Buying a home is an exciting milestone, but it also comes with a lot of steps and important decisions. Whether you’re a first-time buyer or experienced in the process, understanding what to expect can make the journey smoother. Here’s a breakdown of key factors in purchasing a home and applying for a mortgage.
First Steps – Budgets & Getting Pre-Approved
Before buying a home, review your income, expenses, and savings to set a realistic budget. If unsure, consult a mortgage lender who can guide you through the process. Getting pre-approved helps determine your loan eligibility and shows sellers you’re a serious buyer. Lenders assess your credit, income, and financial history to determine how much you qualify for, setting clear expectations for house hunting. Being financially prepared makes the process stress-free and gives you a competitive edge.
What Documents You Need to Get Started
When applying for a mortgage, being prepared with all the necessary documents can save you valuable time and help move the process along. Lenders require specific paperwork to verify your income, assets, and identity before approving your loan. By gathering these documents in advance, you can avoid delays, reduce stress, and ensure a faster mortgage approval. Below is a checklist of essential documents you should have ready when applying for a home loan:
- Income Verification:
- Two years of the most recent W-2s for all applicants on the loan
- Two years of the most recent Federal Tax Returns for all applicants, including all pages and schedules (K1s if applicable)
- Business tax returns (if you own 25% or more of a business)
- Most recent pay stubs covering the past 30 days
- Asset Verification:
- Most recent two months or quarterly statements for checking, savings, investment, and retirement accounts (all pages)
- Identification & Insurance:
- Driver’s license or government-issued identification
- Name and phone number of your insurance agent to acquire a homeowners insurance quote
Loan Programs
When buying a home, several types of loan programs are available, each with its own benefits and requirements. The most common types include Conventional Loans, FHA Loans, VA Loans, and USDA Loans. Conventional loans are not backed by the government and typically require higher credit scores and a larger down payment, though some programs allow as little as 3% down. FHA loans, insured by the Federal Housing Administration, offer more lenient credit requirements and lower down payments (as low as 3.5%), making them an excellent option for first-time homebuyers. VA loans, available to eligible military service members, Veterans, and Veteran spouses, require no down payment and offer competitive interest rates with no private mortgage insurance (PMI). USDA loans, designed for buyers in eligible rural areas, also offer zero down payment options with lower mortgage insurance costs.
For buyers looking for low or zero-down payment assistance programs in Illinois (IL), Missouri (MO), and Kansas (KS), there are state and local programs designed to make homeownership more affordable. These programs often provide grants, forgivable loans, or down payment assistance to eligible buyers based on income, location, or profession.
Mortgage Application Approval Factors
When applying for a mortgage, lenders evaluate your debt-to-income ratio (DTI), credit score, and payment history to assess risk and affordability. Understanding these factors can help you prepare and improve your chances of approval.
DTI is the percentage of your income spent on debts like credit cards, auto loans, and your potential mortgage. Lenders prefer 43% or lower, though some programs allow more. A lower DTI shows financial stability.
Credit scores impact your loan approval and interest rate. A higher score (typically 640+ for Conventional loans) improves terms, while lower scores may qualify for FHA loans but come with higher mortgage insurance costs. Taking steps to boost your score can lead to better loan options.
Payment history is crucial—late or missed payments can hurt your score and make lenders hesitant. Keeping payments current and resolving past-due accounts can strengthen your mortgage eligibility.
By managing debt, improving your credit, and maintaining on-time payments, you can increase your chances of securing a mortgage with favorable terms.
From Pre-Approval to Final Mortgage Approval
After pre-approval, you can start making offers on homes. Once your offer is accepted, the loan moves toward final approval, which includes a home inspection (to check for issues) and an appraisal (to confirm the home’s value matches the loan amount). You may need to renegotiate or pay the difference if the appraisal is low.
During this time, your lender will re-evaluate your financials, employment, and credit to ensure nothing has changed. Avoid taking on new debt, as it could affect approval. Once all conditions are met, you’ll receive final approval (“clear to close”), allowing you to proceed with closing and officially own your home.
Mortgage Insurance and Agent Compensation Changes
Mortgage insurance (MI) is a cost some homebuyers must pay to protect the lender if they default on their loan. It’s required for conventional loans with less than 20% down and for FHA, USDA, and some other government-backed loans, regardless of down payment size. Private Mortgage Insurance (PMI) applies to Conventional loans and can often be removed once the borrower reaches 20% equity. Mortgage Insurance Premiums (MIP) for FHA loans typically last for the life of the loan unless a 10% or larger down payment was made. USDA loans require a guarantee fee, which functions like MI, while VA loans have a one-time funding fee instead of monthly insurance costs.
New rules regarding real estate agent compensation are also reshaping the homebuying process. Traditionally, the seller’s agent offered a commission split with the buyer’s agent, but recent legal settlements and industry shifts are increasing transparency. Buyers now have more flexibility in negotiating their agent’s compensation and may need to pay their agent directly rather than having it included in the seller’s closing costs. These changes highlight the importance of understanding agent fees and discussing payment options upfront.
What to Expect at Closing and How to Reduce Out-of-Pocket Costs
Closing on your home is the final step in the home-buying process. This is when you sign the necessary paperwork, finalize your mortgage, and officially take ownership of the property. At closing, you’ll need to be prepared for several costs, including your down payment, closing costs, prepaid expenses (such as property taxes and homeowners insurance), and any applicable lender fees. Typically, closing costs range from 2% to 5% of the home’s purchase price, while the down payment varies depending on the loan type.
To reduce your out-of-pocket expenses, there are several strategies you can explore. Seller concessions, where the seller agrees to cover part of your closing costs, can significantly lower what you need to bring to the table. Seller Concessions can also be used to help lower your rate. Additionally, some loan programs, particularly FHA, VA, and USDA loans, allow for down payment assistance programs that provide grants or low-interest loans to qualified buyers. You can also negotiate with your lender for lender credits, where they would cover some of the closing costs in exchange for a slightly higher interest rate. Exploring these options can help make homeownership more affordable and reduce the cash needed at closing.
Owning a home offers numerous benefits, including building equity over time, providing greater privacy and control over your living space, establishing strong credit through consistent mortgage payments, fostering a sense of community, serving as a solid long-term investment, offering potential tax advantages, and access to quality school districts. You can learn more about the process, or if you are ready to buy a home, our experienced and highly-rated loan advisors are here to help with every step along the way. Contact us today to get started.