The Mortgage Loan Process
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.
When you work with
me, I will start the process by collecting information the lender needs
to approve the loan. I will explain the types of mortgage loans
available to you, interest rates, fees for each type and the
qualification requirements. During the meeting, I can 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. Paying points will reduce the interest rate of the loan and
is tax deductible in most situations. The interest rate affects the
amount of the monthly payment, while points affect the amount of cash
you must have at closing. Most lender
fees can be paid with the loan proceeds.
Most lenders will
offer a range of interest rate/point combinations to meet your
needs, and I will research them, all to find you the best overall
program. In general, the higher the interest rate, the lower the
points. For example, if the current market provides for an 6.5 percent interest rate with 2 points, a 7
percent rate may be offered at no points. If you are a first-time home
buyer, the larger monthly payments on the 7 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. I am prepared to explain the 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. I 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.
Completing The Loan Application Form
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. Many loans will
allow "Stated Income" with no employment and income
verification. this is good for my clients who
are self employed.
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 we speak. 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. (Not
applicable for a refinance)
- If the house is to be
built, or is still under construction, a set of plans and
specifications. (Not applicable for a refinance)
- 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. (Not applicable for a refinance)
All of this
information should be in the purchase contract. If not, consult the
Realtor or the seller.
I will need to collect 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 2 years of 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. You
may also choose a loan with "Stated Income" to avoid
this, although not all borrowers qualify.
- A written explanation if there are gaps in your
employment record, because of circumstances such as illness, layoffs, or for any other reason.
You will need to 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 or be able to provide prior
to funding the loan:
- 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, I 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.
If buying a home, 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.
Personal
Indebtedness
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 let me know as I have many loan programs
with great rates that we can find for you. 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, I 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 - What Next?
After the loan
application has been completed, it will be forwarded to the our loan processing department and then to
the lender's 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, and I will work with
you and our Processor to ensure the process goes smoothly. 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 I should be able to give an
idea of the processing time for your application.
Within three
business days after receiving the
application, I'll 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. Please note that these fees, especially those relating to current
interest payments will change based on the date the loan closes.
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.
Reducing The Anxiety of Waiting
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 I can do to
reduce the stress.
Keep in mind that I
am your advocate with the lender to make the loan happen. Loan underwriters
are looking for ways to approve loans, not reject them. Be fully
prepared to provide good documentation to assure prompt processing of
your application and approval of your loan.
I will make sure
that lines of communication are kept open. I will be your primary
contact, but often it might be someone in my loan processing department
who can also tell you the status of your application.
You should be
accessible if the I need 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.
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