How Do Mortgages Work?

How Do Mortgages Work?

Buying your first home is a very exciting process. From comparing neighborhoods to house shopping, it is an experience you will never forget. However, before you can really get the process started it’s important to first understand how mortgages work.

Mortgage Prequalification

Mortgage prequalification is the first step in securing a first time home buyer loan. You will be asked to provide a series of financial documents to allow your lender to determine if you are eligible for financing. At this time they will also run your credit. When meeting with your lender, be prepared to provide: two years of W2s and federal income tax returns, sixty days of banking, savings and investment account statements and the past month of pay stubs.

Your lender will use this information to determine the amount of money they are willing to lend you. You will then receive a preapproval letter outlining the details of your prequalification. The letter is to be shared with your real estate agent to prove you are ready to begin seriously shopping for a home. You will also provide this letter when you make your offer on your new home.

Escrow

Once your offer is accepted, you will provide earnest money to begin the escrow process. During escrow your lender will go to work underwriting your loan. To meet the requirements of a first time home buyer loan, the property must undergo an appraisal. A stipulation put in place by the Department of Housing and Urban Development (HUD), your appraisal is intended to ensure you are paying fair market price for the property. The underwriting of your mortgage is dependent on the findings of your appraisal.

Buyer Information Verification

During the underwriting process, your lender will be focused on the “4 C’s.”

Credit

They will assess your FICO scores as well as your credit history and use.

Cash

Your lender will also look into your assets and investments to assess your liquidity.

Capacity

They will also look into your job history and cash follow.

Collateral

Once they receive your appraisal, they will compare your purchase price to the market value of your home. If you have less than 20% in equity, private mortgage insurance will be rolled into your monthly mortgage payment.

Assuming there are no surprises as your lender completes their analysis of the 4 C’s, you will be ready for closing.

Closing

Once the underwriting process is complete, you will close on your new home. During closing you will sign all documents related to your first time home buyer loan. Once all documents have been signed, the official transfer of ownership of the property is complete and you are a home owner!

First Time Home Buyer Loan

If you are ready to begin the exciting process of becoming a first time home buyer, we encourage you to start the application process today. Allow us to walk you through each step and help you secure your piece of the American Dream.

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