Once your offer on a new home is accepted, the real work begins to secure your mortgage. While exciting, the mortgage process involves several critical steps to ensure a smooth path to homeownership. Here’s a guide to help you stay on track:
1. Submit Your Application
With an accepted offer and a chosen lender, it’s time to formally begin the mortgage process. Your lender will have you complete a full application and request comprehensive documentation about your:
- Income: Pay stubs, W-2s, tax returns, proof of other income.
- Debts: Statements for credit cards, student loans, car loans, etc.
- Assets: Bank statements, investment account statements, and other proof of funds for down payment and closing costs.
2. Order a Home Inspection
Schedule a professional home inspection as soon as your offer is accepted. This step is crucial, especially for existing homes (newly constructed homes often come with builder warranties).
Why a Home Inspection is Necessary:
- Uncover Hidden Issues: Professional inspectors are trained to spot defects and potential problems that are not obvious to the untrained eye, from structural issues to plumbing and electrical problems.
- Negotiating Power: If the inspection reveals significant repairs are needed, it provides leverage to negotiate with the seller. You can request them to fix the issues before closing, or ask for a price reduction or credit so you have funds to address repairs after you own the home.
- Informed Decision: It helps you understand the true condition of the property and its potential future costs.
- What to do: Attend the inspection, ask questions, and have a checklist. The final report should detail both defects and positive aspects. Prioritize issues found and decide what you want to negotiate. Remember, everything is negotiable.
3. Be Responsive to Your Lender
After submitting your application, you’ll likely receive conditional approval. This means your loan is approved pending certain conditions being met. Your lender may request additional documentation or clarifications at any point during processing and underwriting. Promptly responding to these requests is vital to keep your application moving forward and avoid delays.
4. Purchase Homeowner’s Insurance
Your lender will require proof of a homeowner’s insurance policy before they can give final approval for your loan. This insurance protects the property from various perils.
5 Key Things to Know About Homeowner’s Insurance:
- Exclusions to Coverage: Standard policies typically do not cover certain risks, such as flood or earthquake damage. These usually require separate, specialized policies. Given Houston’s susceptibility to hurricanes and flooding, a separate flood insurance policy through the National Flood Insurance Program (NFIP) is often critical.
- Dollar Limitations on Claims: Even if a risk is covered, there might be limits on payouts for specific items (e.g., stolen jewelry, fine art) unless they are separately insured or “scheduled.”
- Replacement Cost: Ensure your policy covers the actual cost to replace your home if it’s destroyed, not just its market value or depreciated value. If your coverage is less than the replacement cost, you’ll only receive up to your coverage limit.
- Actual Cash Value (ACV): If you choose not to replace your home when destroyed, you’ll receive the replacement cost minus depreciation. This is the actual cash value.
- Liability Coverage: Homeowner’s insurance typically covers you for accidents that occur on your property, including medical care and legal costs. Review the upper limit of this coverage, especially if you have significant assets to protect.
5. Let the Process Play Out (Appraisal and Title Search)
While you’re handling your responsibilities, your lender will be performing their due diligence:
- Home Appraisal: The lender will order a professional home appraisal to ensure that the home’s value is consistent with the purchase price. The appraiser visits the property, evaluates its condition, and compares it to recently sold, similar homes in the area. This protects the lender from lending more than the property is worth.
- Title Search: The lender will also order a title search to verify that the seller has clear legal ownership of the property and that there are no outstanding liens (e.g., unpaid taxes, previous mortgages, contractor liens) that could affect your ownership.
6. Avoid Taking on New Debt
Maintaining financial stability is paramount during the mortgage process. Do not open new credit cards, take out new loans (e.g., car loans), or make other major financial changes that could impact your debt-to-income (DTI) ratio. Lenders often re-verify your credit and financial situation just before closing, and any significant changes could jeopardize your mortgage approval.
7. Lock in Your Rate
If you haven’t already, ensure you lock in your interest rate with your lender. This protects you from potential rate increases before closing. Your rate must typically be locked in no later than 10 days prior to your closing date. Be aware of the length of the lock period and any fees associated with extending it.
8. Review Your Documents
Once your loan receives final approval and the inspection, appraisal, and title search are complete, your lender will set a closing date. They will also provide you with a Closing Disclosure (at least three business days before closing), which details all final fees and loan terms. Review this document carefully and compare it to your initial Loan Estimate. Understand every line item and ask your lender or real estate attorney any questions you have.
9. Arrange to Pay Your Down Payment and Closing Costs
You’ll need to secure the funds for your down payment and closing costs. This typically involves obtaining a cashier’s check from your bank or arranging a wire transfer well in advance of the closing date. Your lender will provide the exact amount you need to bring.
10. Close on Your Home
This is the final step! At the closing appointment, you will sign a multitude of legal documents related to the loan and the property transfer.
- Read Carefully: Take your time to read all documents thoroughly and ask questions about any terms you don’t understand.
- Final Signatures: Once everything is signed, the lender will release the funds, the transaction will be recorded with local authorities, and you will officially receive the keys to your new home!
Tools like “Home Loan Navigator” can help streamline this process by allowing you to track your application, receive disclosures, and submit documents electronically.