Buying your first home is a big step in building a strong financial portfolio. It’s more accessible than ever with low-interest loans available. Before you buy, however, you need information about what to look for and what to expect throughout the homebuying process. This guide aims to provide you with the steps you’ll encounter on the way to getting your first mortgage.

The information provided here will aid you in securing more than just a loan. It’s a long-term investment strategy that will help you build equity and borrowing power over time. That’s why it’s critical to get the process right.

Compare mortgage lenders and loans.

Several types of mortgage loans exist. The mortgage lender's job is to help you compare them to find the right fit for your financial circumstances and goals. Many lenders are available, including local banks and credit unions, large financial institutions, and brokerages. Finding the right lender for you means comparing what they can offer.

When choosing a lender, focus on:

• Its financial strength. Use FitchRatings to learn how financially stable the organization is.
• Access to competitive loan options, including government-backed loans. The U.S. Department of Housing and Urban Development can verify available lenders.
• Its willingness to work with your credit. If you have good credit, you may find less resistance.

Once you’ve selected a lender you feel you can trust, it’s important to discuss the options it offers. Does the lender offer all types of available loans that may meet your needs? All loan options must adhere to the rules set by the Consumer Financial Protection Bureau if they’re federally backed. You can always seek out more information through this agency.

Evaluate loan terms and mortgage interest rates.

As you compare loans, be sure to carefully determine which lender offers the best combination of loan terms and interest. Lower interest is always beneficial, but you still need that monthly payment to fit within your budget. Here are a few things to think about:

Loan terms: 30- and 15-year loans are the most common. Shorter terms have higher monthly payments but lower interest rates and lower overall costs. Longer-term loans have lower monthly payments but higher interest rates and higher total costs.

Interest rates: Consider both adjustable and fixed-rate loans. With fixed-rate loans, your monthly payment doesn’t adjust based on interest. It stays the same for the life of the loan. With adjustable rates, on the other hand, your payment can start low and increase over time.

Annual percentage rate (APR): When evaluating offers, pay attention to the APR. Whereas the interest rate tells you the cost of the loan expressed as a percentage, the APR also factors fees and other charges into the cost, such as private mortgage insurance, discount points or certain closing costs. Because fees can differ between lenders, looking at APR can give you a better way to compare the cost of different loans.

Understand your mortgage insurance requirements.

Be sure to ask your lender if mortgage insurance is a requirement. If you can’t afford a 20% down payment, mortgage insurance may be required by your lender. Most conventional loans require private mortgage insurance (PMI) for down payments of less than 20% of the home’s purchase price. Federal Housing Administration (FHA), Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) home loans may also have PMI requirements.

Mortgage insurance increases your costs. Typically, you’ll pay a fee at the time of closing and then monthly mortgage insurance premiums as part of your home payment. This is called borrower-paid mortgage insurance (BPMI). However, once you have 20% equity in your home, you can ask your lender to cancel your mortgage insurance.

If you have the option, single-premium mortgage insurance (SPMI) offers the advantage of lower monthly costs since the premium is paid in full at closing. But it will mean higher closing costs, and you won’t receive a refund on any portion if you refinance or sell your home.

Some lenders will cover your PMI costs. This is called lender-paid mortgage insurance (LPMI). While LPMI might seem like a good deal, you’ll likely pay for it in the form of a higher interest rate. If your lender requires PMI, be sure to know what your options are and the benefits and drawbacks of each.

Prequalify for a mortgage.

Before doing this, be sure you’ve reviewed the offers provided to you by your chosen lender. Look at the interest rate, the amount you qualify for, and the loan term or length.

The lender will need to gather your basic financial information to prequalify you for a loan, including your:

• Credit score
• Borrowing history
• Income from all sources
• Other expenses
• Down payment expectations

Once the lender formulates a prequalification offer for you, you can agree to the terms or not. Prequalification does not lock you into anything. It’s based on the information you provide, so the lender’s offer can change if that information is not accurate or up to date.

With prequalification in hand, you can start looking for a home to buy if you don’t already have one in mind. You’ll know how much the lender believes it can lend you, which will help you narrow down homes in your price range.

Get your conditional approval and submit your loan application.

Keep in mind prequalification is not the same as a conditional approval. The loan amount offered when you prequalify for a loan is based on the information you’ve provided — without confirmation of its accuracy by the lender.

Having a conditional approval for a loan means the lender has verified key information and is most likely to approve and fund the loan. However, the loan amount offered after conditional approval may differ from the amount offered at prequalification if the lender identifies any issues while reviewing your information. If you want to compare home loan offers more effectively, it’s possible to get conditional approval from more than one lender. 

In a hot housing market, a conditional approval may give you a competitive edge when you’re ready to make an offer to purchase. Because conditional approval requires an added level of scrutiny, it signals to real estate sellers that you’re further in the process and serious about buying. It also tells them there’s less chance of a sale falling through because your loan wasn’t funded. Without conditional approval, some sellers may not accept an offer on a home because it means there’s still a lot of risk to them.

How do you get conditional approval? You’ll complete a formal application for the loan with the lender. This is when the work gets more intense and requires more attention from you. For this, the lender will need to gather documentation and verify that you qualify for the loan and determine the likelihood of your loan getting through the underwriting process.

You’ll work closely with your mortgage lender on that process. The lender will provide a list of documents and information needed from you. This is evidence that shows the lender you’re financially capable of making the payment required. They may come back for more information several times. Some of the most commonly required documentation includes:

• Social Security numbers for yourself and any co-borrower
• Statements for checking and savings accounts
• Statements for any investment accounts you have
• Documents for all outstanding loans, such as credit cards, car loans and student loans
• Any other outstanding debt obligation documentation
• Copies of your tax returns for the last two years
• W-2s and 1099s for the last two years
• Income information, including statements from employers
• Paycheck stubs to prove income
• Down payment information — how much you plan to pay, as well as any money being gifted to you

It’s important to clarify that any type of loan offer you receive — from the mortgage prequalification to the home loan conditional approval — all comes down to the underwriters. Although they’ll play a role throughout the process, they always have the ability to say no to the loan. Their goal is to ensure the loan is a good risk for the lender. If they can't verify that, the loan may not be approved.

Make an offer to purchase a home.

With your conditional approval done, you can shop for a home. It’s an exciting time and one you don’t want to rush through. Working with a qualified real estate agent is recommended to help you find a home that’s right for your lifestyle as well as your financial needs.

Once you identify the home you want, the next step is to make an offer. An offer to purchase is a legally binding contract. As such, it’s critical to be set in the terms. Your real estate agent or attorney can help you to write a contract that protects you. Here’s what typically happens:

1. Decide how much to offer.

In some markets, offering the full asking price is the best way to get the home quickly. In other markets, you may be able to negotiate the home price down. Consider:

• Comparable homes by size, features and location that recently sold
• Time on the market — longer means the seller may be more willing to negotiate
• Necessary repairs, upgrades and renovations to make the home livable

The market is a big factor in the asking price, and your agent should offer insights into how much to expect to pay. Underbidding on a home you really want may mean the seller goes with someone else who offers more. Overbidding costs you money. Finding that balance is a must.

2. Identify necessary contingencies.

Contingencies are clauses. More precisely, they’re escape clauses. If you decide to move forward with this home's purchase, you want to be sure of the quality and access. Contingencies give you a way out when things aren’t what they should be. Common contingencies include:

• Home inspection outcome
• Appraisal outcome
• Financing and title approval
• Home sale contingency, if you’re selling an existing home before buying

These are written into the contract to make them legally binding. The seller has to agree to them if accepting the offer.

3. Determine earnest money.

Earnest money is like a good faith deposit and is put into an escrow account. Most of the time, it’s between 1% and 2% of the total home price. Offering this helps the seller see you’re serious about the home purchase. At closing, earnest money is typically applied to your down payment and closing costs. If the sale falls through, however, your contract with the seller will outline the conditions under which your earnest money can be refunded. 

When you’ve determined these three factors, your agent can write the contract or offer on your behalf. It’s then submitted to the home seller, who has the legal right to determine if he or she wants to sell to you based on what you’ve offered. The contract will stipulate how much time the seller has to respond.

There may be some haggling involved. Any time the seller makes a counteroffer to you, you can decide to accept it or walk away.

Get a home inspection.

Once the seller approves your offer, it’s time to make sure the home is in good condition. You’ll pay out of pocket for a home inspection. This means hiring a professional to assess the condition of the home. An FHA inspector may be required if you have that type of loan. Your agent may be able to help you find an inspector.

During the inspection, you and the inspector, and possibly your realtor, will walk through the home, looking at all major systems. The goal is to learn if the home is safe, what problems exist and the age of the systems. This includes evaluating the home’s roof, foundation, heating and cooling system, and major appliances.

Keep in mind the inspector does not assess the value of the home. That will be done later by an appraiser.

Obtain home insurance.

When your loan offer begins to move forward, contact your home insurance agent. You can choose one who's already providing for your needs or seek out a new one. The lender will make specific requirements known, such as full coverage on the property. Lenders will not move ahead with a home loan if the insurance policy is not in place.

If everything checks out, the home loan will move into the next phase of loan processing.

Await loan approval.

You’ve selected a lender, prequalified for a home loan, submitted your loan application, made an offer on a house that was accepted by the seller, had the home inspected and secured home insurance. But before you can take ownership, your loan must be approved to close, and all the necessary closing documents must be signed and recorded.

The order in which each step happens at this point in the process can vary depending on a number of factors, such as the individual requirements of your lender or last-minute hiccups that might require you to submit additional paperwork or do things slightly out of order. However, the loan approval and closing process will generally include all of the following steps:

1. Mortgage processing

The loan officer will collect data and documentation from you and then work with a loan processor to verify your information. This helps ensure nothing is missing. You may need to provide additional information at this point, including:

• Evidence of earnest money
• Asset verification documents
• The source of large deposits
• Gift letters if others are giving you money
• Verification of employment from your employer
• Fully executed sales contract (your offer)

Before the mortgage can move on to the next step, an appraisal of the property is required. The appraiser’s job is to make sure the home is worth at least as much as the loan amount. If it’s not, the lender may not approve anything over the appraisal amount.  

2. Underwriting

Now the underwriter on the loan goes to work reviewing your documentation. Underwriters are responsible for ensuring the details of the proposed loan and your financial information meet lending guidelines. They may need more information as they work to document that your loan meets those requirements.

3. Conditional approval

When a loan has outstanding items that the underwriter needs in order to accurately and completely document that your loan meets lending guidelines, those items are called conditions.  Until those conditions are cleared, the loan is considered “conditionally approved.”

4. Approved to close

You may hear the phrase “cleared to close” at this point in the process. It’s the way for the underwriter to say, “Let’s do this.” Final approval is issued. Then the team schedules the loan closing. Be on the lookout for the closing disclosure. This provides your finalized loan terms, including fees and other costs.

5. Closing on the mortgage

The closing process is the final step to homeownership. Be sure to get in contact with the company providing escrow services for your home purchase. The escrow company is a neutral third party that holds funds and documents involved in the closing process, so you’ll want to find out ahead of time how any necessary closing funds should be delivered to the escrow company.

From there, you’ll sit down with the closing agent, usually a closing attorney or a title company, to review a large stack of documents. You’ll need to have photo identification and, in most cases, a bank check for the approved amount to move to the escrow company for closing costs and your down payment.

This amount can also be wired to the escrow company. However, wiring scams are common, so always be diligent when wiring funds. And remember that the escrow company will not change wiring instructions at the last minute.

The attorney or closing officer will review each of the documents with you as you’re signing. During this process, you should ask questions about anything you don’t understand regarding the closing and settlement of the transaction because, by signing, you agree to all of the terms — even if you don’t understand them. However, if you have questions about the loan or its terms, the best person to ask is your loan officer.

These documents will outline all the details of your loan and the terms of the sale, including:

• How much you’re borrowing
• How you’ll pay for the loan
• The title checks completed
• The security of the home for the loan (what happens if you default)
• Your monthly payment amount and duration
• Expectations to maintain home insurance throughout the life of your loan
• Settlement statements

You can expect the signing process to take an hour or two to complete. 

6. Lender review

The lender gathers all the documents you signed and reviews them. Most often, this takes another 24 to 48 hours. Before funding the loan, the lender wants to ensure nothing is missing and that the documents are legally binding. If signatures don’t look the same, changes may be required.

7. Loan funding

Once everything is verified, the loan goes to funding. That means the lender will transfer the funds to the escrow company. Most of the time, this happens on the day of closing. The escrow company ensures all parties are paid as agreed in the purchase and sales agreement and final settlement statement.

8. Becoming a homeowner

This final step in the process is when your closing attorney or title agent sends the necessary documents to the county recorder to create a public record of the transfer of ownership. Once this is done, your real estate agent will receive the recording number. Now they can hand you the keys to your new home!

Homeownership is an exciting opportunity, but one that requires numerous steps to safeguard your investment. Working with the right lender for your needs can make all the difference.