A Mortgage Approval Shows What You Can Afford

It can be tempting to start searching for a new home by browsing listings and scoping out potential neighborhoods. But before you fall in love with a house, you should get approved first. A mortgage approval will help you estimate your monthly payment and understand what you can afford.

Why Getting Approved Is Important

Getting approved first has a few advantages:

• You and your real estate agent will understand what you can afford so you don’t waste time looking at homes outside your budget.
• You’ll be in the best position to make a strong offer on a house because the seller will know a lender already verified your finances.
• After your offer is accepted, you’re less likely to run into surprises that could slow down closing the loan.

Keep in mind an approval is just the start of getting a mortgage. Once you find a house and make an offer, the house will need to pass inspections and be appraised by a third-party. Your approval amount could also change if your financial situation changes.

What Lenders Review

Mortgage lenders typically look at three criteria when deciding on how much you can borrow: your assets, your income and your credit.

Your Assets

Assets are items you own that could be turned into cash should the need arise. They include things like checking and savings accounts, stocks, real estate, personal property and more. Lenders review your assets to make sure you have some money set aside to make your mortgage payments after closing.

Your Income

Lenders review your income to ensure you can afford a monthly mortgage payment. They’ll also check your debt-to-income (DTI) ratio to make sure that the amount of debt you have doesn’t offset your income too much. Typically, a mortgage company will want to see you have a DTI below 50%.

Your Credit

Having good credit can help you qualify for a better interest rate because you’ve shown you’re a responsible borrower. Some mortgage lenders have minimum FICO^® score requirements.

Why You Should Work with a Real Estate Agent

A real estate agent can make a big difference in the home buying process, and not just for the reasons you might think.

Find the Right House

First and foremost, your agent will help you find the right house. Agents have access to the MLS database, which means they know what homes are on the market, what features they have, and what they’re listed for. While real estate listing sites have this information and can be a good starting point, they’re not always 100% accurate or up to date.

Agents have also seen enough homes to know which ones are likely to have expensive problems. Your agent should be able to tell you what to look for and what to steer clear of, which is especially important if you’re a first-time home buyer.

Zero in on a Good Area

Finding the right house isn’t only about knowing which homes are up for sale. A real estate agent can help you zero in on the location that’s right for you. An experienced agent will help you find the very best school districts, amenities and resale values – or whatever is important to you.

Get a Guiding Hand

According to Toney Black, a real estate agent and broker affiliated with Allen Tate Real Estate and Rocket Homes Real Estate LLC, the primary benefit real estate agents provide is consultation. Black talks each of his clients through the home buying process before they even start house hunting so they know what they’re in for. While most homeowners will only buy a house a few times in their lifetime, agents go through the buying process with their clients day in and day out.

Manage the Paperwork

Do you know how to write a purchase agreement? Luckily, this isn’t something you need to worry about. Your agent will draw up the purchase agreement so all you have to do is read it and sign it. There’s a lot of paperwork involved in buying a home, and your agent is there to take care of it.

Finding Homes for Sale

You’ve likely seen plenty of “For Sale” signs in front yards. But what’s the best way to locate available homes that match your goals and finances?

Searching online and exploring the neighborhood you want to live in can be a great start. Your real estate agent will also point out homes that match your goals and can help you keep an eye out for new homes on the market.

When browsing home listings, remember that you’re not just buying the building – you’re also buying a home that should match your lifestyle. Some aspects to keep in mind, aside from the house itself, include:

• The neighborhood – If you’re looking for an area with lively nightlife, you might want to find a home closer to a downtown area. But if you’re hoping to get away from the city lights and sounds to a home with a nice yard and a bit more space, a suburb might be better for you.
• The commute – If you’re switching locations in a significant way, consider how much time you’re comfortable spending on your commute to work.
• The schools – If you have kids or think you might want kids someday, take some time to review the schools in the area. And even if you aren’t planning on having children, a good school district can add value to the home and make it easier to sell if you plan to move again.

Deciding How Much to Offer

You’ve set your budget, you’ve looked at homes to buy and you’ve found one you love. So how do you know how much to offer? Staying inside your budget is important, but there’s more to getting the house you want than just picking a number. Here are some things to consider when deciding how much to offer:

• Are there comparable homes for sale in the same area? Noting how long they’ve been on the market can give you an indication of how much competition you’re facing. The more competition you have, the stronger your offer should be.
• How long has the house been on the market? If it’s been a long time (more than two or three months) or has been listed multiple times, the seller may be more willing to accept an offer below asking price.
• Do you expect to have to compete against other buyers? If the house is in a highly desirable area, there’s a chance you could enter a bidding war. You’ll need to decide how high you’re willing to go before you make your initial offer. If you expect the home to have other bids, it might make sense to come with your strongest offer upfront.
• Does the house require repairs or renovations? To help you stay on budget, keep these future costs in mind.

What to Include in Your Offer

When you’re ready to make an offer, your real estate agent can help you get in touch with the seller and submit the offer in writing. Chances are your real estate agent will write the actual offer letter, but here are some details it will include:

• The address of the home
• Your name and the names of anyone buying the house with you, like your spouse
• The amount of your offer
• Any contingencies you’re requesting (i.e., conditions that must be met before the sale is a done deal), such as a successful home inspection
• Any seller concessions you’d like (i.e., things you’re requesting from the seller), such as cash toward closing costs
• Items you want to include in the sale, like appliances and window treatments
• The amount of your earnest money deposit
• Your approval letter, so the seller will know that you won’t run into any financing problems
• The date you expect to close
• The date you want to move into the house
• The deadline to respond to your offer

The Three Stages of Getting Ready to Close

Once your offer has been accepted, closing the loan involves three stages: the home inspection, the appraisal and underwriting. Knowing how these pieces work together can help you prepare to close your loan.

The Home Inspection

Once you’ve had an offer accepted, it’s time to schedule your home inspection. While this step is usually not a requirement for getting a mortgage, it’s a way to protect yourself from buying a home that will cost you more money than it’s worth. It’s your job to find an inspector and pay for the inspection. However, your real estate agent may be able to help with this. They can recommend an inspector and possibly even set up the inspection for you.

A typical home inspection will cover surface-level elements of the home such as structural components, outlets, heating and cooling systems, appliances and more. However, the inspector can’t check out aspects of the house that aren’t easily accessible or visible. For instance, you’ll need a specialized inspector to identify lead, mold, asbestos, radon and pest problems.

Be sure to attend your inspection and ask all the questions you can think of. This is your chance to walk through your new home with an expert. They can tell you about the red flags and make recommendations for what to fix first and how to go about it.

What Happens in the Days Before Closing

You found a home that meets your needs, got your offer accepted and got approved for a loan. Now, you’re finally ready to sign on the dotted line. Closing is where you’ll sign all of the mortgage paperwork and, in most cases, take possession of the property. Here’s what you need to know about closing

Acknowledge Your Closing Disclosure

Before your closing, you’ll get a document called a Closing Disclosure, which will include a summary of the final costs of your loan.

It’s important to acknowledge that you received the document as soon as possible. Your lender is legally required to give you the Closing Disclosure three business days before closing, so if you don’t acknowledge receipt of your Closing Disclosure quickly enough, your closing could be delayed.

Attend a Final Walk-Through

In most cases, you’ll get to do a walk-through inspection of the property up to one day before closing to make sure everything is in order. This is to make sure the property is in the condition that was stated in your purchase agreement. Here are some questions to ask as you take one last look at the property before closing:

• Were all the agreed-upon repairs completed?
• Did the sellers leave behind all appliances, window treatments, etc., that were specified in the purchase agreement? Are these items in the condition you expected them to be in?
• Did the sellers damage the property in the process of moving out?
• Do the lights and faucets work?
• Does the garage door open?
• Has the seller removed all hazardous materials, such as old paint cans and construction materials?

If there are any major issues, you can ask to delay the closing or contact the listing agent to negotiate a fair solution.

What and Who to Bring to Closing

What You Should Bring

These are some items you must bring to closing:

• Your driver’s license or other valid, government-issued photo ID
• A cashier’s check or proof of wire transfer to pay your down payment and closing costs
• Your Closing Disclosure to compare to the final paperwork
• A list of key contacts, such as your agent or lawyer, in case you have questions

Who Should Attend

In general, all buyers who are going to be on the loan should plan to be at closing. It’s possible to close if you can’t be present, but you’ll need to give someone power of attorney.

In some states, the buyer and seller will both be at closing, whereas in other states each party attends a separate closing. In other words, you might see the seller at closing, but it’s not a guarantee.

You can expect a closing agent to facilitate the closing. They’re a neutral third party who will help both buyer and seller along the way. And of course, your real estate agent can attend, although this is not required.

What You’ll Pay for at Closing

At closing, you’ll get the keys to your home, and you’ll also need to pay any closing costs. Here’s a breakdown of the most common upfront costs:

Down payment:

Your down payment will become the equity you have in the home.

Escrow funds:

Your lender will collect these funds at closing to ensure there’s enough money in your account to pay tax and insurance bills as they come due.

Third-party fees:

This covers costs from third parties your lender uses to process your loan. These fees typically include appraisal fees, title insurance costs and credit report fees.

Per diem interest:

You’ll pay daily interest upfront to cover the period between closing and the date your first mortgage payment is due.

Homeowners association (HOA) dues:

If you’re moving somewhere that has HOA dues, you may be required to pay a year’s worth of dues at closing.

Discount points:

A point (or discount point) is a fee paid to lower your interest rate. If you’ve chosen to pay points, you’ll pay for them at closing.

Where Your Monthly Payment Goes

Each month, you’ll make a monthly payment to your lender that will go toward paying back the amount you borrowed (commonly called the principal), plus interest. Your monthly payment may also include mortgage insurance.

Your mortgage statements will show how your payment is broken up. Initially, the bulk of your payment will go toward paying down the interest on the loan, but over time, more of your payment will go to paying down the principal balance.

If you have an escrow account on your loan, part of your payment will go there. The amount of money that’s added to your payment for escrow depends on the amount of your taxes and insurance premiums. Your lender will analyze your account each year to make sure they’re collecting the appropriate amount of money, and they’ll adjust your payment if they’re collecting too little or too much.

How to Handle a Missed Mortgage Payment

If you’re a few days late on your mortgage payment, you likely won’t have to pay a penalty. Most lenders have a grace period – usually around 14 days – when you can make your mortgage payment without an additional late fee. If you fail to pay before the grace period expires, you’ll likely pay a penalty. Plus, a late payment will lower your credit score.