INTRODUCTION
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 LOAN
APPLICATION INTERVIEW
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, 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 the 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.
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COMPLETING THE LOAN
APPLICATION FORM
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 whether 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, 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 your should be prepared to
answer.
Details of Purchase
Contract and the Property 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:
1. 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.
2. If the house is to be
built, or is still under construction, a set of plans and
specifications;
3. The complete mailing
address of the property, its age and its full legal description;
4. 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.
Personal Information
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.
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Employment History and
Sources of Income
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:
1. 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.
2. Recent paycheck stubs
and Federal W-2 forms for two years (some lenders may require full
Federal tax returns).
3. Records of dividends
and interest received from investments.
4. 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.
5. 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.
Personal Assets
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:
1. 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.
2. Recent bank statements
for at least two months.
3. Current market value of
stocks, bonds, CDs and other investments.
4. Vested interest in all
retirement funds.
5. Face amount and cash
value of life insurance policies in force.
6. Make, model, year and
value of automobiles owned.
7. 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).
8. Value of other personal
property such as furniture.
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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.
Personal
Indebtedness
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.
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Additional Information
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; 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 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.
Provision of 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.
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-WHAT NEXT?
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.
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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.
REDUCING THE
ANXIETY OF WAITING
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.
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