Steps in Applying for a Mortgage
If you’re about to apply for a
mortgage, take the following steps:
Pre-qualification
Letter
Lender pre-qualification provides a
ballpark estimate of how large a mortgage you can afford. While it doesn’t
obligate the lender to approve your loan, it’s a way to help ensure that you will
apply for a mortgage loan within your price range. If you’ve met with the
lender to get pre-qualified for a loan, you will have a good idea of the maximum mortgage
amount you can afford and will have focused your house search on properties within your
price range.
Ratified Sales Contract
Most loan applicants go to their
loan interview with a ratified contract of sale on a house in hand. Typically, we
would have presented your offer to the seller of the property and helped you
negotiate any sales contingencies with the seller (such as making repairs, settling by a
certain date, etc.). A ratified sales contract means both the buyer and the seller have
signed off on the final offer. This final sales contract is the starting point
for the loan application interview. Your ratified contract will specify the
amount of your down payment, the price you will pay for your house, the type of mortgage
financing you will seek, and your proposed closing and occupancy dates. When you meet with
your loan officer, you will need to communicate all these terms specified in the sales
contract.
Earnest Money Deposit
This is a “good-faith”
payment you submitted with the offer to show the seller that you are serious. The earnest
money is deposited in an escrow account and will be applied to your closing costs.
Sometimes, your lender will want you to bring a receipt for the earnest money deposit
along with your sales contract to the initial loan application meeting.
Home Inspection Report
Obtaining a satisfactory home
inspection report should be one of the terms in your sales contract. As part of your
decision to go ahead and buy a certain house, you will want the peace of mind that comes
from having hired a professional house inspector who has evaluated the structural and
mechanical conditions of the property. The home inspection report can identify
problems before you purchase a home. If you put a contingency clause into your
purchase agreement stating that the purchase of your home depends on a satisfactory home
inspection report, then you will be able to cancel the sales contract if serious problems
are identified, or you may be able to get the seller to agree to pay for needed repairs or
renegotiate the terms of the purchase.
Information Your Lender
Needs at Application
Typically, you will complete the
Uniform Residential Loan Application when you meet with your lender. This standard
residential mortgage loan application is a four-page document that asks in-depth questions
about you, your income, your assets and liabilities, and your credit and asks for a
description of the property you wish to buy.
In some cases, the lender may ask
you to fill out your loan application before your interview. You will then bring
your completed application form to the interview. Or, you can mail or fax the
application to your lender prior to your appointment. Some lenders may even let you
fill out your application over the telephone with a loan officer. By receiving your
completed application before your meeting, your lender will be better prepared to advise
you.
Some lenders have slightly different
information requirements, so you may also wish to ask your lender what to bring to your
initial loan interview.
It may take a bit of time to gather
all the required information. However, knowing what to bring will result in
fewer delays in the processing of your loan. And that will save you time in the long run.
Decisions You Make at Application
By the time you go to your loan
interview, you may have already determined the type of mortgage you want and the mortgage
amount. Other important information may need to be determined at the time of your loan
application.
The lender will need key information
about the following:
Type of Mortgage
Your loan application asks you to
specify the type of mortgage you want. Your lender will most likely offer you a variety of
fixed-rate or adjustable-rate mortgages with various repayment terms. There are also
balloon mortgages, Two-Step Mortgages®, Fannie Mae's Community Home
Buyer’s ProgramSM, FHASM and VASM loans, and many
others.
It’s advantageous to learn
about the various types of mortgages available to you before you apply for your loan. In
fact, it makes a lot of sense to see what types of mortgage loans are available even
before you start the house-hunting process. The type of mortgage you choose will directly
affect how much house you can afford -- and the amount of your monthly mortgage payments.
If you bring a ratified sales
contract to your loan application interview, it may specify the type of financing you
want. Your contract to buy the house may depend on your ability to secure or receive
a commitment for the type of loan you specify. If you are coming to your loan
interview without a specified type of loan in mind, be sure you’ve done your research
beforehand to know which type of financing is best suited to your lifestyle and budget.
Mortgage Amount
This is the amount of money you want
to borrow. Again, this is a decision you most likely will have made before the loan
application. Your requested mortgage amount will be based on the purchase price of your
new home and the amount of money you will be putting toward a down payment. Before
actually applying for a loan, many borrowers find out how much they can afford by getting
pre-qualified by a mortgage lender.
However, if you have been
pre-qualified, remember that your prequalification letter from a lender is only a ballpark
range of your buying power. It doesn’t obligate the lender to approve
your loan for that full amount. The lender can approve you for the amount
requested, or a lesser amount, or nothing at all, depending on other factors such as your
credit and the appraised value of the property. If your loan application reveals you
as creditworthy, it is likely that your pre-qualification amount will be close to the
actual amount of mortgage funds a lender will be willing to loan you.
Down Payment
Some loan programs
offer 3 percent down payments if you meet certain income standards. The Veterans
Administration (VA) and the Rural Housing Service (RHS) offer no-down-payment loans.
However, most lenders expect home buyers to have enough money available to make a down
payment of at least 5 percent of the value of the home. If you can afford to put more
money toward a down payment, it will reduce the amount of your monthly mortgage payments.
The lender will want to know how
much money you plan to put down and the source of those funds. Sources you may draw
upon include savings, stocks and bonds, Individual Retirement Accounts (IRAs), pension
funds, real estate holdings, life insurance policies, mutual funds, and employee savings
plans. Under some mortgage programs, such as Fannie Mae’s Community Home Buyer’s
ProgramSM with the 3/2 Option®, part of your down payment may come
from a grant from a nonprofit housing provider in your community. You may also rely
on a gift of money given to you by a parent or another relative that need not be repaid.
If you use gift money for a down payment, you will need to present a letter to your
lender that states the amount of the gift, is signed by the giver(s), and is usually
notarized by a third party.
Settlement Date
In your sales
contract, you specify a time frame in which you wish to close on your new home (usually
30, 45, or 60 days from the time you have a ratified sales contract). If you have a
limited time frame, ask your lender about any type of express services that may allow for
less documentation and alternative means to verify information you’ve furnished on
your application.
You will need to tell your loan
officer the approximate date you would like to close your loan, so that your loan
processing will coincide with this date.
Lock-in Interest Rate
The mortgage interest rates quoted
to you the day you apply for your mortgage may stay the same, decrease, or increase when
you actually close on your home. That’s why many mortgage lenders offer loan
applicants a rate lock-in. This lock-in can guarantee you a specified interest rate,
provided the loan is closed within a set period of time. Ask the lender if the rate can be
locked in at the time of application or only at loan approval, how long the lock-in
remains in effect, whether there is a charge for locking in the rate, and if you can also
lock in points. You will then need to let the lender know if you want to accept the
interest rate available on the day of your loan application or let the rate float until
you go to closing. If your lock-in period expires before you go to closing, your
lender is not obligated to give you the same interest rate you had locked in earlier. So,
it is important to lock in for a period that will cover the time until your expected
closing date.
Costs You Pay
In addition to the
information described earlier, you should also bring your checkbook to the interview.
Although costs and terms vary among lenders, most lenders require you to pay an
application fee, a credit report fee, and in some cases a separate appraisal fee at the
time of your loan application.
Application Fee
The application fee covers the
lender’s cost to process the information on your loan. Often , the fee includes the
appraisal -- which is the cost the lender will pay a professional appraiser to estimate
the value of the property you plan to purchase.
Appraisal Fee
An appraiser is a person who is
qualified by education, training, and experience to estimate the value of real and
personal property. Appraisers usually charge one fee for a single-family home and slightly
higher fees for a two-family, three-family, or four-family home. Appraisals for
government-insured loans, such as a FHA (Federal Housing Administration) loan or a VA
(Department of Veterans Affairs) loan, need to be done by FHA- or VA-certified appraisers
and may cost you less than those for other types of loans.
Credit Report Fee
The credit report fee covers the
lender’s cost for ordering a credit report on you from a credit reporting agency.
This report will verify information that you supply on your application and will supply
additional information from the credit agency’s own files and from the public record.
When a credit report is received, your lender will check it against your application and
look for any discrepancies. You may be asked to explain information in your credit report.
If You Change Your Mind
Check with your
lender to see if there are any circumstances under which you would be entitled to a refund
of your application or credit report fee. In some cases, you can only get a refund of your
application fee if your lender does not approve or deny your application in the time
agreed upon (usually 30 days from the date of your completed application).
Application Legal Requirements
Legally, your lender
is required to furnish you with several types of documents and information in conjunction
with your application for a mortgage loan. This information includes the following:
Annual Percentage Rate
Also known as the APR, this
percentage figure includes interest plus certain closing costs and any points and other
finance charges. It factors these upfront costs over the term of the loan. The
APR must be disclosed to you according to federal Truth-in-Lending laws within three
business days of when you apply for a loan, or prior to or at closing for a refinance.
Disclosure about ARMs
Federal law requires your lender to
give you information either when you receive an application form for an ARM or pay a
non-refundable fee -- whichever comes first. Your lender should provide you with a
written summary of the important terms and costs of the loan, the past performance of the
index which the interest rate will be tied, and a copy of the booklet Consumer Handbook on
Adjustable-Rate Mortgages.
Good-Faith Estimate
Within three days after you have
submitted your application for a home loan, the lender is required by federal law to
provide you with an itemized estimate of the costs to close (or settle) the loan. This
report is referred to as a “good-faith estimate.” It is a ballpark estimate of
how much money you will need to pay at the closing table along with the seller's costs.
Costs can and will vary from the actual amounts indicated, so be sure to take this for
what it is -- an estimate.
Guide to Settlement
Costs
The lender must also give you a copy
of the government publication Settlement Costs: A HUD Guide. This publication describes
the settlement process and nature of its charges, provides information about your rights,
and includes an item-by-item explanation of settlement services and costs. The lender has
three business days after your written application is taken to give this guide to you.
Authorization Forms
You may be asked to sign several
authorization forms that will allow your lender to verify the information on your
application. These include the authorization of credit investigation and authorization to
verify your employment, past rental or mortgage payment history, and bank deposits.
When compiling a credit profile of
you, your lender must certify that the credit report will only be used for the purpose of
qualifying you for a mortgage loan. As part of the credit evaluation process, your lender
cannot seek any subjective information from your neighbors or co-workers concerning your
character, reputation, or other personal aspects unless you receive notice. These
limitations are set by the Fair Credit Reporting Act.
Under the Equal Credit Opportunity
Act, your lender cannot discriminate based on race, color, national origin, sex, marital
status, age, religion, and the fact that all or part of your income comes from a public
assistance program, and your exercise of any rights under the Consumer Credit Protection
Act. Your lender also cannot ask questions about your future parenting plans,
although the lender may ask about the current number of children you have and their ages.
Alternative Documentation Loans
An alternative-doc
(or alternative documentation) loan uses methods other than traditional documentation to
verify information. Instead of sending a letter to the borrower’s
employer, the lender asks for the applicant’s last two annual W-2 forms and a
month’s worth of computerized pay stubs. The lender may then make a phone call
to the employer to verify the documentation.
Instead of sending a letter to the
bank, the lender accepts the borrower’s bank statements for the preceding three
months, and 12 months of canceled checks substitute for the letter of verification mailed
to the landlord or the previous mortgage lender.
Before your loan interview, ask
whether your lender offers alternative documentation -- and find out if you may be
eligible. In most cases, alternative documentation can be used for salaried individuals
who receive a computerized (as opposed to handwritten) paycheck. Self-employed individuals
or those who earn commissions will most likely not be able to use alternative
documentation for employment verification.
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