Buying a home may be the most exciting,
confusing and stressful financial transaction you ever undertake.
Even if you have done it before, 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.
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 loans available
to you, interest rates, 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.
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 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 the terms of the lock-in agreement.
The loan application asks for information
on the property, terms of the purchase contract, employment
and financial history of all loan applicants, including
your spouse and/or other co-borrowers. The lender will verify
or not, to approve the loan, so it is very important to
submit a complete and accurate application.
You can complete the loan application
process easier if you prepare for it ahead of time. A great
amount of detail will be asked about your personal finances,
including bank account numbers and balances, current loan
amounts, payments, and credit card account numbers. You
will want to be thorough and precise in your answers. It
will be to your benefit to assemble it this kind of information
before the meeting with the loan officer. The following
is a summary of information required on the loan application,
documents you may need to provide and the questions 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 addendums, 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, layoffs, or for any other reason.
The loan officer may 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 account balances reported by the institution
and balances you provided on the loan application
have to be reconciled. Be sure you have 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 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 requested
by the lender. As with 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 have data correct,
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 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 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 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 on your part and has no effect
on your loan application. The lender, however, is required
by federal law to request the information. Under Federal
Regulations, this lender is required to note race and sex
on the basis of physical observation or surname.
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.
Based on the application, the
loan officer may be able to pre-qualify you, 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 forwarded to the lender's loan processing
department and then to an underwriter, where the decision
to approve or reject the loan will be made. Loan processors
send out 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 receiving
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 an approval letter . If the loan
does not close within the specified commitment period, the
terms are subject to change.The approval may contain conditions
you need 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 an approval letter. This is not unusual, but
make sure you understand the terms of the approval.
Once the approval letter 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 submission of the loan application and approval
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 both you and the lender can do to reduce the stress.
Keep in mind 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.
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.
