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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Equal Housing Opportunity