So here's how we're doing it using a VA loan. I'm not sure how FHA or regular loans work but I'm sure someone can fill in the blanks. VA is our guarantor and USAA is our mortgage company.
I could be getting something wrong so don't trust me.
1. We got prequalified for a certain amount. We went to our bank and said we wanted to borrow X dollars. The bank pulled our credit and agreed to pre-qualify us for that amount with an interest rate of X percent. We used a bunch of online calculators to get an idea of whether or not the bank would be willing to loan us that amount, so we were confident in our approval when we finally sent the pre-qual request. At this point, the rate is understood (ie we know what they're offering) but not locked.
2. We made an offer on a house. The offer was for less than we were pre-qualified for so we went back to the bank and had them change the number to the lower amount to discourage the owner from countering with a higher number. Along with the offer, we sent them the pre-qualification letter from the bank.
3. The seller countered with some dumb stuff, like they would accept our offer if they took their appliances with them. We accept this counter offer. We send an "earnest" check for $4k which I guess shows that we're serious.
4. We notify our bank that the seller has accepted and fax them a copy of the contract. The bank sends us a packet of stuff they want in order to do the actual qualification for the loan. They wanted bank statements, statements explaining why we had applied for credit in the last 90 days (we had a car loan that we paid back in 60 days), a letter saying how much we pay per month for daycare, explanations for why there were holes in our employment history (my wife graduated law school less than 2 years ago), etc.
5. At this point the bank "locked" our interest rate for 90 days. If we close within the 90 day period, we get the interest rate on the loan that we have agreed to with the bank.
6. We pay out of pocket for an inspector who goes over the house and notes each and every thing wrong with the house (hopefully). If there is anything materially different from what the seller disclosed (ie something is worse than they said), you have the option of walking away, having them fix it, or lowering the house price. Or they can tell you no and you either live with it or walk away.
6a. A VA appraiser comes out and appraises the value of the home. If it is lower than the price you have offered, something happens here. The appraisal was higher than the offer so we didn't have to worry about this. The VA appraiser also notes anything "major" that is screwed up on the house. VA requires these things to be fixed before they will approve. We demanded they be fixed by the seller. The seller agreed.
7. The title company is assigned and makes sure that the owners actually own the home.
Everything below here we haven't actually done yet.
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8. The bank approves the loan.
9. VA sends an appraiser again for a final inspection. If the stuff has been fixed, they approve the loan.
10. The title company approves the owner as the actual owner of the house?
11. The seller hands you the keys.
12. Profit?
What comes out of our pocket vs. what goes "into the loan"?
Out of pocket:
Earnest money. This money goes towards your first mortgage payment (I think) if the house closes. If not it is returned to you.
The inspector. I think it was $500 or $600.
Closing costs at the time the loan is finally approved. This includes any down payment. We are not putting down a down payment.
Also of note, we are "selling points" to keep our out of pocket closing costs down because we have the ability to pay double our mortgage payments every month.
Total out of pocket for us: $9,000.
What gets rolled into the loan (making it bigger than the offer accepted by the seller, if that makes sense):
VA closing costs.
Other closing costs.
The points we sold.
The total for the additional money rolled into the loan for us is about $7,500.
Our mortgage loan requires that our property taxes ($600/month) and home insurance ($200/month) be included in the mortgage payments. Not included is flood insurance (not required but we're doing it anyway), which will cost us about $200 a year.