|
Steps to Take
Before You Apply for a Loan
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 pre-qualification 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.
Application
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.
|
