Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.

From start (searching online) to finish (closing escrow), buying a home takes about 10 to 12 weeks. Once a home is selected, the offer is accepted, the average time to complete the escrow period on a home is 30 to 45 days (under normal market conditions). Though, well-prepared home buyers who pay cash have been known to purchase properties faster than that. Market conditions are a major factor in how fast homes are sold. In hot markets with a lot of sales activity, buying a home may take a little longer than normal. That’s because several parties involved in the transaction get behind when business suddenly picks up. For example, a spike in home sales increases the demand for property appraisals and home inspections, yet there will be no increase in the number of appraisers and inspectors available to do the work. Lender turn-around times for loan underwriting can also slow down. If each party involved in a deal takes a day or two longer to get their work done, the entire process gets extended.

In sellers’ markets, increasing demand for homes drives up prices. Here are some of the drivers of demand: Economic factors – the local labor market heats up, bringing an inflow of new residents and pushing up home prices before more inventory can be built. Interest rates trending downward – improves home affordability, creating more buyer interest, particularly for first-time homebuyers who can afford bigger homes as the cost of money goes lower. A short-term spike in interest rates – may compel “on the fence” buyers to purchase if they believe the upward trend will continue. Buyers want to make a move before their purchasing power (the amount they can borrow) gets eroded. Low inventory – fewer homes on the market because of a lack of new construction. Prices for existing homes may go up because there are fewer units available.

A buyer’s market is characterized by declining home prices and reduced demand. Several factors may affect long-term and short-term buyer demand, like economic disruption – a big employer shuts down operations, laying off their workforce. Interest rates trending higher – the amount of money people can borrow to buy a home is reduced because the cost of money is higher, thus reducing the total number of potential buyers in the market. Home prices drop to meet the level of demand and buyers find better deals. Short-term drop in interest rates – can give borrowers a temporary edge with more purchasing power before home prices can react to the recent interest rate changes. High inventory – a new subdivision and can create downward pressure on prices of older homes nearby, particularly if they lack highly desirable features (modern appliances, etc.) Natural disasters – a recent earthquake or flooding can tank property values in the neighborhood where those disruptions occurred.

A stratified market happens where supply and demand characteristics differ by price point, in the same area (typically by city). For example, home sales for properties above $1.5M may be brisk (seller’s market) while homes under $750k may be sluggish (buyer’s market). This scenario comes along every so often in West Coast cities where international investors – looking to park their money in the United States – buy expensive real estate. At the same time, home sales activity in mid-priced homes could be entirely different.

Home shoppers pay little or no fees to an agent to buy a home. Here’s why: For most home sales, there are two real estate agents involved in the deal: one that represents the seller and another who represents the buyer. Listing brokers represent sellers and charge a fee to represent them and market the property. Marketing may include advertising expenses such as radio spots, print ads, television and internet ads. The property will also be placed in the local multiple listing service (MLS), where other agents in the area (and nationally) will be able to search and find the home for sale. Agents who represent buyers (a.k.a. buyer’s agent) are compensated by the listing broker for bringing home buyers to the table. When the home is sold, the listing broker splits the listing fee with the buyer’s agent. Thus, buyers don’t pay their agents.

Most loan programs require a FICO score of 620 or better. Borrowers with higher credit scores represent less risk to the lender, often resulting in a lower down payment requirement and better interest rate. Conversely, home shoppers with lower credit scores may need to bring more money to the table (or accept a higher interest rate) to offset the lender’s risk.

The national average for down payments is 11%. But that figure includes first time and repeat buyers. Let’s take a closer look. While the broad down payment average is 11%, first-time homebuyers usually only put down 3 to 5% on a home. That’s because several first-time homebuyer programs don’t require big down payments. A longtime favorite, the FHA loan, requires 3.5% down. What’s more, some programs allow down payment contributions from family members in the form of a gift. Some programs require even less. VA loans and USDA loans can be made with zero down. However, these programs are more restrictive. VA loans are only made to former or current military service members. USDA loans are only available to low to-middle income buyers in USDA-eligible rural areas. For many years, conventional loans required a 20% down payment. These types of loans were typically taken out by repeat buyers who could use equity from their existing home as a source of down payment funds. However, some newer conventional loan programs are available with 3% down if the borrower carries private mortgage insurance (PMI).

If the built-up equity in your current home will be applied to the down payment on the new home, naturally the former will need to be sold first. Some home buyers decide to turn their current home into an investment property, renting it out. In that case, the current home will not need to be sold. However, your loan advisor will still need to evaluate your risk profile and credit history to determine whether making a loan on a new home is feasible while retaining title to the old home. Buyers often have a short time frame to sell their current home when relocating to a new city because of a job transfer. If you are moving but taking a position with the same employer, check to see if they offer relocation assistance to help offset some of the costs.

That’s up to you! For sure, home shopping is easier today than ever before. The ability to search for homes online and see pictures, even before setting a foot outside the comfort of your living room, has completely changed the home buying game. Convenience is at an all-time high. But, nothing beats visiting a home to see how it looks and ‘feels’ in person.

When you make an offer on a home, your agent will ask for a check to accompany it (checks are the same as cash, and the deposit is typically 1% to 2% of the purchase price). Earnest money is made in good faith to demonstrate – to the seller – that the buyer’s offer is genuine. Earnest money essentially takes the home off the market to anyone else and reserves it for you. The check (or sometimes cash) is deposited in a trust or escrow account for safekeeping. If a deal is struck, the earnest money is applied to the down payment and closing costs. If the deal falls through, the money is returned to the buyer. Important: if the terms of a deal are agreed upon by both parties, but then the buyer backs out, the earnest money may not be returned to the buyer. Ask your agent about the ways to protect your earnest money deposit and the ways to protect it – such as offer contingencies.

Written offers should stipulate the timeframe in which the seller should respond. Giving them twenty-four hours should be sufficient.

Sellers can flat-out accept or reject an initial offer. But there is a third path that is quite common, sellers can initiate a counteroffer. Remember this: a deal isn’t dead until it’s dead. So, if a counteroffer is proffered by the seller, you’re still in the game. You and your agent just need to review it to determine whether the counteroffer is acceptable. If so, then approving it closes the deal immediately. Keep in mind, offers and counteroffers can go back and forth many times; this is not unusual and negotiations are a part of what Realtors do as a matter of routine. Each revision should bring both parties closer together on the terms of the deal.

Yes! Home inspections are required if you plan on financing your home with an FHA or VA loan. For other mortgage programs, inspections are not required. However, home inspections are highly recommended because they can reveal defects in the home that are not easily detected. Home inspections bring peace of mind to one of the biggest investments of a lifetime.

It’s not required, but it’s a darn good idea! Final walk-throughs give buyers a chance to make sure nothing had changed since their first visit. If repairs were requested, as part of the offer, a follow-up visit ensures that everything is squared away, as expected, per the terms of the contract.

• You can use our online prequalification tool to connect with a loan officer and find out approximately how much you can borrow before you start shopping for a house.
• Once you have that number, you can provide more information and allow your loan officer to run your credit report to verify your assets and income.
• Your loan officer can also help you obtain a complete written credit approval, subject to an appraisal, before you make an offer on a house.

Keep in mind that there’s a difference between being preapproved and prequalified. When you’re prequalified, you’ve given your mortgage lender all the basic info they need to help you determine what loan program and what amount you may prequalify for. When you’re preapproved, your lender will have collected the necessary documents and verified your information to move the loan forward to underwriting and approval.

Prequalification can be done easily, quickly, and online. To take the next step and to get preapproved, you may be asked for:

• Tax returns and W-2 forms from the most recent two years.
• Bank/asset statements from the most recent two months.
• Paystubs from the last 30 days.
• Valid photo ID.

But remember, by furnishing any and/or all of this documentation, you are in no way obligated to accept the terms and conditions of the mortgage offered, nor do you have to provide these documents to receive a Loan Estimate (LE).

• Don’t start shopping for a new home until you’ve been prequalified.
• Don’t pack or ship any important documents, such as tax returns, bank statements, paystubs, and W-2s.

Prequalifying for your home loan before you begin shopping for a house can save you hours of unneeded stress and heartache. When you know how much house you can afford in advance, you can meet with your realtor, well-informed and ready to make an educated buy. In eyes of a seller, a prequalified homebuyer also appears more motivated. Likewise, holding on to your paystubs, bank statements, and tax returns can make a speedy prequalification even speedier. To further grease the wheels and keep your loan process moving, make all your bill payments on time. It also helps to have a paper trail of any large deposits you make, as well as to notify your loan officer directly if you plan to use a down payment gift from your family. *Avoiding these actions before and during the financing process can prevent any unnecessary confusion.

• Don’t suddenly pay off all your debts.
• Don’t apply for new credit cards.

Prequalification can be easy, but it’s after you get preapproved and the loan process progresses that your lender is required to pull a refreshed credit report before closing to check for any new debt. So, any major changes in your finances could delay your loan closing – or even result in a denial despite an earlier approval.

How can you keep your credit clear while your new home loan is in the works? Don’t do this:

• Apply for a new credit card, auto loan, or other types of credit.
• Co-sign a loan with someone.
• Change jobs, become self-employed, or quit your job.
• Skip payments on existing credit accounts, utility bills, or loans.
• Charge up your existing credit on big-ticket items, like furnishings for a new house.

If you think any of these don’ts are musts, talk to your loan officer before you take action. They can help you figure out what to do so that your mortgage loan is the least negatively affected. *Avoiding these actions before and during the financing process can prevent any unnecessary confusion.

• Income ratio:Your total monthly housing expense divided by your pre-tax monthly income.
• Debt ratio:Your total monthly housing expense plus any recurring debts, i.e., car payments, monthly minimum credit card payments, and other loan payments, divided by your monthly income.
• Standard loan underwriting guidelines suggest a max 28 percent income ratio and 36 percent debt ratio, which may vary based on personal finances, loan program, and down payment.
While not taking on any debt and paying for everything with cash seems like a logical choice if you feel you can’t afford your lifestyle, no credit also means bad credit in the eyes of a lender. There’s bound to be a time when you can’t buy something with cash, like buying a house (in most cases). So, we recommend opening at least three credit card accounts and making occasional purchases. To manage your debt and maintain healthy credit, keep credit card balances to less than 30 percent of your credit limit. Also, don’t close long-term credit lines, even if they’re not being used. Your longest-standing credit card account might be a huge contributor to your credit score health — and the mortgage rate you qualify for.

• Cash reserves:The extra funds available to you after your loan closes.
• These funds reflect your ability to make monthly mortgage payments, and different loan programs may have different cash reserve requirements.

To estimate your ability to pay your monthly mortgage, we recommend setting aside about 28 percent of your monthly income. This number factors into your debt-to-income ratio, mentioned above. For many people, any number between 25 and 32 percent of your income is manageable. But, relying on a higher percentage of your monthly income could put you at risk if you have a big financial change, like rising insurance costs or loss of employment.

• This insurance helps protect a lender if a borrower forecloses on their property.
• Borrowers pay for the mortgage insurance, allowing lenders to grant loans they might not have otherwise.
• Mortgage insurance may be required on some loans when a down payment is less than 20 percent.

Mortgage interest, insurance paid, and property taxes are normally tax-deductible for your principal residence. As confirmed by TurboTax, buying a house is an investment, but the tax deductions may be large enough to lower your tax bill “substantially.” Interest/insurance payments on a residential mortgage (as well as mortgage interest/insurance on a second home) may be fully deductible. Likewise, selling one home and buying another means you might be able to protect the profits on the sale of your home, as long as it was used as a principal residence for any two of the last five years. You could protect up to $500,000 in tax‐free profit when filing federal taxes jointly or $250,000 when filing single. This added bonus of tax‐sheltering the profits on the sale of your home may be available to you once every two years. Homeowners who take advantage of these deductions could save hundreds of dollars in annual taxes.

• Also called discount points, mortgage points work as a one-time fee you can opt to pay if you’d like to get a lower interest rate.
• One mortgage point equals one percent of your total loan amount and may drop your interest rate one-eighth to one-quarter percent lower.

You may have noticed by now that lenders charge their own fees, which can vary greatly. One lender may choose to waive a fee but add on another. Another lender might quote an interest rate before adding or subtracting discount loan points that can change the total cost of a mortgage.

• Annual Percentage Rate: The cost of your total loan credit calculated into an annual interest rate, also called APR.
• The APR includes loan points and other prepaid finance charges to reflect the true yield on the loan, which is why the APR is normally higher than a loan interest rate.
• To check that you’re getting the most competitive loan, you can compare “apples to apples,” or APR to APR, on different loan programs.
After you’ve applied for a home loan, you can expect to receive a Loan Estimate (mentioned above) from your lender. If you applied for more than one type of loan, an LE will be broken down for each loan type. The APR for a loan will be listed on page 3 of the LE, in the comparison section. Most of the time, you’ll notice the difference between your APR and your loan interest rate right away. An APR is often higher than an interest rate because of added fees. An APR is essentially a comparison tool. Interest rates, loan fees, and points may be all over the map. But, the APR can always be used to accurately compare multiple loan products. And in cases where an interest rate looks a little too attractive, the APR can tell you the real story. You can use this handy trick to separate the good from the bad when choosing a mortgage: Compare a loan’s APR to its advertised interest rate. An APR that’s noticeably higher than the interest rate may be a red flag that added costs are attached to the loan. Your loan officer can also help you compare and better understand loan fees.

• Having good credit helps to get a more competitive mortgage interest rate, but perfect credit isn’t required.
• If you have a low credit score or have filed bankruptcy in the past, you can work toward improving your credit.

Don’t let something as intimidating as a credit score keep you away from the information you’re entitled to. Checking your free credit report yearly, available from one of the three nationwide credit reporting agencies, can help you to keep tabs on your financial status — which becomes especially important when you’re buying a house. Yearly credit checks can also help you catch any problems that pop up early on, like mistakes on your credit report or instances of fraud.

Once you get your annual report back, here’s how to understand your FICO score, ranging from 300 on the low end to 850 on the high end. There are five factors that make up your credit rating:

1. Types of credit: Taking out a variety of credit lines, like credit cards, a car loan, and other credit accounts, could increase your score. FICO score impact: 10 percent.
2. New credit accounts: On the other hand, having a lot of credit inquiries could lower your credit score — with the exception of home and auto loan inquiries that may be lumped together as one inquiry within a 30-day period. FICO score impact: 10 percent.
3. Length of credit history: It’s not necessarily bad to have a short credit history, if you’ve been handling your money well. And having one or two good credit accounts is better than having no credit at all. FICO score impact: 15 percent.
4. Payment history: Delinquent and overdue bills can lower your credit score. FICO score impact: 35 percent.
5. Outstanding balances: Keeping the amount you owe to creditors to under 30 percent of your credit limits shouldn’t affect your credit score. FICO score impact: 30 percent.

This bears repeating — your credit score matters when you’re trying to buy a house. Your credit score has a direct impact on your mortgage interest rate. A great score could qualify you for the lowest available interest rates, compared to a poor score that might make it harder to get a loan. Talking to your loan officer about how you can fix some blemishes in your credit score is well worth the time and effort to get a lower rate. Lowering even one percentage point on a mortgage could save you thousands over the long-term

• Most loan programs are looking for a two-year job history in the same field — though changing jobs to move to a better position could be seen as favorable.
• For recent college grads, you may still be able to get a home loan without a two-year work history.

If you’ve recently transitioned from conventionally employed to self-employed, you may need five more documents to complete your mortgage approval:

1. 1099 for the last two years.
2. Form 1120S or K1.
3. Both personal and business full tax returns for the last two years.
4. Proof of self-employment.
5. Current balance sheet and profit/loss statement.

If you receive retirement or disability income, you may need five additional documents for home loan approval:

• Pension award letter.
• Social Security award letter.
• Supplemental Security Income (SSI) benefits.
• Permanent disability award letter.
• Recent retirement account statement.