Whether you're a first-time homebuyer or a seasoned pro, the mortgage process can sometimes seem complex. You've been saving for a home, so where do you go from here? We've laid out the process below to help you navigate the homebuying journey.
1. Homework, homework, homework
Homework — there, we said it again. Before you make any major financial decisions it's important to do your homework. If you're reading this, you've already begun! But this is just the start. Take time to get familiar with the ins and outs of the process and know what to expect. If you've read article after article and you still have questions, a Chase Home Lending Advisor would be happy to help.
2. Check your credit score
First thing's first — you need to see if you're eligible for a mortgage. Getting a mortgage largely depends on your credit score. The higher your score, the better your chances of being approved for a loan. Generally, you'll want your score to be at least 620 or above. If it's not where you'd like it to be, there are plenty of ways to improve it, like reducing your balances or paying your bills on time. Having a strong credit score can lower your interest rate, so focus on improving your credit rating.
3. Understand your debt to income ratio
Lenders will ask questions about your financial situation, such as the amount of your monthly debt compared to your total monthly income or debt-to-income (DTI). This is the amount of money you bring in each month versus your monthly payments for things such as credit cards, auto and student loans. The lower your debt-to-income ratio, the more likely you’ll be approved for a mortgage loan.
4. Review your savings
If you're ready to buy a home, you may have already started saving for it. Review your savings and decide how much of it you can put towards a new home. Keep in mind things like emergency funds, insurance premiums and any large bills you'll have to pay soon. Deduct what you'll need in the near future to see how much you have left.
5. Decide on a down payment amount
Now that you know how much you can spend on your new home, do the math to see how much of a down payment you can afford. Ideally, you'd be able to put a 3%-20% down payment on a home. A loan-to-value (LTV) > 80% generally requires that you pay private mortgage insurance (PMI). PMI generally requires a premium that will be added to the total monthly mortgage payment and is considered in your total DTI.
6. Choose a mortgage term
Now it's time to dive deeper into the world of homeownership. Decide what kind of mortgage you want and more importantly what's in your budget: 30-year fixed-rate, 15-year fixed-rate, an adjustable-rate mortgage are just some examples of the terms available. If you're not sure what those terms mean there are many resources to help you research the different types of mortgages. Do your homework and pick the one that best fits your unique needs.
7. Find your real estate agent
A good real estate agent is a valuable asset. They can answer questions, help you look for homes within your budget and assist you throughout the homebuying journey. Without a real estate agent, you could find yourself to be at a disadvantage to a buyer that has an Agent representing them. Realters are there to help make things as easy as possible and the seller is responsible for paying the majority of their fees.
8. Determine your closing costs
After you've narrowed down the homes you like, calculate how much the closing costs will be. Generally speaking, closing costs are around 2% to 5% of the home's selling price. This may make a difference in how much of down payment you can afford, which may affect your mortgage. If you have a real estate agent, they can help you determine this cost, as well as any additional costs you'll have to pay. Your Agent may also recommend negotiating these costs with the seller.
9. Consider getting prequalified
Consider getting prequalified for a mortgage. Think about this as a test run for applying for a mortgage. You'll answer a series of questions about your finances and your lender will discuss with you the mortgages/loan terms you qualify for. But remember — this isn't a conditional approval letter, so you may not be asked for all of the information you need to provide for a full mortgage application.
10. Compare mortgage lenders
As you look for a mortgage lender, pay close attention to their offerings. Be sure to note their mortgage rates and fees (which is best determined by Annual Percentage Rate or APR) as well as any promotions they might have. Talk to lenders to fully understand the type of mortgage you're considering and be sure they offer the term you're looking for. Once you've found a lender that fits your needs, you can begin the mortgage application process.
11. Gather your documentation
Make sure you have everything in order before you apply for a mortgage. You'll want to have items such as your pay stubs, W2s, Social Security or pension award letter, bank statements, and possibly your Federal Tax Returns (1040s) available.
Once you feel you're ready to go from looking to buying, it's time to apply.
Your lender will ask a series of questions to complete your application such as your finances, personal information, the home you're buying, etc. Your lender will ask for the documents you collected in the previous step. This is where you'll choose the type or term of mortgage you're applying for, and provide information about the home you're purchasing. The term of the loan can be changed during the loan process if you haven't fully decided the best option for your budget at this time.
13. Be patient
As your application is reviewed, you're encouraged not to make any significant changes to your finances such as leaving your job, buying a new car or applying for any new credit cards. The idea is to remain as close to your debt-to-income (DTI) and credit rating as when you applied. If those items change, your loan may be impacted. This is also the perfect time to get some tasks checked off your to-do list to prepare for your move such as scheduling movers, getting a Homeowner's Insurance policy in place, etc.
14. Get a Home Inspection
This isn't a requirement, but it's a smart move. Get your home inspected before you buy. The inspector will look for any issues with the foundation, roof, plumbing, electrical wiring, heating and cooling systems, etc. You may also be able to negotiate the sales price or even ask the seller to make repairs as part of the negotiations.
15. Closing time
Once your mortgage application has been approved, you'll take the last steps to officially close on your home. After you've put your signature on the last line on the last page, you're a proud new homeowner! This is the part where you get the keys and start moving in — the part you've been saving, studying and working for.
We hope this step-by-step guide of the homebuying journey has helped you understand everything that goes into it. As always, if you have any questions, call us or go to your local Chase branch to speak to a Chase Home Lending Advisor.