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 Lender 