Navigating the Home Loan Process

So, you’re ready to buy your first home? Wonderful! When done right, home ownership can be a truly rewarding and financially beneficial experience. Owning a home provides flexibility, stability, and freedom that renting cannot match.

Still, the home buying process can be intimidating, especially in a housing market where prices keep going up and where the demand is very strong! It can be difficult to know where to start, especially for first time homebuyers!

Size your Budget

The first step in your journey to buy a home is to figure out your total budget. The good rule of thumb is that your total housing expenses (including mortgage principal and interest, homeowner’s insurance, property taxes, and – if applicable – private mortgage insurance/PMI) should not exceed 30% of your take home pay. For example, if your take home pay is $4,000 per month your total housing expenses should not exceed $1,200 per month.  This provides room in your budget to meet your other financial obligations and unexpected repairs.

Online calculators can help you calculate your monthly housing costs using various loan terms, down payment amounts, property tax and insurance rates as well as PMI to determine an accurate monthly payment. This will help you determine the maximum house price you should be looking for.

Once you have an idea of what your maximum purchase price ought to be, it’s time to save up cash for a down payment. Typically, conventional loans require a 20% down payment to avoid paying PMI. Some conventional loans, FHA and VA loans may allow for lower down payments but might have higher fees and interest rates. Fortunately, there are numerous down-payment assistance, closing costs and incentive programs in most States and counties that can help and often be layered with cash or incentive(s) offered by lenders. The best way to find out about these incentive programs are to attend a First Time Homebuyer Class with a HUD-approve housing counseling agency like CCCSMD.

No matter how much you choose to put down, strive to keep your emergency fund in place.  Adding a special line in your budget for saving for a down payment will help reduce the risk of dipping into your emergency fund or compete with other savings goals.

Keep in mind that housing will likely be the largest expense in your monthly budget. If you are able to keep your mortgage expense limited to 30% or less of your take home pay, it will leave a lot more room for other types of expenses. Limiting your housing costs will help you increase monthly cash flow, reduce financial stress, and provide more room in your budget for other financial priorities such as debt payoff and investing.

Know your Credit Score

Knowing your credit score early in the home loan process is important, as your credit score will determine your ability to obtain a loan, as well as your interest rate. A higher credit score will mean a lower interest rate on your mortgage, potentially saving you thousands of dollars over the life of the loan. Although lending standards vary, you will typically have an easy time qualifying for a conventional mortgage with a score of 670+.  With a credit score of 740+, you may be eligible for the best interest rates.

You can obtain your credit report for free through and during the pandemic, this service is available weekly free of charge.  At CCCSMD, we offer a credit report review to help you navigate your report and determine any actions you can take to put your report in a more favorable position.

Get Prequalified

Real estate agents will usually require a prequalification (or “preapproval”) letter prior to showing homes to clients. This letter will state the maximum mortgage amount the bank is willing to lend based on your overall financial picture. One of the easiest ways to obtain a prequalification letter is to contact your local bank. You’ll need to provide some general information about your finances but will likely not be required to provide any documentation during this phase. The process is simple and should only take a few minutes. You are not obligated to use this lender when finalizing your financing later in the process.

A very important thing to note is that the amount listed on the prequalification letter is the maximum amount the bank will lend, not necessarily how much you should spend. If you are able to spend less, great! Be sure to clearly communicate to your real estate agent how much you want to spend, keeping in mind what you set in your budget, rather than simply shopping for houses based on the maximum amount listed on the prequalification letter. 

Shop! Shop! Shop!

Are you looking for a single-family home, a townhouse, or a condo? How many bedrooms and bathrooms do you need? Are you anticipating any family changes over the next 5-10 years, such as having children or maybe one spouse leaving the workforce? Do your best to consider how the house will work for your family for the foreseeable future.

Now that you have your prequalification letter in hand and you know how much you want to spend, the next step is to find an expert real estate agent. Do some research on Realtors in your area and be sure to pick an experienced agent who is dedicated to helping you find the right house.  It is typical for the seller to pay the real estate agents involved in the transaction, so working with an agent will likely not cost you anything as the buyer.

Once you’ve found your agent, you are ready to start shopping. Be sure to check out lots of houses to see what is available in your price range and to understand the market. Your agent should provide a lot of value during this process to teach you about the state of the market, find new locations, and help you identify properties that could be a good fit.

Get it “Under Contract”

After you’ve found the right house, you’ll need to make the seller an offer. Your agent will work with you to put together the required paperwork and will present your offer to the seller’s agent. The seller can respond by accepting or rejecting your offer, or by presenting a counter offer. If you and the seller can come to an agreement and an offer is accepted, congratulations! You now have a binding contract and the house is considered “under contract.”

Work Through the Contingencies

After getting the house under contract, you will have a specific amount of time to move forward with any contingencies listed in the contract. These contingencies commonly consist of a home inspection, sale of another home, and finalizing buyer financing which will often include a home appraisal. There may be some bumps along the way, particularly if an issue is discovered during the home inspection, or if the appraisal comes in lower than expected, but you’ll need to work with your real estate agent to help navigate these items and resolve any issues with the seller.

In today’s market, where affordable housing is in short supply, you need to be careful of the steps you take to get your offer accepted by the seller.  If facing a bidding war, you may be encouraged to waive all contingencies to increase the chances of your offer being accepted.  Be cautious with waiving contingencies and ensure you know the risks you are taking, as you may end up with unwanted surprises after closing. Another tactic you may have heard of to win over a seller is to write a “pick me” letter.  However, this can present discrimination concerns under the Fair Housing Act and should be avoided.

Secure Financing

While working through contingencies, you will also be finalizing the financing with your lender. There will be a lot of pay stubs, tax forms, and seemingly endless paperwork during this period. Try to provide the requested items in a timely manner to keep everything on track for closing. It is important to not take on any new debt during this period as it can change your debt-to-income ratios or credit score and could create problems with getting your mortgage approved.

CCCSMD is approved by the Department of Housing and Urban Development (HUD) and offers workshops and pre-purchase counseling that is typically required for down payment and closing cost assistance programs.

Closing Day

Congratulations! You made it to closing! During closing, you will be completing all of the required paperwork to legally transfer ownership from the seller to you, the buyer. Often times the buyer and seller will both be present, although separate signings are also common. Be prepared to work through a mountain of paperwork, but walking out with the keys will be worth it! Enjoy your new home!

Take the whole process one step at a time, lean on an experienced real estate agent, and be sure to stick to your budget. For help developing a budget and a plan that can put on the path to homeownership, contact a CCCSMD Financial Advocate for a mortgage counseling session today. You’ll be glad you did.