Are you asking yourself, “How do I get a home loan?” This article breaks the application process down into three easy steps.
Step 1: Fill out your mortgage application
Most mortgage applications are the same—generally they are based off of the Fannie Mae application. If you’re working with a local loan officer, you will probably get something that looks similar. If you’re working online, your mortgage company will have their own online form. The experience will be nicer, but the data you provide is roughly the same.
It’s not that the application is hard, it just requires a lot of information. Employment history, living history, debt information, bank balances—generally these are things you’re going to have to look up. At Clara, we try to make this as painless as possible. We connect with thousands of banking institutions, so many of our customers can connect their accounts when applying for a home loan. This makes the process much, much easier.
If you are filling out a paper form with another lender or broker, this is a time where budgeting tools like Mint or YNAB become useful because you can look up all of your accounts and balances in one spot. No need to log in to five different bank, credit card, and loan portals just to fill out your application.
Consolidating your cash
If you haven’t done so already, it’s a good idea to consolidate the cash you will be using for closing at the time of application. If you are in the middle of the loan process, and large amounts of money start flowing in and out of your accounts, your lender will start asking a lot of questions.
Consolidating your accounts earlier in the process can also help avoid some potential issues—like a transfer not completing as quickly as you need it to. Money transfers can take a few days to complete, especially between different banks. If your cash “disappears” while it is in transit between accounts, it could keep you from closing your loan.
When it’s feasible, it’s better to consolidate the assets you’re using for your purchase into one place, or at least into one bank, as early as possible.
Avoid new credit accounts
The creation of any credit accounts after your mortgage application could create some hiccups in the process. While you’re trying to close your home loan, it’s good to avoid things like:
- Taking out a loan to buy a car
- Opening new credit card accounts
- Applying for personal loans
It’s also important to note that you should try to avoid making any large purchases on existing credit lines. Any new credit activity could change your credit score, your debt to income ratio, or a number of other things that could affect your ability to qualify for your loan.
Step 2: Lock in your interest rate
Remember that interest rate on your pre-approval letter? Well it’s likely to change. If you remember from earlier, your mortgage interest rate is affected by the market, and the market tends to move daily.
To get your lender to commit to an actual rate, you’ll need to do a “rate lock” after you submit your application. This tells your lender to take the interest rate for that day and lock it in for your particular loan. Once your rate is locked, from that moment forward, regardless of what happens to the market, you and your lender agree that the rate you lock in will be the interest rate for your home loan.
If you’re not ready to lock immediately, you can choose to “float” your rate. In this case, you are delaying your rate lock to a later stage in the process (usually in the hope that rates go down.)
Interest rates can move day to day. They may not be huge moves, but it doesn’t take much to affect your payment or affordability. When deciding whether or not to lock your rate, do your research and consult with your loan officer.
Interest rate float down
What happens if you lock your rate early on and rates go down? If rates have moved significantly, you’ll have the option to do a “float down”—the lender will lower your rate to put you closer to the market rate. Float downs generally have a cost to them, so it’s only worth doing if the rate is significantly lower.
But take note: the float down process is a negotiation. If you’re early on in the process, and you feel like you are not getting a fair deal, you may consider switching lenders. Sure, you will need to start your loan from scratch, but if rates have moved significantly, then it may be worth it. This kind of pressure on the lender may be enough to receive a rate that is closer to market or get any fees waived. You have a lot of leverage in this situation.
Cost & timeline for rate locks
Also worth noting, rate locks themselves have an expiration date. If you lock early and then experience a delay in closing, you’ll have two options: a rate lock extension, or locking in a new rate.
This can happen whether the delay is your fault, the lender’s fault, or the fault of a third party (e.g., a delay in getting the appraisal). If you end up needing a rate lock extension, it will generally have a cost. However, if interest rates have gone up since you first locked, it may be worth paying for the extension.
Before you lock your rate, ask your loan officer how long your rate lock is good for, if a float down carries a fee, and what an extension would cost if required.
Step 3: Gather initial info & documents
Your lender is going to ask you for a a lot of information. There are thousands of data points that need to be collected, managed, and verified when originating a loan.
Much of that data comes from documents. Most of these requests will be specific to your personal finances and your specific loan product. But at the start of the application process, almost everyone is asked to provide an initial set of documents that includes:
- Tax returns – At the very least, you will need the previous year’s tax return. In most cases, you will be asked for two years of returns.
- Bank statements & pay stubs – Lenders may start by asking for the previous two months, but it is helpful to have the last 12 months on hand. If you get an actual paper pay stub, start saving them now!
- Debt statements – Have 12 months of statements ready for any debts like credit cards, student loans, auto loans, or any personal loans.
- Asset statements – Make sure to have statements ready for any investment accounts that you plan to liquidate and apply toward your cash to close.
- Previous addresses & history – Your lender will need two years of living history. If there are any gaps (ex. traveling for an extended time or living with family), they will need an explanation. They may also ask for contact info to confirm your housing history, so make sure you have a way to contact your old landlord or building manager.
- Employment history – You’ll need your job title, start and end dates, company address, a company telephone number, and in some cases contact info for HR or your immediate supervisor. Finally, creating that LinkedIn page has paid off!
- Marriage certificates – Less common, but they may ask for them if you are buying with a spouse.
Divorce decree – They may ask for them to prove you are NOT buying with a spouse.
- Identification – You should have expected this, but you’ll need an ID to close your loan. It has to be valid, so if you’ve been delaying that trip to the DMV, do it earlier rather than later. Few things are less fun than an emergency visit to the DMV while trying to close your mortgage.
- Pro-tip: Collect these documents as early as possible, and update them regularly. When the time comes to apply, providing this info will be a snap. And if you’re working with Clara, providing your documents is just a simple upload to our site. You even have the option to snap a photo of your documents and upload them directly from your cell phone.