Getting a Mortgage: More Complicated Than You Might Think

As anyone who has been through it will gladly tell you, buying a home is no walk in the park. Unless you are able to pay cash upfront (and really, how many people can do that?), you will have to apply for a mortgage. Getting a mortgage sounds easy enough – I have good credit, I have a job, no sweat, right? – when in fact it is actually a complicated and sometimes protracted process that involves more dance steps than the Macarena. If this is your first home you’re buying, you might not know what you are getting yourself into. Here, put simply, are the stages of getting a mortgage.

Step 1: Get pre-approved

Before you even put an offer on the home of your dreams, you should get pre-approved. This used to be an optional step for the cautious buyer, but nowadays many sellers won’t even look at you unless you are touting that golden letter. A pre-approval is pretty much what it sounds like: a letter from a mortgage lender saying that you are conditionally approved for a loan up to a certain amount of money. Note that a pre-approval is not the same as pre-qualification, which doesn’t guarantee that you will meet the advanced criteria for a mortgage, or that you will definitely close. Pre-approval requires you to furnish your lender with a lot of documentation. To crib a list from Realtor.com, this includes:

• Pay stubs from the past 30 days showing your year-to-date income
• Two years of federal tax returns
• Two years of W-2 forms from your employer
• 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts, such as CDs, IRAs, and other stocks or bonds
• Any other current real estate holdings
• Residential history for the past two years, including landlord contact information if you rented
• Proof of funds for the down payment, such as a bank account statement. (If the cash is a gift from your parents, you need to provide a letter that clearly states that the money is a gift and not a loan.)

Step 2: Get a favorable appraisal

Here’s the lowdown: a bank will not give you the money for a house that is not worth what you offered on it. Whether the seller has been delusional in their pricing or you just got a little overzealous in a bidding war, a contracted home sale price means nothing until an appraiser comes out and verifies that the home is worth at least that much. If a home comes in over appraisal, congratulations! You will be buying the house with built-in equity. If the appraisal falls short, however, you have a few options to salvage the sale. From Century 21:

1. Negotiate with the seller. For the appraisal to pass, the seller may agree to lower the sales price. Of course, this might require some negotiating by your real estate agent with the sellers agent.
2. Appeal the appraisal. Sometimes called a rebuttal of value, an appeal involves your loan officer and agent working together to find better comparable market data to justify a higher valuation. If you file an appeal, the appraiser will review the information and then make a judgment call on whether or not to adjust the info.
3. Order a second appraisal. If you believe the initial appraisal is significantly off base, for whatever reason (maybe the appraiser overlooked a good comp or wasn’t familiar with the local housing market) you can order a second appraisal. You’ll have to pony up for the expense, and appraisals can range between a few hundred dollars and $1,000, depending on the area.
4. Walk away. This is a total bummer, but it may not be worth overpaying for a home.

Step 3: Lock in your credit score

While your mortgage is in underwriting, which can feel like forever, it is your responsibility to make sure that your credit score holds still while the bank takes the picture, so to speak. During this period, you don’t want to do ANYTHING that might ding your credit – don’t make any major purchases with your credit card(s), don’t allow any hard inquiries into your credit, and, for the love of everything holy, don’t miss any payments. If your credit score drops between pre-approval and closing, it can send your mortgage journey completely off the rails. The bank WILL check your credit right before closing. Don’t give them any reason to raise an eyebrow.

Step 4: Cross all your “t’s” and dot all your “i’s”

Underwriting is, like I said already, the most tedious part of getting a mortgage. It requires a lot of paperwork going back and forth, and it can get very repetitive. During this time, the bank will double (and triple) check your basic information to ensure that the mortgage goes on record as being given to the right person. Things that you and the bank will have to sign off on together to ensure there’s no confusion:

• The spelling of your name
• Loan term (15 years? 30 years? Something different?)
• Loan type (a fixed-rate or adjustable-rate mortgage)
• Interest rate
• Cash to close amount (down payment and closing costs)
• Closing costs (fees paid to third parties)
• Loan amount
• Estimated total monthly payment
• Estimated taxes, insurance, and other payments

At the end of this process, hopefully you end up with the keys to the home of your dreams!