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Buying
a home may be the most exciting, confusing and stressful financial transaction
you ever undertake. Even if you have done it several times you can still find
the process complicated and intimidating, particularly when it comes to getting
a mortgage loan. Countless loan documents, unfamiliar terminology and
uncertainty serve to temper the joy of buying a new home. As soon as the sales
contract is signed, obtaining the financing for the purchase becomes paramount
for all but a very few buyers. If you understand the steps required to qualify
for a mortgage loan, however, much of the stress can be avoided. The following
explanation of the loan application process is intended to help you through the
complexities of obtaining a mortgage loan.
The steps in the mortgage process are:
1.Decide on the lender or
broker you wish to use.
2.Gather your financial data
3.Meet with your lender representative, or contact their telephone banking group.
4.Complete the application forms
5.Lender will obtain credit report and property appraisal
6.Lender may verify data provided on income and assets
7.The loan is reviewed by "underwriter" and approval granted
8.Title work is completed on the property
9.Funds are disbursed to borrower at time of 'closing'
The process of obtaining a loan may begin even
before you locate a home you wish to buy.
Generally, all lenders or brokers will require the
same information to process your mortgage loan.
Once
you have selected a lender, the next step will probably be a meeting with a loan
officer or other lender representative, whose job is to begin the collection of
information the lender needs to approve the loan. They will explain the types of
mortgage e loans available to you, the interest rates and fees for each type and
the qualification requirements. During the meeting, the loan officer will fill
out, or assist you in filling out, the loan application form.
By this time you should
have a good idea of the general interest rates and fees being charged in the
area. The total cost of a mortgage loan consists of the interest rate on the
loan, origination fees, discount points, and miscellaneous other charges. One
point is equal to one percent of the amount of the loan and is usually collected
at the loan closing, or settlement. The interest rate affects the amount of the
monthly payment, while points affect the amount of cash you must have at
closing.
Most lenders will offer
a range of interest rate/point combinations to meet the borrower needs. In
general, the higher the interest rate, the lower the points. For example, if the
current market provides for an 8.5 percent interest rate with 2 points, a nine
percent rate may be offered at no points. If you are a first-time home buyer,
the larger monthly payments on the 9 percent loan may be easier to handle than
the 2 points that will require additional cash at settlement. If you are a
corporate transferee, however, your company's relocation policy may pay all or
part of origination costs and the lower rate will have more appeal. The loan
officer is prepared to explain all of your options to you.
When discussing the
terms of the loan, make sure you understand how and when the rate and fees on
the loan are going to be set. Most lenders will quote a rate and fee at the time
the application is taken and then will guarantee, or "lock" the rate
quote for a specified length of time. A rate lock protects you from rising
interest rates while the loan is being processed, but it also typically commits
you to close the loan at the rate and the fee even if rates decline prior to
closing. Lock periods may run from 10 to 60 days, with longer periods available
in some cases at an additional fee. The lock period must be long enough to get
you through the estimated closing date. A 30-day lock affords you no protection
if closing is at least 60 days away.
You may have the option
to let the rate "float," getting the final rate and fees set nearer
the settlement date. If you believe rates are declining and are willing to run
the risk that interest rates could rise during the processing of your loan, you
may select this alternative. Before you take a floating rate, make sure that the
rise in interest rates will not create a problem for you because you have
insufficient income to cover the higher mortgage payments. In either case, make
sure you understand exactly the terms of the lock-in agreement.
The loan application
form asks for information on the property you are buying, terms of the purchase
contract and the employment and financial history of all loan applicants,
including your spouse and/or other co-borrowers. The lender will verify or not
to make the loan, so it is very important to make sure that it is complete and
accurate.
You can complete the
loan application process much more easily and accurately if you prepare for it
ahead of time. A great deal of detail will be asked about your personal
finances, including bank account numbers and balances, current loan amounts and
payments, and credit card account numbers. You will want to be thorough and
precise in your answers, so it will be to your benefit to assemble this kind of
information before the meeting with the loan officer. The following is a summary
of the major kinds of information required on the loan application, the
documents that may be needed and the questions that you should be prepared to
answer.
Because the property is
security for the loan, the lender will have an appraisal made of the property,
and you need to have the following information available:
- A complete copy of
the sales contract, including any addendum's, signed by all parties, showing
the full names of the sellers and buyers as they will appear on the new
deed, the amount of earnest money deposit and who is responsible for closing
costs, origination fees, etc.
- If the house is to be
built, or is still under construction, a set of plans and specifications.
- The complete mailing
address of the property, its age and its full legal description.
- Name, address and
telephone number of the real estate agent and/or the seller of the property
who will assist the appraiser in obtaining access to the property.
All of this information
should be in the purchase contract. If not, consult the Realtor or the seller.
The
loan officer will want the social security numbers of you and your spouse (or
other co-borrowers), age, number of years of schooling, your marital status,
number and ages of dependents and your current address and telephone number. If
you have lived at your current address less than 2 years, be prepared to furnish
former addresses for up to seven years. You will also be asked to detail your
current housing expenses, including rent or mortgage payments, real estate taxes
and insurance (your mortgage payment may include tax and insurance funds). You
will need the name and address of your landlord(s) or mortgage lender(s) for the
past two years.
Your ability to make the
regular payments on the mortgage and to afford the costs associated with owning
a home are primary considerations is the lender's loan approval process and
should be your primary concern. Required information includes:
- At least two years
employment history with employer's name and address, your job title or
position, length of time on the job, salary, bonuses, commissions and
average overtime pay.
- Recent paycheck stubs
and Federal W-2 forms for two years (some lenders may require full Federal
tax returns).
- Records of dividends
and interest received from investments.
- If you are
self-employed, full tax returns and financial statements for 2 years, plus a
profit and loss statement for the current year to date.
- A written explanation
if there are gaps in your employment record, because of circumstances such
as illness or layoffs, or for any other reason.
The loan officer will
have you sign a Verification of Employment (VOE) form. This will be sent to your
employer to verify your employment and earnings. One will be sent to previous
employers if you have been on the job less than two years. Many lenders now use
a general authorization form which allows them to verify employment and other
financial information on the application.
If you are relying on
income from other sources, such as rental property, social security or
disability payments, child support, etc., you must provide adequate proof of the
source. Appropriate documents could include canceled checks, copies of leases,
certification of benefits, divorce decrees and similar evidence.
A detailed listing of
your personal assets is required on the loan application form. You will need to
have the following information available to complete the form:
- All bank accounts,
both checking and savings, and money market accounts, with the name and
address of the institution, name(s) on the accounts, account numbers and
current account balances.
- Recent bank
statements for at least two months.
- Current market value
of stocks, bonds, CDs and other investments.
- Vested interest in
all retirement funds.
- Face amount and cash
value of life insurance policies in force.
- Make, model, year and
value of automobiles owned.
- Address and market
value of all real estate owned along with the amount of rents collected, the
mortgage on the property and the monthly mortgage payments (a profit and
loss statement will be required for investment properties).
- Value of other
personal property such as furniture.
As with the Verification
of Employment, the loan officer will have you sign Verifications of Deposit (VOD)
for each of the institutions (or a general authorization) where you have savings
or checking accounts. Differences between the account balances reported by the
institution and the balance you give for the loan application have to be
reconciled, so be sure you have your correct current balances.
The lender will look for
the source of funds with which you will make the down payment and pay closing
costs and fees. Gifts from a relative, church, municipality or non-profit
organization may sometimes be used, but must be verified in writing. If you are
providing less than 5 percent of the sales price, the donor must be a relative
and must provide a letter stating the donor's relationship to you, the amount of
the gift and the fact that no repayment is expected.
You will be asked to
itemize all of your current bills, loans and other debts, including current
balances and monthly payments. Debts include automobile loans, credit cards such
as Visa, Mastercard and other retail store accounts, finance company, bank and
credit union loans and existing mortgages, including home equity loans. You
should be able to give the account or loan number, the monthly payment, the
number of payments remaining and the outstanding balance.
The information you
provide on the loan application will later be verified by a credit report
ordered by the lender. Like employment and deposit information, differences
between your figures and those on the credit report will raise questions and may
delay the approval of your loan. It is to your advantage to take time to get
your data right prior to filling out the loan application.
If you have had credit
problems, you should inform the lender. Lenders recognize that unemployment,
illness, marital problems or other financial difficulties can temporarily impair
your credit rating. Provide a written explanation of the circumstances regarding
the problem to be included with the loan application. The lender must consider
such a written explanation as part of the underwriting analysis. If the problem
has been corrected and your payments have been made on time for a year or more,
your credit will probably be judged as satisfactory. Chronic late payments,
judgments or loan defaults, however, severely damage your credit standing and
may prevent you from obtaining the financing you need to complete the purchase.
If you have been through
bankruptcy or foreclosure proceedings within the past seven years, be prepared
to give full details and copies of applicable documents regarding them.
You will also be asked
to explain the details if you are obligated to pay alimony, child support or
separate maintenance. Such obligations are treated like debt payments by most
lenders and will be part of the underwriting analysis.
You will be asked to
sign a section of the loan application form which contains your certification
that the information you have provided is correct to the best of your knowledge;
your promise to advise the lender of any material changes in the information on;
and your consent to (1) verification of the application data, (2) submission of
account history to credit reporting agencies, and (3) transfer of the loan or
loan servicing to successors to the original lender.
The last part of the
application form requests information on the race and gender of the applicants.
The Federal Government uses this data to monitor lenders' compliance with fair
housing and equal credit opportunity laws. Providing this information is
strictly voluntary on your part and has no effect on your loan application. The
lender, however, is required by federal law to request the information.
Because of the
particular circumstances surrounding a loan application, the lender may require
additional information or documentation regarding you or the property after the
application has been submitted for approval. Loan officers make every effort to
collect all data at the outset, but cannot foresee every eventuality. Requests
for additional information are not necessarily bad omens and your primary
concern should be in responding promptly with the information.
At the time the
application is taken, you will probably be asked to pay for the credit report
and appraisal fees. depending upon the locality and the type of the loan, these
fees will generally run up to $500.
Based on the information
collected in taking the application, the loan officer may be able to pre-qualify
you for the loan requested, but cannot approve the loan. That is done by the
lender's underwriters after all documents and information have been received and
verified.
After the loan
application has been completed, it will be turned over to the lender's loan
processing department and then to the underwriter, where the decision to approve
or reject the loan will be made. Loan processors send out the Verifications of
Employment and Deposit and order the credit report, property appraisal and other
documents. The time it takes to receive these documents affects the length of
time required for approval of the loan. If you are transferring from out of the
local community, it may take longer to receive the credit and employment
information. Processing times vary from one lender to another, but the loan
officer should be able to give an idea of the processing time for your
application.
Within three business
days after completing the application, the lender must provide you with a Good
Faith Estimate of the anticipated closing costs. It will show costs
associated with the loan settlement, such as origination fees, mortgage
insurance, title insurance, escrow reserves and hazard insurance.
Within the same three
days you will also receive a Truth-in-Lending Disclosure statement. This
statement shows, among other things, the estimated monthly payment. The total
cost of all finance charges on your loan is also shown, stated as an Annual
Percentage Rate (APR). The APR represents the dollar amount of finance
charges you pay either up front or over the life of the loan, converted to an
annual interest rate. Since the APR includes origination fees and other charges
as well as interest on the mortgage loan, the APR is usually higher than the
interest rate on the loan.
After the lender has
approved the loan, you will usually receive a commitment letter which sets out
the terms of the loan and the length of time for which those terms are offered.
If the loan does not close within the specified commitment period, the terms are
subject to change. You usually must accept the commitment by returning a signed
copy to the lender within five to ten days and may have to pay part or all of
the origination fees at this time. The commitment may contain conditions that
you will still have to satisfy, so you should read it carefully.
In cases where closing
is scheduled soon after approval, the lender may give you verbal approval
instead of a commitment letter. This is not unusual, but make sure you
understand the terms of the approval.
Once the commitment
letter or approval has been received, you are assured the financing you need to
complete the purchase of your home and you need to turn your attention to
completing the details required for settlement.
For many home buyers,
the period of time between the submission of the loan application and receipt of
the commitment letter is one of uncertainty and concern. Requests for additional
information, unexpected delays and lack of communication all serve to increase
the tension. There are a number of things that both you and the lender can do to
reduce the stress.
Keep in mind that the
lender wants to make the loan. Loan underwriters are looking for ways to approve
loans, not reject them. If you have come to the interview with the loan officer
fully prepared and have provided good documentation, you have done a great deal
to assure prompt processing of your application and approval of your loan.
You and the lender need
to make sure that lines of communication are kept open. Your contact person may
be the loan officer, but often it might be someone in the lender's loan
processing department who can tell you the status of your application. Remember,
however, that it may take several weeks to process the application and frequent
inquiries from you prior to that time will not speed things up.
You should be accessible
if the lender needs additional information or documents during processing. If
you are from out of town, use your real estate agent as a contact if necessary.
Quick response to lender requests helps keep the process on schedule. In order
to protect both you and the lender, mortgage loans require much more paperwork
and legal documentation than an automobile or other installment loan, and
lenders do not ask for more than is absolutely necessary.
Obtaining a mortgage
loan need not be an ordeal that dampens the thrill of acquiring a new home. If
you understand the lending process and are prepared to do your part, it simply
becomes a key step in owning a home.
The following is a list of the questions you can
expect when you contact our office:
1.Do
you plan to live in the property?
2.Is the property a single family, a condo, or a cooperative apartment?
3.Where is the property located?
4.What is your (and any co-borrowers) gross monthly income?
5.Do you routinely receive overtime or bonuses?
6.If self employed, what is your net income?
7.What monthly financial obligations do you have?
8.How much cash do you, or will you have, to invest in the transaction yourself?
9.Be prepared with explanations of any credit problems within the last two
years.
Organize your documents
If you are buying or
refinancing a home
1. If you are salaried: provide
two years W-2 and one month of pay stubs OR if you are self-employed: provide two
years tax returns and a YTD profit and loss statement.
2. If you own rental property,
please provide rental agreements and two years tax returns.
3. If you wish to speed up the
approval process, please also provide three months bank statements for each
bank, stock and mutual fund account.
4. Provide recent copies of any
stock brokerage or IRA/401K accounts that you may have.
5. If you are requesting a cash
out refinance please provide a letter explaining what you plan to do with the
proceeds.
6. Provide a copy of divorce
decree if applicable.
7. If you are NOT a US citizen,
provide us with a copy of your green card (front & back), or if you are NOT
a permanent resident provide us with your H-1 or L-1 visa.
If you are applying for a home
equity loan
1. If you are salaried: provide two
years W-2 and one month of pay stubs OR if you are self-employed:
provide two years tax returns and a YTD profit and loss statement.
2. If you own rental property,
please provide rental agreements and two years tax returns.
3. Please provide a copy of the
note on your first mortgage. This will normally be found in your closing loan
documents.
4. Please provide a signed letter
explaining what you plan to do with the proceeds.
5. Provide a copy of divorce
decree if applicable.
6. If you are NOT a US citizen,
provide us with a copy of your green card (front & back), or if you are NOT
a permanent resident provide us with your H-1 or L-1 visa.
Get Qualified
Getting qualified before you apply for a loan
can help you understand how much you can borrow.
When buying a house, you may get
pre-qualified or pre-approved. You can typically get pre-qualified over the
phone or on the Internet in a few minutes. A pre-qualification is not as
beneficial as a pre-approval where you have to go through a more rigorous
process which includes verification of your credit, income, assets and
liabilities. It is highly recommended that you get pre-approved before you start
looking for a house. This will help you:
1. Find out the maximum house you
can buy, so you don't waste time looking for properties you can not afford.
2. Puts you in a stronger position
when you are negotiating with the seller, because the seller knows that your
loan is already approved.
3. Helps you close quickly, since
your loan is already approved.
Shop loan programs and rates
To shop for a loan you will need to:
1. Think about how long you plan to
keep the loan. If you plan to sell the house in a few years you may want to
consider an adjustable or balloon loan. On the other hand, if you plan to keep
the house for a longer time, you may want to look at fixed loans.
2. Understand the relationship
between rates and points. Points are considered to be prepaid interest and
are tax deductible. Each point is equal to one percent of the loan. So for
example 1 point on a $150,000 loan is $1,500. The more points you pay, the lower
the rate you will get.
3. Compare different programs. Shopping
for a loan can be difficult. With so many programs to choose from, each of which
has different rates, points and fees, it's hard to figure out which program is
best for you. That's where an experienced loan officer can help you make a
decision that's best for you.
Obtain Loan Approval
Once your loan application has been received we
will start the loan approval process immediately. This involves verifying your:
1. Credit history
2. Employment history
3. Assets including your bank accounts,
stocks, mutual fund and retirement accounts
4. Property value
Based on your specific situation, additional
documents or verifications may be required. To improve your chances of getting a
loan approval:
· Fill out the loan
application completely.
· Respond promptly to
any requests for additional documents. This is especially critical if your rate
is locked or if you plan to close by a certain date.
· Do not make any
major purchases. Do not buy a car, furniture or another house till your loan is
closed. Anything that causes your debts to increase might have an adverse affect
on your current application.
· Do not move money
into your bank accounts unless it can be traced. If you are receiving money from
friends, family or other relatives, please contact us.
· Do not go out of
town around the closing date. If you do plan to be out of town when your loan is
expected to close, you may sign a power of attorney, to authorize another
individual to sign on your behalf.
Close the Loan
After your loan is approved, you will be
required to sign the final loan documents. This will normally take place in
front of a notary public. Be prepared to:
· Bring a cashiers
check for your down payment and closing costs if required. Personal checks are
normally not accepted.
· Review the final
loan documents. Make sure that the interest rate and loan terms are what you
were promised. Also, verify that the name and address on the loan documents are
accurate.
· Sign the loan
documents.
Your loan will normally close shortly after you
have signed the loan documents. On refinance and home equity loan transactions
federal law requires that you have 3 days to review the documents before your
loan transaction can close.
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