Mortgages for First-Time Homebuyers 101: The Basic Steps in Getting Pre-Approved for a Home Loan.

Summary

This article breaks down what first-time homebuyers can expect when starting the mortgage application process. The first step is getting pre-approved, and we will discuss the steps to pre-approval and how first-time homebuyers can be prepared, knowledgable and less stressed during this process. 

by Christian Scully

There are two types of first-time homebuyers that I meet a lot in my work as a mortgage loan originator:

Some buyers reach out seeking a mortgage for the first time, excited and motivated to start shopping for their first home and have an expectation that they can simple fill out a quick application and be handed a couple hundred thousand dollars to go pick out the home of their dreams. 

Others reach out absolutely terrified at the idea of applying for a mortgage, either based on bad experiences their friends have had, or general anxiety when it comes to finances or credit.

These two polar opposite attitudes when it comes to applying for a mortgage are both extremes. The problem with expecting the process to be super fast and easy is that they tend to be surprised at the need for some of the necessary steps in the mortgage process. This can cause frustration and even anger at times. And the issue with being frightened of the process and expecting a nightmare is that it causes unnecessary stress on the buyer and already begins the experience with negative attitude.

Let's take a very simple, quick overview of how to start the mortgage application process and hopefully help set your reasonable expectations and provide a clear path to your goal of purchasing a home. The first phase of the mortgage application process involves getting pre-approved for a home loan. This should be every first-time homebuyer's first step in the home buying process as well. Before you can start seriously shopping homes, you need to know if you are in a financial position to actually be approved for a mortgage, and know exactly the maximum price of a home you can afford, and what type of loans might be the best option for your needs and goals. 

Step 1: Initial conversation with a licensed mortgage loan officer.

You are going to need to find a lender to start the process with. Fortunately, lenders are everywhere! Without going into too much depth on how to find a mortgage lender, I'll say just use your best judgement in choosing a trustworthy service provider as you would anything else. You might ask friends and family for a referral, you might search for reviews online, you may even be connected through a realtor or a service on Zillow or Realtor.com. Whichever way you find them, you'll want to have an initial conversation with the loan officer at least over the phone. 

What to expect: 
The loan officer will likely ask you a few questions to get to know your current situation and what your goals are. They may ask you about your current employment (you need to show 2 years of work history), your income, your current living situation, your savings and investments available for a downpayment and closing costs and if you have a rough idea of your credit score. They will likely also ask you what you think you can afford for a monthly mortgage payment and the price of houses you have been looking at online. Finally, they may ask you what your timeline is for buying a house. 

If the loan officer doesn't ask, be sure to mention any concerns you have in entering the process. For example, if you are concerned about your credit score, bring up the issue and ask if there is anything the loan officer can do to help with credit repair. If you are concerned that you might not have enough money saved for a down payment, they can offer you guidance.

This conversation will provide the loan officer a good introduction into your situation and your goals, and also is a great opportunity for you to ask any questions you have about the process and determine if the loan officer seems friendly, knowledgable and helpful. 
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Step 2: Fill out and submit an online application.

Most lenders today offer some type of an online application. This makes the process super easy to start. Once you have had an initial conversation with your loan officer, they will likely ask you to fill out an online application. It will likely be as simple as creating an account, and answering basic questions step by step. It may ask you to upload documents, and if you have them handy feel free to do so. Often you can skip questions that you don't have the answer to or you are unsure of. Either way, the process can take 10 minutes or so and you submit it. 

+ Better Note: If you have one conversation with your loan officer and they end the conversation by sending you a prequalification letter, without having you fill out an application or taking an application over the phone, and without seeing any of your personal financial documents, then you need to find a new lender to work with. This is not a real prequalification and can only lead to problems. 
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Step 3: Gather and submit personal financial documents.

There are a few basic personal financial documents that your loan officer will need to review in order to verify the information on your loan application. You should expect to provide the following documents: 

• Your two most recent year's W2. This is your tax form provided by your employer if you are not self-employed. It will be required for the mortgage application and will help your loan officer verify your annual pay amount and employment history.
• Monthly bank statements from the most recent 2 months for all checking and savings accounts. 
• Most recent quarterly statement for any investment accounts, including retirement (if applicable).
• One month's pay stubs, so if you are paid weekly provide 4 most recent paystubs. If you are paid bi-weekly, just provide your most recent 2 paystubs. 

Plan to provide the following as well, if they apply to your situation: 

• VA certificate of eligibility if you are a veteran seeking a VA loan
• 2 years personal and business tax returns if you are Self-Employed
• Divorce Decree if you have an alimony payment
• Child Support agreement if you pay child support
• Receipt of Child Support if you are paid monthly child support 

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Step 4: Discuss loan program options with your loan officer.

Once you submit an online application and provide your personal financial documents to your loan officer, they will have enough information to start determining your qualification level. Expect them to run a credit report to determine your credit score and payment history. They will be able to suggest loan programs based on your income, mothly debt, credit score and purchasing goals. They will likely suggest your best options, which will likely be a conventional loan, FHA, USDA or VA. Other programs exist for borrowers with specific circumstances. Feel free to ask any questions so that you understand what you can expect from each program, and why it may be right for you.

Your loan officer will likely be able to provide an estimated interest rate you may qualify for if approved. 

+ Better Note: Interest rates change every day, they go up and down for various reasons. Your interest rate is not typically set until you find the home you want to buy, have a purchase contract and actually submit a mortgage application. Fully expect any rate you are told at this stage by your loan officer to change. It may go up or down, depending on the market. Don't get hung up on the interest rate either. Yes it is important, and you want the best rate you can qualify for, but it not the most imporatant piece. Read this article for more about this topic. 
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Step 5: Make a plan to either start shopping for a home or to improve any sections of your loan application. 

At this point your loan officer will have either determined that you are well qualified to apply for a mortgage, or that there are some issues that need work. 

If they determine that you are pre-approved, they will provide you with a "pre-approval letter". This letter will generally state that the lender has reviewed your documents, credit report and loan application and determined that based on all the information you provided you are qualified to purchase a home up to a maximum amount. This letter should go to your realtor, who will include it in any offers you make in the home buying process. 

If the loan officer finds that you are not yet qualified to purchase the home you desire, then they can make a few recommendations. First, if you need or want to purchase a home sooner than later, you may need to adjust your target. If you are not qualified to purchase as much of a home as you were initially hoping, then your loan officer can tell you the maximum purchase price for your situation. 

If the loan officer determines that there are issues with your credit report or that you have a low credit score, they should tell you exactly what the issues are and if there are steps you can take to fix them. The worst case scenario is that the issues are brought to your attention and time is needed to repair them, and you will now know what NOT to do moving forward. If there are issues that can be repaired immediately, a good loan officer should be able to tell you exactly what to do in order to increase your score to where it needs to be. 

Your loan officer may determine that your monthly debts are too high, or that your income is too low, or that you need to save up more money for a downpayment. 

Either way, at this point you will have a plan of what to shop for, or a plan to repair any financial or credit issues so that you can continue on your path to purchasing a home in the future. 
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Step 6: Stay in touch with your loan officer. 

Whatever the outcome of your pre-approval process, stay in touch with your loan officer. If you are pre-approved and start shopping, feel free to send an update to your loan officer with properties you are considering. They will be able to tell you roughly how much to expect for a down payment, closing costs and monthly mortgage payment. 

If you were given a plan to repair credit or improve your finances, be sure to update your loan officer as you make progress. Once you complete the tasks, your loan officer should be able to update your loan file and determine if you are now prequalified to apply for a mortgage.

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+ Better Tip

To make the pre-approval process go as fast and easy as possible, there are a few things you can do. First, be prepared with your financial documents. Pull together your W2s, paystubs and bank statements. The more accurate information you provide at the start of the process, and the faster you can provide documents that smoother everything will go. Fill out as much of the online application as possible and get it done, it won't take very long. Many new buyers may put it off, thinking that it will take a long time or will be stressful. It is really just going to ask for basic information, and will allow your loan officer to get some work done on their end. Finally, if your loan officer gives you a plan to improve finances or repair credit, take action on it as soon as possible.