.

Talk to several lenders of different sized banks. You don’t have to use the bank where your checking and savings accounts are located. Due to regulations and the software that banks rates and fees are competitive between banks. More important is understanding how strict the lending policies are, and whether the bank offers the mortgage program(s) you may qualify for. Not all lenders are familiar with or deal with all mortgage programs.

Lenders should understand that you are shopping around for the right lender for your needs. It is also important to use a local lender or mortgage broker. You want someone who understands state and local laws.  That online low interest rate may not actually be the one you wind up with – rates are also impacted by state and local regulations.  

Different banks can offer different programs, especially in today’s market and that can impact your monthly payment.

3. Discuss your loan options with lenders and your agent.

Deciding which types of mortgage loans are best for you depends on your personal situation, your financial scenario, and your plans for this home. Be straight forward with your lender and your agent the more information they have the better they can help you succeed. For example, if you are not planning to stay in your home long-term or plan to rent it out in future, a COOP may not be the best choice as they often do not allow renting and even if they do, those rules could change after you buy.

If you only have a small down payment you may want to consider an FHA loan as opposed to a conventional loan.  Or you may qualify for one or more home buyer programs offered by state or local jurisdictions.

Mortgage programs are always changing. You need to sit down with your lender to understand the different options out there that could work for you and the type of home you most likely will purchase. And don’t forget that your agent is a good resource who can help guide you on your decision.  They know what has worked for other buyers who may have similar finances.

4. Get pre-approved (not pre-qualified) by your lender.

Plan to complete a loan application with one or more lenders.  Make sure to take it one step further from getting pre-qualified and get pre-approved instead.

The difference between pre-qualified and pre-approved is how far you have gone in the process. A pre-qualification is based on the information you provide verbally and usually a credit check.  A pre-approval means that lender has verified your income, your employment, your credit, and calculated what you can afford based on documentation you provided such as tax returns, bank statements, and paystubs. Once you are pre-approved you will know exactly how much you qualify for. Remember to verify the monthly payments this equates to and have the lender calculate the target home price based on the budget you set.

Make sure you gather up the documents you will need to supply to your lender to get pre-approved, tax returns, paystubs, bank statements.  The lender will need to verify your monthly income, employment history, how much you have in savings, credit history etc.   

Once the lender has completed this deep dive into your financial situation, they will determine how much they are willing to lend you. You will get a written statement of how much they are willing to lend you, and when this commitment “expires”.  Commitments expire after 30-90 days depending on the lender. At which time you will have to update your documentation to the most current paystubs, bank statement etc.

It’s important to take this step before looking at houses, it allows you to know how much you can afford.  Due to changing laws, you may need the pre-approval for you agent to show you homes.  Finally, many sellers are requiring that offers be submitted with a current pre-approval, so you need it to get an accepted offer.

5. Commit to a lender once you’re under contract.

If you have been working with more than one lender you will need to pick one to move forward with when you have signed a contract to buy a home.  At this point the lender will order an appraisal, which you will have to pay for.  While you are waiting for the appraisal your lender will be asking for updated documentation, most current paystubs, bank statements, a gift letter if you are getting a gift from a family member towards the down payment.  You need to respond quickly to your lender as the contract you signed had deadlines for mortgage commitment and closing dates which you agreed to.

By responding quickly to your lenders requests you create a partnership that will get you to the closing table more smoothly.

As you can see, there are a number of steps to getting a mortgage, working with an expert who can steer you through the process will get you to closing smoothly.  Email me and I’ll review your options and connect you with two to three lenders who have the lowest rates and best loan programs for first time home buyers. 

Stay tuned for next week! It’s the Fun “House Hunting” Guide is the next article in Beginners Guide to Buying a Home series. You’ll find out the ways you can shop productively (and smartly!) with tactics that will streamline your search.