Getting a Mortgage Loan

For first time home buyers the process of getting a mortgage can seem a little daunting. Where should you start?

It’s always a good idea to get all the figures before you get too far into the buying process. There’s not much point in looking at houses that aren’t within your budget, so determining how much you can (and should) spend is a good place to start.

There’s a number of ways to figure out how much you can afford to spend on your home. The easiest is to start by talking to some lenders about pre-qualifying for a mortgage loan. It’s easy – go down to the local bank (or other financial institution that you may be considering), make an appointment with a mortgage specialist, and let them do all the math for you. After asking a few questions about your earnings and current debts, most will be happy to give you a breakdown of how much they would be willing to finance and what your monthly payments would be.

For the most part lenders will be all too happy to offer the consultation, it’s a good way for them to keep at the top of the list when you’re actually ready to close your mortgage (after you’ve found the right home). Keep in mind however that being pre-qualified isn’t quite the same as being pre-approved. While the two are similar; a qualification is more of a quick review and confirmation that you should be approved, while the approval itself will require actual credit checks and financial documentation. That said, just be up front and detailed with the numbers during the qualification review, and you should get accurate numbers.

Another way to get a quick idea is to take a look at what the monthly payments would be on your home loan, then see how they fit into your budget. Most people use a mortgage calculator for that rather than having to do the math. Don’t forget to weigh costs against what you’re paying now for rent (or payments an existing home loan), and remember that mortgage calculators won’t include things like utilities, gas bills, and other things you may have had inclusive before.

While I think it’s a little over-simplified, some people like to use their gross annual salary (before taxes) multiplied by 2.5 to 3 times as a guideline. For example, a family income of $80,000 a year would mean budgeting $200,000 to $240,000 for your new home.

That’s not a bad way to get a quick estimate, but don’t forget to take other costs into consideration: a walk to work may save on a lot on auto expenses and allow you to budget slightly higher – whereas a long commute might increase fuel costs and other car expenses by hundreds a month, requiring lower mortgage payments. None of this touches on other debts and unique expenses you may have as well, so be sure to consider your personal finances before putting too much stock in any “rule of thumb”.

If you already spoke with some lenders and pre-qualified for a mortgage loan when you were determining a budget, you’ve already got a base number to work with. That’s great as a starting point, but don’t assume the first interest rates offered are the best you can do.

Your home is probably the most expensive thing you’ll ever buy, and you’ll be making payments on it for a long time to come. Because a single interest point can add up to tens of thousands of dollars over the course of the loan, it’s definitely a good time to shop around and get the best rates possible.

Different lenders will have similar methods for determining whether they’d like to have you as a customer, and if so, how much they’ll charge you for the privilege. They won’t however have identical formulas, so it’s not uncommon to see interest rates for a prospective borrower fluxuate by as much as a full percentage point from lender to lender. Interest rates may vary greatly depending on the type of loan as well - a bank may have great rates on fixed-length mortgages but have higher than average rates on ARM’s for example.

From down payments to closing costs to PMI, there’s a lot of little details to consider in regards to financing, but in a nutshell the lesson is simple; keep shopping around until you’re sure you’re getting the best deal possible, what seems like the smallest differences will add up big.

Help on finding the right home is quite the subject in itself. Your needs, personal preferences and budget requirements all have to be taken into consideration. I’d recommend finding a good realtor who’s happy to share their thoughts – do your best to articulate to them what you want and what you need, and let them help you through the process with their knowledge and experience.

Do your homework, finding the right home is just as important as finding the right financing. You can find more help on the subject using the libraries to the left, but keeping with the financial side of things for now, lets assume you’ve found the right property and are ready to move on.

Making an offer and negotiating the deal is something else your realtor will be able to help out with, but even they have limitations as to how far they may advise when it comes to questions like “how much should I offer?”. Generally speaking, unless there’s a number of interested buyers for the property at the time you’re considering making an offer yourself, you’ll want to start off offering less than the asking price. How much less really depends on a number of things.

How long has the house been up for sale?
If the asking price hasn’t changed but the house hasn’t sold after some time, the seller may be more likely to consider lower offers for the property. Most people won’t take much less than full asking price immediately after the sale goes to market, because they still believe (perhaps rightfully so) that they can get every dollar for it. Over time however, if they overpriced the home or there isn’t much interest in it for whatever reason, they’ll start to lower their expectations as the weeks and months go by.

How does the price compare to other properties that have sold in the area?
In most cases it’s possible to find a nearby property that is similar and has sold recently. That’s usually the best way to decide on a fair market assessment, because it represents an actual figure that a real buyer was willing to spend. If the seller is asking for more than a similar property sold for they may be over-valuing the home, and your counter offer should reflect that.

There’s a lot of other things to consider as well, I’m just trying to remind you that “rules of thumb” need to be taken with a grain of salt before you apply them to your own offers depending on the circumstances. A lot of people will spit out numbers like “5% to 8%”, but from my own experience, I have offered as much as 30% under asking price (which many would consider insulting without knowing further details) and gotten the deal at that. On the flipside, I’ve also seen many homes actually sell well above the initial asking price when bidding wars start.

That said, if there seems to be a lot on interest in the home from other buyers don’t expect the seller to consider “lowball” offers when there are presumably higher ones coming in. If that’s not the case and they’ve been having a hard time getting offers, you may be able to go significantly lower than traditional wisdom would suggest.

Once you’ve decided to make an offer, your agent will take that offer to the sellers representative for review. What happens at that point is up to them, they may either accept the price and conditions offered, refuse the offer, or make you a counter-offer. Desperate sellers may take your first offer, but most will “play the game” and attempt to come back with at least a slightly higher price and/or more preferable conditions, in which case it’s your turn to either reject the counter or make another counter of your own.

If it sounds confusing, think of it like negotiating for the best price at a car dealership – you can walk away because the price is too high, the dealer can walk away if your price expectations are too low, or if the differences aren’t too great, you can usually agree to meet somewhere in the middle so everyone wins.

Once an offer has been made and accepted, you will be presented with a purchase offer that includes the property details, any conditions made, the selling price, warranties, and closing date. Review it very carefully with your agent or lawyer to make sure you’re not signing anything you shouldn’t be, and make sure any conditions you require are there in writing. Your offer should be contingent on your financing and a home inspection at the least, since you usually won’t be able to finalize your mortgage loan until you’re past this step, and doing inspections beforehand on prospective properties can get quite expensive. Your agent or realtor should be able to help with any other conditions you may want or require in the offer to purchase.

Once the contract is verified for accuracy you’ll need to sign quite a few dotted lines, and will usually need to make a good faith deposit as well. The deposit amount can vary, but is usually a few thousand dollars – to be held in escrow for the time being (something else a licensed realtor will handle for you). The deposit will go towards the purchase price upon closing, or be returned if a condition stipulated in the contract is not met by the seller.

Once that’s done, you’ve effectively bought the house. Take all the pertinent information to your mortgage lender, and they should be able to take it from there. If you haven’t already pre-qualified and found the best rates for your situation, don’t be afraid to shop around some more at this point - you should have a little time allocated in your contract to secure the financing, so use it to your advantage to get the best rates you can.