Buying a home can be exciting, but the process of getting a mortgage can be overwhelming, especially for first-time homebuyers. The process involves several steps that can seem confusing, and it’s important to understand each step to make informed decisions.
In this article, we’ll guide first-time homebuyers through the mortgage approval process and help you understand what to expect along the way.
What is a Mortgage?
If you’re a first-time home buyer and new to the home buying process, you may be wondering what a mortgage is in the first place. Investopedia defines a mortgage as “A mortgage is a type of loan used to purchase or maintain a home, land, or other types of real estate.”
When you go to buy a house, you need to be prepared to pay for the house over a set period of time. After a down payment, the rest of the purchase price and any interest is paid down over time in monthly payments. A larger down payment often means that you will have less to pay over time.
What Are the Different Types of Mortgages?
There are two main types of mortgages that you might consider as you go through the process of buying a home and taking out a mortgage. The first is a fixed-rate loan that has a fixed interest rate over a set period of time.
There are also adjustable-rate loans with interest rates that change according to the set interest rates of the major banks in Canada.
While most fixed loans are often recommended when interest rates are low, an adjustable-rate loan can be beneficial when the starting rate is higher. You should talk to your mortgage lenders about which mortgage financing option is right for you.
The 7 Steps to Getting a Mortgage
While a smooth mortgage approval process is a dream for many home buyers, it can sometimes be a tricky and stressful process. Here are seven steps that you can take before signing your mortgage contract.
Step 1: Determine Your Budget
Before you start house hunting, it’s important to determine your budget. Your budget will help you narrow your search and avoid the mistake of buying a property that you cannot afford.
To determine your budget, consider your income, retirement accounts, property taxes, other expenses, credit report, and available funds for a down payment and maximum loan amount.
Your income will determine how much mortgage you can afford. As a rule of thumb, your monthly mortgage payment should not exceed 28% of your gross income.
This means that if you earn $60,000 a year, your monthly mortgage rate should not cost more than $1,400 ($60,000 multiplied by 0.28, then divided by 12).
Additionally, consider your monthly expenses, such as car loans, student loans, credit card bills, and insurance. Subtract your expenses from your pay stub to determine how much you can afford to spend on your mortgage.
Your credit history and score will also play a crucial role in your mortgage approval process. A good credit score will help you qualify for better loan terms and interest rates. A low credit score, on the other hand, will make it harder for you to get approved for a mortgage from a mortgage lender.
Finally, consider the available funds in your bank accounts for a down payment. Your down payment will affect your loan estimate and interest rates, so make sure you save enough money for it.
Step 2: Mortgage Pre-Approval
Once you’ve determined your budget, the next step is to get pre-approved for a mortgage. This pre-approval step is crucial in the process as it shows sellers that you’re a serious buyer and can afford their property. A privacy consent form is also included in the pre-approval process.
To get approved for a home loan, you’ll need to provide your mortgage broker with your financial background and information, such as your income, assets, and credit score from a credit bureau report.
Financial institutions will use this information to determine how much mortgage you can afford and whether you qualify for a loan.
As well, before a lender approves your loan or mortgage transaction, they will need the property details to ensure that the home meets a certain standard. Often, the home’s title is researched by a title company or land titles office as well.
Shop around at credit unions, mortgage brokers, banks, and other lending institutions and compare offers to find the best mortgage options for you.
Step 3: House Hunting and Making an Offer
Once you’ve been approved for a mortgage, it’s time to start house hunting with real estate agents. Look for properties that match your budget, needs, and preferences. You can search for properties online, attend open houses, or work with a real estate agent.
Once you find a property that you like, it’s time to make an offer. Your offer should be based on factors such as the property value, repairs needed, and local real estate market. Your real estate agent can help you make a competitive offer that reflects these factors.
Step 4: Mortgage Application
If your offer is accepted, it’s time to get a mortgage with an application. The loan application process involves filling out forms and providing your lender with financial information, such as your income, assets, debts, and debt payments.
During the application process, your lender will verify your financial information and bank deposits, including your income, employment history, credit score, and debt-to-income ratio. They may also require additional documents, such as tax returns, pay stubs, and bank statements.
Step 5: Mortgage Underwriting
After you’ve submitted your mortgage application, it’s time for underwriting. Underwriting is a process where a lender assesses the risk of lending you money. This involves reviewing your credit score, employment history, income, assets, debts, and other financial information.
The underwriting loan processing time typically takes two to four weeks, although it can take longer depending on your financial situation, the lender’s workload, and other factors. During this process, your lender may request additional documents, such as updated bank statements or pay stubs.
Step 6: Mortgage Approval Process
Once your mortgage application has been underwritten and approved, it’s time for final approval. Your lender will issue a loan commitment letter that outlines the terms and conditions of the loan, including the interest rate, monthly payment, and closing costs.
Review the loan commitment letter and mortgage statement carefully and ask your lender any questions you may have. If you’re satisfied with the terms, sign the letter and return it to your lender.
Step 7: Closing Costs and Details
The last step in the process is closing. Closing is where you sign the final documents, do a final walk-through, transfer funds, and take possession of your new home.
Before closing, review the closing statement and sale agreement carefully and make sure there are no errors or fees you don’t understand. You may also need to provide a cashier’s check or wire transfer for the down payment and closing costs.
During closing, you’ll sign several documents, including the mortgage note, mortgage deed, and other documents related to your loan and property. Once the documents are signed, you’ll receive the keys to your new home!