Buying a home can be one of the most exciting and sometimes overwhelming experiences and working with a lender is a critical part of the process. I often say that the difference between a lender and a real estate agent is:
- Your Real Estate Agent is the person who helps you find the place where you celebrate your dinners, have family parties, spend time with your loved ones, and watch your children grow.
- Your Lender is the person who’s going to dive into the Financials. Tax returns, bank statements, if you stop at the local 7-Eleven on a Friday night, go through and pick up something, they’re going to see that. They will see your patterns. Don’t be afraid to be brutally honest with either your agent or lender. Make sure you feel comfortable because these are people who help you throughout this process, so once you have a real estate agent like myself, you’re going to start working with a lender to get pre-approved.
I support you along the way and communicate with the lender. There are many moving parts during the home-buying process and whether you’re a first-time buyer or an experienced homeowner,, and understanding how to navigate the relationship with your lender will help you feel more confident and ensure you get the best deal possible. Here’s everything you need to know about working with a lender during your home-buying journey.
- Know Your Financial Situation First:
You should have a clear picture of your finances because lenders want to know your income, debts, savings, and credit score to determine how much you can borrow and what loan terms you’ll qualify for.
- Check Your Credit Score: Your credit score will play a major role in the interest rate you receive. Scores above 740 generally get the best rates, but if yours is lower, you may still qualify for a loan—just with higher rates or additional requirements.Understand Your Debt-to-Income Ratio
- (DTI): This ratio compares your monthly debt payments like student loans, credit card payments, and car loans to your gross monthly income. The preferred DTI ratio is 43% or lower, but there are some programs that allow higher ratios.
- Plan for a Down Payment: Conventional loans typically require at least 20%, but the more money you can put down, the better. There are options with as little as 3% down, especially for first-time buyers, but remember that a lower down payment may mean paying for private mortgage insurance (PMI).
What to Expect:
- Document Gathering: Prepare to provide paperwork that details your income, debt, and assets.
- Questions, Questions, and More Questions: Your lender will ask about your financial situation in detail to make sure you’re ready for the responsibilities of homeownership.
- Quick Pre-Approval Letter: Once you’re pre-approved, you’ll get a letter that shows sellers you’re a serious buyer—always a big plus when you’re bidding on a home.
Pro Tip: Even though this step is about money, don’t be afraid to ask your lender questions about loan types, interest rates, and what they recommend based on your situation. This is the time to learn about your options!
- Get Pre-Approved
Once you understand your financial situation, it’s time to get pre-approved for a mortgage. This is a crucial first step in the home-buying process.
Pre-approval happens when a lender reviews your financials (income, debts, assets) and determines how much they’re willing to lend you. They’ll provide a pre-approval letter, which you can use to show sellers that you’re a serious buyer with the financial backing to make an offer.\
To get pre-approved, you’ll need to provide documents like pay stubs, tax returns, bank statements, and information about your debts. The lender will use this to assess your ability to repay the loan.
Having a pre-approval letter in hand gives you a budget to work with and makes your offer stand out to sellers. It shows you’re financially capable and ready to move forward.
- Application: Getting Into the Details
Once you’ve found your dream home, the next step is submitting a formal loan application. The lender will ask for even more details about your finances, including things like your employment history and your debts. This stage can feel like a lot of paperwork, but it’s all about making sure you’re qualified for the mortgage you’re applying for.
What to Expect:
- More Paperwork: You may need to provide additional financial documents, such as updated bank statements or proof of employment.
- Loan Options Discussion: Depending on your financial profile, your lender might present you with different types of loans (like fixed-rate or adjustable-rate mortgages), and this is your chance to pick the one that suits your long-term goals.
- Understand the Types of Loans Available
There are several different types of mortgage loans available, and each one has its own requirements and advantages. It’s important to know what options are available to you and choose the one that best fits your financial situation and long-term goals.
- Conventional Loans: These are the most common types of loans and generally require a 20% down payment to avoid PMI. They typically have the best terms for buyers with good credit.
- FHA Loans: If you have a lower credit score or don’t have enough for a large down payment, FHA loans may be a good option. These require as little as 3.5% down but come with mortgage insurance.
- VA Loans: Available to active-duty military, veterans, and some members of the National Guard and Reserves, VA loans allow you to purchase a home with no down payment and no mortgage insurance.
- USDA Loans: These loans are for people buying in rural or suburban areas and offer 100% financing, meaning no down payment is required.
- Adjustable-Rate Mortgages (ARMs) vs. Fixed-Rate Mortgages: ARMs offer lower rates at first but can increase over time, while fixed-rate mortgages offer stability with a consistent interest rate for the life of the loan.
- Ask Questions About the Loan Estimate
Once you’ve submitted your application, the lender will give you a Loan Estimate, which is a document that outlines the loan’s terms, including:
- Interest Rate: The rate at which you’ll be charged for borrowing money.
- Monthly Payment: This will include your principal, interest, taxes, and insurance (PITI).
- Closing Costs: These include fees for things like the loan origination, appraisal, title search, and any other services needed to complete the transaction.
It’s essential to carefully review your Loan Estimate to understand the total cost of the loan. If anything is unclear or doesn’t look right, don’t hesitate to ask your lender for clarification.
- Underwriting: The Waiting Game
After you submit all your paperwork and your loan is pre-approved, it moves to the underwriting process. This is when the lender evaluates your financial details to ensure everything checks out. The underwriter will review your credit report, income verification, assets, and other financial information.
What to Expect: Underwriting can take anywhere from a few days to a couple of weeks. It’s common for the underwriter to request additional documentation during this period, so stay on top of any follow-up requests.
- Possible Delays: If there’s an issue with your paperwork, or if the underwriter needs more information, this could cause delays. Stay in communication with your lender to ensure everything is moving forward smoothly.
- Patience is Key: Underwriting can take time—sometimes a week or more—so be prepared for some waiting. It’s a detailed process, and sometimes more documents are needed to satisfy the lender.
- Additional Requests: If the underwriter spots anything that needs further clarification, you might get a request for additional documents. This could be a little stressful, but don’t worry; your lender is there to help you navigate it.
Pro Tip: Stay in close contact with your lender during this stage. If they need anything from you, the quicker you respond, the smoother the process will go.
- The Closing Process: Signing on the Dotted Line
Once you’ve made it through underwriting, you’re almost there! The next step is closing—the final meeting where you’ll sign all the paperwork to officially take ownership of your new home.
What to Expect:
- A Lot of Paperwork: At closing, you’ll be signing a stack of documents, including your mortgage agreement and a host of legal forms.
- Closing Costs: Don’t forget about closing costs. These can include fees for things like home inspections, loan origination, and insurance. Your lender will give you a “closing disclosure” ahead of time so you’ll know what to expect.
- Feeling of Relief (and Excitement!): After you sign everything, you’ll be handed the keys to your new home. That feeling of walking out of the closing meeting is one you won’t forget!
Post-Closing: Moving Forward with Your Mortgage
Congratulations, you’re a homeowner! But your relationship with your lender isn’t over just because the paperwork is done. You’ll continue working with a lender to manage your mortgage payments, adjust your escrow accounts, and, if needed, handle any future refinancing.
What to Expect:
- Monthly Payments: Your lender will outline your payment schedule, and you’ll begin making monthly mortgage payments.
- Escrow Account: Most lenders require an escrow account to pay property taxes and insurance. These costs are added to your monthly mortgage payment.
- Refinancing: If interest rates drop or your financial situation changes, you may want to refinance your loan. Your lender can guide you through this process.
- Support: If you have questions down the road about your loan or your payments, your lender’s team will still be there to help.
Building Trust with Your Lender
Buying a home is a big deal, and your lender plays an essential role in the process. They’re there to guide you through the financial aspects and help you find the best loan for your needs. Keep open lines of communication, ask plenty of questions, and be proactive about your financial situation. By working with a lender, you’ll make the journey to homeownership as smooth as possible
How do you feel about working with a lender? Are you in the process of buying a home now or still in the planning stages?
Call us at 317-914-5557 or visit us at homeindyrealtyteam.com to start your journey today!
Visit us at homeindyrealtyteam.com
Related: Check out our latest YouTube Shorts series, What’s the Deal? with Dody Mariscotti: Working with a Lender
