The Mortgage Process: First Time Homebuyers

The mortgage process can often be bewildering to the average borrower, and understandably so. With words like origination, processing, underwriting, securitization, and servicing being thrown around, what is otherwise a straightforward process is hidden behind obscure terms.

A lack of understanding of the mortgage loan process decreases your confidence, making you more likely to make poor decisions. It also makes you more susceptible to smoke-and-mirrors sales tactics designed to lead you to rely on your lender to make decisions for you (which are rarely in your favor). Our guide through the mortgage process will help put you in the best, long-term financial position, coming out the other end unscathed.

Here are Benzinga's tips for first-time home buyers.

Mortgage Origination

Before anything else, you'll have to find the right mortgage lender. There are a couple of ways to go about this, but all stem from your outlined goals for procuring a mortgage. Assessing your needs and wants from a lender will put you in a better position to secure a good deal.

Do you value intimate customer service, where your lender knows exactly who you are and your situation?

Going with a smaller lender with fewer clients might be for you. You probably won't be getting the best interest rate, but you will be getting the assistance you desire. Would you rather be a faceless mortgage in a sea of clients, but with the best possible interest rate?

You might want to look at large lenders. Through in-person analysis, online exploration, and asking friends and family about their experience and advice on the matter, you'll be better equipped to find the right lender if you have your needs outlined.

Pre-approval

Before you are looking at homes or are under contract with a seller, you want to make sure that you get pre-approved before talking to a realtor. After the subprime mortgage crisis of 2008, home loans have become more heavily regulated. As a result, there are very specific federal guidelines regarding income, savings, credit score, etc., which must be met in order to obtain a mortgage.

Getting pre-approved is extremely important. Here's why: 

• You'll understand your own qualification
• You demonstrate to a seller that you are qualified to purchase their home

If you are one of the fortunate few who have the qualification for a mortgage and get pre-approved for an amount sufficient enough to purchase a home in your local market, congratulations! You have begun the home-buying process. What you haven’t done, however, is committed to a lender.

Although the lender that pre-approved you is crossing their fingers, hoping that you will move forward with them, there is no obligation to do so. You have not guaranteed your qualifications at this point, either. Pre-approval is just a preliminary check and is often based on your word by a mortgage loan originator.

Things can, and will, change in the meantime, so it is important to be in contact with the lender who pre-approved you throughout the process.

Read Benzinga's How to Get Pre-approved for Mortgage.

Find a Home

Finding a home, as in seeking out a home you like at a reasonable price, is only half the battle. You must also secure the purchase of the home with a purchase agreement (PA) between yourself and the seller. Depending on your situation, this could be difficult.

Every seller would like to have a line of well-qualified buyers placing cash bids on their property. If you are reading this article, however, you are probably not a cash buyer. 

The good news is neither are most of the buyers on the market - that's one of the first-time home buyer benefits. So get out there, talk with your realtor, assess the market, and place an offer that you think will stick. Assuming the seller likes your offer (perhaps after some negotiation), the seller signs the final offer and you’ve secured a purchase agreement.

Shop for a Mortgage

Once you have signed a PA, you’ll notice the conversation with lenders changes almost immediately. A signed PA is a loan officer’s ticket to write your loan and move things into underwriting. However, they can’t do so without your permission.

Because of this, they may do anything to earn your business.

Is this a bad thing? Absolutely not. Can it be uncomfortable?

Undoubtedly.

This is where the high-pressure sales tactics begin, peppered with subtle deceit and assumptive language. All these tactics are designed to discourage you from utilizing your upper hand as a borrower. Shopping for a mortgage is an art and it is one of the most important topics to understand before signing on the dotted line.

Here are a few things to understand before you get started:

• Do not accept the first offer you are given
• Choose 2-4 good lenders
• Figure out what program works best for your situation
• Get offers, also known as Loan Estimates, from each
• Leverage those offers against each other for the best deal
• Always remain cordial. Getting frustrated or making an outrageous request is never going to get you what you want.

See Benzinga's Best Mortgage Companies for First time Home Buyers.

Processing and Underwriting

Once you’ve chosen a lender and come to an agreement on a price, you will begin transitioning into processing and underwriting. Usually, this transition can be handled in the same phone call. Your lender will run through a list of qualifying questions, verify your documentation, and send your file to an underwriter.

Underwriting a mortgage can take a long time, usually between 30-60 days, especially for a purchase transaction as opposed to a refinance.During this time, you will likely have to pay a home inspection cost. Typically, there are 4 major steps in underwriting: 

1. Initial underwrite: Verification of your essential documentation, contacting references, double-checking your qualifications to verify that the loan officer qualified you accurately.
2. Appraisal: A licensed appraiser is sent to the property to verify the value of the lender’s collateral and determine if it meets the appropriate property condition requirements.
3. Homeowners insurance and taxes: Verify the true cost of homeowners insurance and taxes and ensure that they are included in your monthly expense ratios.
4. Final sign-off: Even after you’ve done all the work from pre-approval to passing the appraisal, your loan still goes to another underwriter to determine your fate. If they see something they don’t like, it's back to the beginning.

Closing

You've made it past the final gatekeeper. That’s fantastic because, unless someone backs out of the deal, you’re headed to closing. Closing generally takes about an hour, during which a number of things take place:

• Legal ownership of the home is transferred from the seller to the purchaser
• Funds are collected allocated and dispersed to the appropriate parties
• The mortgage note is signed by the Mortgagor (you) and given to the Mortgagee (the lender)
• A bunch of miscellaneous legal jargon
• You get the keys to your new house

Congratulations; you are now a brand new homeowner! However, the mortgage process is not over. In fact, it has really only just begun.

Servicing

Although servicing is a longer process than origination, it is much less involved. Except for a few curveballs, almost everything is a repetitive process, in which you will take very little part in. Servicing is simply the handling of your mortgage after closing.

The steps include:

1. Securitization: The act of bundling your loan with others like it and selling it on the secondary market. This is where the lender makes most of their money. (Usually done without your knowledge and has little effect on you directly).
2. Payment Processing: Making sure your monthly payment is allocated to the correct entities (Uncle Sam, insurance company, investors, and lender).
3. Customer Service: Handling your inquiries.
4. Loss Prevention: Ensuring that you pay your bills, and taking appropriate action if you do not (including short sale and foreclosure).

Although servicing requires little of you (except that you pay your mortgage, of course), you should note that servicing rights often transfer from company to company. That's right. Even though you closed your mortgage with one company, you’ll probably end up dealing with another company altogether.

Worse yet, servicing rights can legally be transferred every six months, which can create even greater confusion. This is why it can be good to seek a company that will commit to retaining your servicing rights to avoid future confusion or mishaps.

Final Thoughts

Mortgage financing is an important decision attached to potentially the largest investment you will ever make. It is thus extremely important to be aware of the process but equally important to be aware of the numbers and ensure that you get a good deal as well.  Hopefully, this article has answered your questions about how to qualify for a home loan as a first-time buyer.

Frequently Asked Questions

Related content: Mortgage Qualifying: Appraisals and Property Requirements