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.
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.
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