Very few people have the luxury of paying cash for a new home. When purchasing a home, most buyers must take out a mortgage. A mortgage is a legal instrument that secures a loan against a house (also referred to as a Deed of Trust in Virginia).
When you secure a loan to purchase a home, you will sign a promissory note and a mortgage deed during the closing proceedings. Below are some helpful hints to guide you through the process of applying for a home loan:
The First Step: Pre-Qualification vs. Pre-Approval
Before you even begin looking at homes, you should contact a mortgage specialist. Getting pre-qualified or pre-approved increases your chances of having your Offer to Purchase accepted by the seller. A seller is much more likely to accept an offer from a buyer who already has financing committed.
- Pre-Qualification: This is an informal estimate of how much you can borrow. It can usually be done over the phone by providing your income, long-term debts, and the amount of down payment you can afford.
- Pre-Approval: This is a lender's formal commitment to loan you money. You provide your loan specialist with your actual financial records. Getting pre-approved gives you your exact budget and shows sellers you are a serious buyer.
Applying for a Loan
Your mortgage specialist will need several financial records to process your application:
- W-2 forms or tax returns for the past 2 years.
- Proof of gross monthly income for the past 30 days.
- Proof of investment income, including rental properties.
- A list of creditors, including account numbers, balances, and monthly payments.
- Two months' worth of bank statements.
- A copy of the sales contract for the property you wish to purchase.
During processing, the lender will verify all information and run a credit check. Avoid applying with too many lenders in a short period; numerous inquiries on your credit history can negatively affect your FICO score.
Types of Mortgage Loans
- Conventional Loans: These can be Fixed-Rate (interest rate never changes, typically 15 or 30 years) or Variable-Rate (interest rates adjust periodically, commonly called Adjustable Rate Mortgages or ARMs).
- Hybrid Loans: These feature a fixed rate for the initial period (e.g. 3, 5, or 7 years) and then convert to an adjustable rate for the remaining life of the loan.
- Government-Backed Loans: Insured through the FHA (Federal Housing Administration) or VA (Department of Veterans Affairs). These typically require smaller down payments and offer interest rates below current market averages. FHA programs are particularly helpful for first-time buyers.
- Bridge Loans: Short-term loans (usually one year) designed for buyers who close on their new home before selling their current one. These help bridge the gap between properties but include higher interest structures.
Loan Approval & Commitment
Once approved, the lender will issue a **Commitment Letter**. This letter may contain conditions (such as specific repairs that must be completed before final approval). It will also outline your "lock-in" rate, which is the lender's guarantee of a specific interest rate, typically valid for 30 to 60 days. If the lock-in period expires before closing, you may have to pay extension fees.
Closing & Closing Costs
Prior to closing, you will do a final walkthrough of the home to ensure it is in the agreed-upon condition. The closing attorney will provide the final settlement statement (HUD-1 or Closing Disclosure) detailing the exact funds you need to bring. At closing, remember to bring: a certified cashier's check for closing costs, a picture ID, your checkbook, and proof of homeowner's insurance.
Typical closing costs include: attorney's fees, prepaid property taxes, loan origination fees, recording fees, prepaid interest, title insurance, survey fees, and escrow deposits.