10-Step Guide to Financing Your Dream Home
Step #8 – Secure a Home Loan
Return Tomorrow for Step #9
Once you’ve made an offer for a home and the sellers have accepted it, you may feel you can relax and just get ready to pack up and move.
However, until you get to the settlement date and have the keys to your new home in hand, you will need to stay vigilant about finances and keep in close communication with your real estate agent, the title company and—most of all—your lender: your home loan may still need attention.
From Pre-approval to Final Approval of the Home Loan
When you consulted a lender and obtained a pre-approval letter for a home loan, you may have thought your loan application was complete—but now that you have a contract, the real application must be processed.
Hopefully, your lender already went through the step of obtaining documentation from you—of your income and assets, bank statements and W2s, and an authorization to request your federal income tax returns. If not, you will need to gather all your financial documents now and provide them as soon as possible to your lender.
Even if your pre-approval included full documentation, you’re likely to need to give a lender updated paperwork such as your latest pay stubs, particularly if your pre-approval was several months ago.
The second part of your loan application depends on an appraisal of the property you are buying. Every lender needs an appraisal to understand the underlying value of the property, which is collateral for your mortgage. It’s up to you to pay for the appraisal but the lender will choose the appraiser.
If the appraisal meets or exceeds the price you have offered for the home, that piece of your loan application is complete; but if the appraisal comes in too low, you will only be allowed to borrow up to the maximum of the appraised value—minus your down payment.
In other words, if the appraiser says the house you want to buy is worth $200,000 and you intend to make a down payment of 10%, the lender will only approve a maximum loan of $180,000. If you and the seller have agreed on a higher price for the home, such as $215,000, you will either need to renegotiate the offer or come up with the extra cash to make up the difference.
Follow Your Lender’s Lead
During the interim period between the signing of the contract and settlement date, you will have several responsibilities to make sure your mortgage is in place when you are ready to close.
Respond immediately to all lender requests: Lenders often need more information from you while your home loan is being processed. Even if it seems excessive, make sure you provide everything needed in a timely fashion.
Keep track of all deposits and withdrawals: If you have any unusual deposits other than your paycheck, you will need to provide a paper trail of where the money came from, so it’s best to avoid any major financial moves at this point. If you must move money around for your home purchase, keep excellent records and be ready to provide them to your lender.
Maintain your credit profile: Don’t apply for new credit, spend anything on your credit cards or close any credit accounts—because any one of these moves could hurt your credit score or change your debt-to-income ratio. Wait until after the closing to make any purchases for your new place.
Communicate with everyone: Your real estate agent, your title company and your lender should be busy behind the scenes getting ready for settlement day, so you should stay in touch with them often to see if everything is on track—and if they need anything from you.
Following these simple steps makes it much more likely that your loan will be ready when you are ready to pick up your keys.