Obtaining a Home Mortgage

Buying a home may be the most exciting, confusing and stressful financial transaction you ever undertake. Even if you are not a first time home buyer, you can still find the process complicated and intimidating, particularly when it comes to getting a mortgage loan.

For most people, obtaining a mortgage is central to buying a house. In fact, the process of buying a home typically begins with getting pre-approved for a mortgage loan since most real estate agents require a written mortgage pre-approval before showing homes for sale. Even if you want to purchase a house that is for sale by owner, the seller will likely want written evidence that you can obtain financing for your home purchase.

The process of selecting a lender and the right mortgage can be intimidating. There are many types of loans to choose from. Not only is it important to select the right mortgage type, it is very important to get the best mortgage rate possible since the interest rate and other mortgage terms will have a significant impact on the affordability of your new home purchase. If you understand the steps required to find the best 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.

What to Look for in a Mortgage Lender

There are several characteristics you should look for in a prospective lender. First, make sure that the lender is well established in the community and has a good reputation. Since much depends on the experience and knowledge of the loan officer, it is a good idea to check with real estate agents and former clients to find out how skilled that loan officer is and whether his company has a good reputation. You may want to avoid companies that will not provide loan officer to manage all aspects of your loan from start to finish. While suitable for mortgage refinancing's, mortgage companies that do not provide local loan officers and rely instead on call centers (such as most internet loan companies and captive mortgage companies of some of the large real estate brokerage chains) are typically not responsive enough to the fluid nature of a real estate purchase transaction. The result is often times delays in closing and other approval problems that are very inconvenient.

Make sure the lender has a broad offering of mortgage products that are suitable for your financial situation. At a minimum the lender should have a good selection of conventional fixed rate and adjustable rate loans (see description of Traditional Loans and No Money Down Loans from the links above). He should offer first time buyer programs such as FHA loans, VA loans and high loan-to-value (LTV) conventional loans. Ask if he is licensed to make second mortgages in the state. If you are self-employed, ask whether he can accommodate reduced documentation type loans. Be sure to discuss the type of property you are purchasing and make sure the lender is knowledgeable in that property type.

Next, make sure the lender offers high quality customer service. He should promptly return phone calls and be on time for appointments. Be sure that he is capable of completing the mortgage financing in the time you require. Ask whether his appraisers work with his company (many times it is preferable to have the property appraised by independent appraiser who has expert knowledge of the local real estate market). In your reference checking, ask if the loan officer consistently meets expected closing dates.

Make sure the loan officer clearly explains all the terms of the loans. A capable loan officer will have a spreadsheet template that outlines all the financial aspects of the purchase transaction. The spreadsheet should explicitly state all closing costs and fees. He should discuss in detail the terms of the mortgage (interest rate and whether it is fixed or variable and how it varies, the term of the mortgage, prepayment penalties exist, monthly payment, up front fees, closing costs and cash required at settlement). Select the following link to see an excellent example of a home purchase financial proforma. If the loan officer is not prepared to outline the specifics of the purchase in this manner or is unable to explain these items, you may want to make another selection.

Finally, make sure the terms quoted by the lender are competitive. It is a wise idea to call several lenders to request price quotes from each to ensure you are getting the best mortgage rate. Be careful of the "captive mortgage companies" of some of the real estate brokerage firms. Many of the real estate brokerage firms have formed mortgage companies to "try to capture extra profit margin" from your home purchase. The brokers and owners of these firms apply pressure to their real estate agents "to use the in house mortgage rep." In many cases, their interest rates and loan fees are higher than what is available on the open market.

Getting Pre-Approved for a Mortgage Loan

The first step in purchasing a house is usually requesting a mortgage pre-approval from a reputable lender. Typically the pre-approval can be requested by email (feel free to select Get Pre-Approved above) or over the phone and usually takes 30 minutes or so.

The loan officer will ask the basic information he needs to complete the pre-approval. He will likely ask for your contact information, your income, financial resources available to you for the purchase, your debt levels, your monthly payment obligations and your social security number so that he can check your credit report. He should also ask the purchase price you are contemplating and the type of property you would like to purchase. After taking the necessary information from you, the loan officer will analyze the information and determine what loan programs you would be approved for and the corresponding purchase price. At a minimum, he should give you a written approval letter on the lender's letterhead, a copy of your credit report, detailed financial information about the purchase such as loan amount, closing costs, pre-paid items, monthly payment and an estimate of the cash required at settlement. The loan officer will typically provide a copy of the approval letter to the real estate agent to confirm that you have the financial ability to complete the purchase.

Selecting the Property and Negotiating the Purchase Contract

The next step is to work with the real estate agent to find the property you would like to purchase. Once you have made a selection, the real estate agent will prepare a written offer and present it to the seller's realtor. You will work with the real estate agent to negotiate purchase terms that are acceptable to both you and the seller. When you have reached agreement, you will sign the purchase contract. At this point, you want to contact your lender to begin the loan application process.

Finalizing the Financial Aspects of the Purchase

Arrange a time to meet with the loan officer to finalize your decision regarding the financial aspects of the purchase. You will need to decide what type of mortgage to apply for and how large a downpayment you are going to make. You need to have the following information available:

• A complete copy of the purchase 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, annual property taxes, common charges and owners association dues.
• 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.

Have the loan officer explain the types of mortgage loans available to you, interest rates, fees for each loan type and the qualification requirements. 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 5.25% percent interest rate with 2 points, a 5.75% percent rate may be offered at no points. If you are a first time home buyer, the larger monthly payments on the 5.75% 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, ask the loan officer to site an interest rate index that will indicate when rates have gone up and signal when rates have declined. Have him show you were the index is published on the internet or in the news media. There is a strong financial incentive for loan officers to pass along rising rates to clients but not declining rates. Having a benchmark to measure daily interest rate changes is a very smart idea.

Completing The Loan Application

When you made your final loan selection, the lender will prepare the loan application forms for your signature. The loan officer will arrange to meet with all borrowers to discuss and sign the loan application forms. Because of all the Federal and state laws relating to fair lending practices, you will be required to sign many forms. Make sure the loan officer provides ample explanation of each form and affords you the time required to read and understand what you are signing.

The loan application will require information on the property, terms of the purchase contract and financial history of all loan applicants, including your spouse and/or other co-borrowers. Typically, the borrower is required to make lengthy disclosures to the lender about his employment and sources of income, his assets, recurring financial obligations and make available information for the lender to check his credit report. However, some loans require less documentation usually at the cost of a higher interest rate; the less information that is provided by the borrower, the higher the interest rate on the loan. Such loans are referred to as "reduced doc", "stated income loans" and "no doc" loans based on the disclosures the borrower is required to make. The loan officer should be able to explain the differences pertaining to each term. One of these type loans may apply to you if for some reason you are not able to provide the level of documentation outlined below. If you would like more information on these types loans select Get Pre-Approved above.

Below we discuss the normal disclosures required of a "full doc" loan. This standard is typical of conventional conforming mortgages and government sponsored loan programs such as FHA loans and VA loans.

Personal Information

The loan officer will want the social security numbers of you and your spouse (or other co-borrowers), date of birth, 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). If you rent, you will need the name and address of your landlord(s) for the past two years.

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. Required information includes:

• At least two years employment history with employer's name and address, your job title or position, date hired, length of time on the job, salary, bonuses, commissions and average overtime pay.
• Typically, the lender will require consecutive paycheck stubs (computer generated with year to-date totals) covering the most recent month's employment.
• Federal W-2 forms for two years (sometimes it is necessary to provide full Federal tax returns).
• Records of dividends and interest received from investments (if applicable).
• 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.

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.

Personal Assets

You will be asked to provide a detailed listing of your personal assets to be used to complete the purchase plus some level of reserves. If the assets have not been in your name for at least several months, it will be necessary to disclose the source of the funds. The lender will require past account statements to verify that the funds have been in your possession for an adequate period of time. It is usually not necessary to disclose assets that significantly exceed that required for the purchase. You will typically be asked to provide some of the following information:

• 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.

In many cases, it is possible to get downpayment assistance from a relative, a friend or a charitable organization use to make a downpayment. Gifts must be verified in writing. The lender will require the donor to sign a letter indicating that the funds do not need to be repaid. For conventional loans, 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. In some cases, it is possible for a home buyer to purchase a home with no downpayment required and with the seller paying the buyer's closing costs and pre-paid items. In these cases, the buyer can purchase a home with no money out of pocket.

Personal Indebtedness

The lender will access a list of all your recurring financial obligations from your credit report. Debts such as automobile loans, credit cards balances and other retail store accounts, finance company, bank and credit union loans and existing mortgages and 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 on any new obligation not shown on your credit report.

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.

Additional Information

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.

After The Loan Application - What Next?

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. The loan officer or loan processor orders an appraisal of the property. 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. It typically takes two weeks from the time the appraisal is received to complete the loan underwriting process.

Along with the Good Faith Estimate, 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 commitment letter. Normally, a mortgage commitment letter is required to be delivered to the property seller within 30 days of signing the purchase contract. The commitment may contain conditions you need to satisfy, so you should read it carefully. After the commitment letter is received, the your attorney or escrow company will order the title work on the property. This usually takes approximately 2 weeks to complete. When the title work is complete, the attorney will forward it to the lender for their review. At that point, a closing is scheduled. On the closing day, the buyer and the seller meet at the attorney's office. The lender arranges to have a check or funds wire delivered to the closing agent. Title is signed over to the purchaser and funds are transferred to the seller. At this point you are the owner of your new home.