Outlining the Mortgage Process

The mortgage process can be intimidating to a new homeowner. If you have previously shopped for an installment loan, such as a car loan or student loan, though, the basics are the same. Set your needs and goals first, shop around and finalize.

Step One: Creating a Budget

Many homeowners think of a budget for a new property in terms of total sales price. The sale price of a home is important in terms of two things, however: first, the down payment required for the property and, second, the monthly payment incurred. Set your budget in terms of these two expenses. Minimum down payments start at 4 percent, but a down payment of 20 percent avoids private mortgage insurance. In terms of a monthly payment, debts should not exceed one half of your salary each month. Individuals with student loans or car debt should take this into account when determining a budget.

Step Two: Shopping Around

Once you know your budget, you can begin shopping around for lenders. Traditional lenders include banks and mortgage companies, and they are often the source for the most secure, least expensive loans. You may also consider federal lending programs through the Federal Housing Administration, which help new homeowners find less expensive mortgages. These options are available only to those individuals with good credit and solid financial profiles. If your credit score is below 700, you have defaulted on an installment loan in the past or you have an unstable income, you may need to seek an alternative lender, such as an online mortgage company.

Step Three: Applying

Once you have limited your options to one or two mortgage companies, it is time to apply. You will likely be assigned a broker at the company of your choice. This individual will provide you with the necessary documents. Prepare your application thoughtfully and be sure to include any supplemental documents required. Your application is a reflection of your responsibility and attention to detail. As would a potential employer with a job application, a lender will judge your loan application on these items in addition to the content.

Step Four: Processing

Perhaps the hardest part of sourcing a mortgage is waiting to hear the verdict. The loan will go through a process called "underwriting." The broker will verify the facts you have presented on your application. If the information is correct and sufficient, the broker will then determine the rates you qualify for. It can take several weeks to hear a verdict on this issue, and working with any federal agency may delay this process.

Step Five: Closing

Today, most mortgages are processed before the buyer finds a home. This is called "pre-approval," and it helps you know the price of homes to consider. Once you have found a home that meets the terms set by your mortgage lender, you will have to officially close the loan with the lender. If too much time has lapsed or any of your financial circumstances have changed, you may need to reapply. If nothing has changed, the lender will draw up your final contract, and you will place a down payment, pay closing costs and sign your mortgage for your new home.