| It may seem as though applying for your mortgage is the most complicated financial task you will undertake. Lenders ask many questions about you and your finances because they want to help you attain a home you can afford. If you know what to expect and what your lender is looking for, you’ll find applying for a mortgage isn’t so bad. It can be time-consuming, but there’s no reason for it to be difficult. This section will help you learn the steps.
Usually, some type of prequalification is done in the first interview with a lender. Here you will provide basic information needed to help you obtain a loan. | |
The lender makes preliminary calculations based on information you give about your income, debts, and assets. These calculations help determine whether you can afford the loan you would like or how much you can afford to borrow. The lender may also explain the application process and steps to getting a mortgage at that company. Prequalification occurs before the formal application is signed and submitted. At this time, lenders do not verify the information you give them, and they may not check your credit. Lenders are not committed to make a loan for you at this time. Prequalification is just an estimate of the amount you may qualify to borrow. You can use this preliminary information to assess the impact a particular monthly payment may have on your total budget. In a pre-approval, lenders do check the accuracy of the information provided. They may contact the employer to verify employment dates and income and check your credit. If the information checks out and your credit is good, the lender will give you a pre-approval letter for a specific loan amount. You can be pre-approved by more than one lender. At this point, you are on the way to buying a home.
The pre-approval letter shows the real estate professional and home sellers that you are serious about buying a home, that your credit is good, and that you are working with a lender or lenders who will provide you with a loan. The pre-approval is specific to each lender but can be helpful in shopping with other lenders. The more homes you see, the better your chance of finding the home you really want. Visit as many homes as possible, and try to be organized (see Step 4). Plan your visits by neighborhood. If you find a home or area you like, visit it at different times of the day. You may be surprised how your feelings about it may change. If you’re working with a real estate professional, make sure that person understands your needs. Clearly state what you want in a home and why, and what you can afford. Do you think that person is listening to you? You’ll know soon enough. Don’t be afraid to shop around by interviewing several real estate professionals. When you have found a home you want to buy, the first step is to make a formal offer. Two things happen: You sign a sales contract and pay what is called "earnest money," or a deposit. This deposit can range from $100 to 10 percent of the purchase price and more in some areas. Usually, the deposit is applied to your closing costs. The deposit and signed sales contract indicate your serious intention to buy the house. You may want to make your contract contingent on - A satisfactory property inspection
- Final loan approval
- Passing lead paint and termite inspections
A note on contingencies: Some housing markets are so “hot” that some home sellers may not accept contingencies. You must proceed carefully in such cases.
There is a lot to do, but when you break it into parts, it gets easier. Basically, you need to supply information about who you are, where you work, your finances and the house you’re buying. Download a sample application form (PDF), and use this checklist of items you will need:
- Photo I.D.
- Last two pay stubs
- Proof of other income
- Last two tax returns
- Employment history (two years), including addresses and contact information
- Previous lenders or landlords (past two years)
- Your monthly household budget (for your reference)
- All debts
- All savings
- Other assets (life insurance, property, etc.)
- Source of downpayment
Lenders will require proof of identity (picture ID, driver’s license, passport, Green Card, etc.) as well as your Social Security number, age, number of years of school, marital status, number and age of dependents, and your address and telephone number. (If you lived elsewhere in the past two years, be ready to provide those addresses, too.)
List for the past two years your employer’s name, address and telephone number; your job title or position; how long you held the job; and all your other financial information (including salary, bonuses, commissions and average overtime pay). You may be asked to sign a form that will be sent to your employer (and previous employers if you’ve held your current job less than two years) to verify this information.
Provide all your W-2 forms for the past two years and your two most recent pay stubs. (Some lenders may want to see your entire tax return for the past two years.) If you are self-employed, be prepared to provide complete tax returns for the past two years along with a profit-and-loss statement for the current year. Don’t forget proof of other sources of income such as rental income, Social Security or disability payments, alimony, child support, etc. Proof of these could be canceled checks, copies of leases, divorce decrees, certification of benefits or other documents. Finally, if there are any gaps in your employment over the past two years for whatever reasons (illness, layoff, etc.), provide a brief written explanation.
There’s a lot more to your finances than pay stubs. You need to present a complete picture of your assets and liabilities. Having a sound budget makes every step easier.
You’ll be asked for your current rent or mortgage payments, real estate taxes and homeowners insurance, and the name(s) and address(es) of your landlord(s) or mortgage lender(s) for the past two years. Make an itemized list of your current debt. Include automobile loans; bank and credit union loans; any existing mortgages or home equity loans; and outstanding balances on credit cards. Debts also include alimony, child support or maintenance payments you’re required to make. For each separate account or loan on your list, you should include the account or loan number, the monthly payment, the number of payments remaining and the outstanding balance. This information is in addition to the credit report that your lender will order. You’ll want to check your credit report before you start this process as there may be inaccuracies that you can correct.
Start with your bank accounts. Include checking, savings and money market accounts. Make sure you have the name and address of the institution, the name(s) on the account, the account number and the current balance. This will be verified by your lender. Gather your two most recent statements for each account.
If you own stocks, bonds, CDs and other investments, including mutual funds, list them and include the two most recent brokerage statements. Also provide a record of dividends and interest received from any investment, such as the 1099s provided for tax filing. List retirement accounts such as IRAs, SEP-IRAs, 401ks, and others. Bring your most recent statements. Provide information on life insurance, including the face amount and cash value of any policies in force (available in annual or quarterly reports from your insurance company or from the policy). List the make, model and year of cars or trucks you own. List any real estate you own and include the address and market value. Include the mortgage and monthly payments and a profit-and-loss statement (or copy of schedule E from your personal tax return) for investment properties. If you own any other items of great value let your lender know. These can be jewelry, furniture, artwork—as long they are yours outright.
In most cases, this already will be in the hands of your lender, supplied by a broker or real estate agent. However, you should be aware of all the elements. Here are the basics: address, a detailed description, an independent appraisal and contact information for access to the property (usually the seller or the seller’s agent). In addition, your lender should have a complete copy of the signed sales contract. If the home is yet to be built or is still under construction, a complete set of plans and architectural specs is required. Download a sample appraisal form (PDF).
One more thing you should be prepared to answer: Where did your downpayment come from? Your lender will want to know where you obtained funds for your downpayment, closing costs and other fees. Gifts may be used for this purpose but must be verified in writing (even gifts from relatives). If you’re providing less than 5 percent of the sales price as a downpayment, the gift usually must come from a relative along with a letter stating the person’s relation to you, the amount of the gift and that no repayment is expected.
Be aware that in some cases, payment of credit report and appraisal fees (usually $500 or less) may be required when applying.
Your application, along with all the supporting information you’ve provided, is turned over to the lender’s loan processing department and then to the underwriter.
Your lender’s processing department will verify all the information you’ve supplied. In addition, they will order your credit report and any other documents still needed and arrange for an appraisal of the home.
After verification, the underwriter receives your application. Underwriting is where the final decision to approve or decline your loan is made. Underwriters work with guidelines provided by the investor that is backing or in some cases funding the loan.
Large investors "buy" loans from the lender. In return the lender provides them with a "return" on their investment by paying the investor a fee, just as you pay the bank a fee (interest) for lending you the money. Underwriting guidelines are statistical models that are applied to the data from your application — and they’re not all the same. One lender might approve you for a mortgage that another would not.
The approval process generally takes anywhere from one to six weeks, depending on the type of mortgage you choose, whether you’re buying a home outside your local community and other factors. Stay in touch with your lender, and be prepared to answer questions that might come up. Federal law requires the lender to give you several disclosures shortly after the completion of the loan application process:
Within three business days the lender must give you an estimate of your closing (The closing is when you formally receive the loan.) costs, called the Good Faith Estimate. This statement shows your estimated monthly payment, the cost of your finance charges and other facts about your mortgage.
This statement provides your estimated monthly payment, your annual percentage rate (APR), which is the total cost of all finance charges including points, interest, loan fees, as well as other information. Because the APR includes origination fees and other finance charges in addition to the interest on the principle, it is usually higher than the interest rate alone.
This booklet from the U.S. Department of Housing and Urban Development (HUD) describes the loan closing process. It is available online at http://www.hud.gov/offices/hsg/sfh/res/sfhrestc.cfm
In many lending transactions today, the lender is acting on behalf of an investor (or investment company) that is funding the loan. In most cases, the investment company does not have the capability to accept your payments. Some banks do service their own loans, but in many cases the loans are backed by or sold to investment companies, and the right to service them is sold as well. This is why most loans are transferred to a different company that is specifically set up to or has a large department to service mortgage loans.
If the lender plans to transfer servicing, the borrower must be provided with a statement indicating that the lender may transfer payment collection to another loan servicer. The statement also shows the lender's three-year history of such transfers. The new servicer has certain duties to notify you when it takes over your account. It also has duties in regard to administering the escrow account from which your taxes and insurance are paid. See What's in a Mortgage Payment. (if applicable)
This tells you whether your lender receives a financial benefit by using a specific vendor. You may want to pay attention to whether the lender is working with vendors (title insurance companies, etc.) who may be providing a referral fee to the lender. This is legal, but you are entitled to know.
An important thing to remember while you’re waiting for your loan to be approved is that lenders are in the business of making loans, not denying them. If you’ve provided complete and accurate information along with supporting documentation, you’ve helped assure your application will be processed promptly.
Even if you have been completely accurate, you should be prepared for your lender to ask for more information about you or the home you’re buying. A request for more information is not uncommon. If additional questions do arise, be available to provide the information as quickly and completely as possible. If you have travel plans, you should provide a telephone number where you can be reached, or use your real estate professional as a contact person. If you have questions, you can call your loan officer or the designated contact person to ask about the status of your application. Keep in mind that processing may take several weeks. Calling very often will not speed up the process.
In most cases, the inspections occur after the seller has accepted your offer and you have applied for the loan. Having reputable home and pest inspectors examine the property before you buy is important even if the home is new. Many factors in a home can affect your safety and health. Knowing what to look for will help you avoid buying a home with problems that could cause harm.
After you select an inspector, you should walk through the house with that person. Inspections offer you some assurance that the condition of the home will have a positive effect on its value. Your lender or real estate professional may know of inspectors or you can ask friends or relatives. It is good to get an objective opinion. If home or pest inspection problems are noted, you can and should renegotiate with the seller about possible repairs or a reduction in sale price. These matters should be resolved, in writing, before going to settlement. Note:In some markets where demand for homes exceeds the supply, and sellers receive several offers, they may not be willing to negotiate on inspection-related issues. They may only sell "as is." In these cases, try to have an inspection prior to making an offer so that you will be aware if problems exist.
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