The Mortgage Application Process

The process of submitting an application for and acquiring a conventional mortgage generally take only a few weeks.  Whereas, conventional loans issued to borrowers with severe credit issues, and Government loans , can take several months to process.  Once a lender has been chosen, the course of action should include the subsequent steps:

1.    Get preapproved or prequalified for a loan.

2.    Locate a home that you would like to purchase.

3.    Evaluate loans with your lender or mortgage broker.

4.    Fill out an application for the loan that would like.

5.    Get a good-faith estimation from your lender.

6.    Get approved (or rejected) for the loan.

7.    Supply evidence of mortgage and homeowner’s insurance.

8.    Go to the home sale closing  to finalize the transaction.

Get Preapproved or Prequalified

Once a lender has been chosen along with the size and type of loan, the next action is to get preapproved or prequalified.

• Getting preapproved: In order to get you preapproved for a mortgage loan, the lender will conduct a complete analysis of your  financial documentation.  You will probably need to provide copies of bank account statements, pay stubs, and tax returns.  Many lenders charge a fee of approximately $50 so as to pre-approve you for a mortgage loan.
• Getting prequalified: In order to get prequalified for a mortgage. you need to supply the lender with factual data relating to your assets, income, and debts.  The lender will then create an estimation of the size mortgage that you will probably be able to get.  When you get the estimate, you are considered prequalified for a loan.  This a much more casual variety of preapproval.

Preapproval and prequalification are indicators that you will most likely qualify for a mortgage of a specific type and size.  In reality, neither of these is a guarantee that you will be approved once you actually submit an application for a loan.  Nonetheless, it is always useful to get preapproved, not only prequalified, for a mortgage loan.

Locate a Home that You Would Like to Purchase

After you have been preapproved, it’s time to begin shopping for a home.  As you are shopping, you should be aware of the specific size of the loan for which you have been preapproved.  This does not necessarily mean that you must unconditionally stay within the given price range, however, selecting a dramatically higher priced home will force you to start the entire process, of preapproval and prequalification, over with your lender.  Once you have found a home, you will:

1.    Make a first offer to the seller: Your first offer should be approximately 10-15% lower than the total amount that you have been preapproved for plus the amount you expect to pay as the down payment. This will leave you with some room to deal if the seller demands a higher price.

2.    Negotiate a final deal with the seller: When the seller receives your first offer, he or she will more than likely to come back with a somewhat higher counteroffer.  You will then need to negotiate other terms of the transaction, like if the seller will pay for upgrades or repairs to the property.

3.    Sign a purchase agreement: A purchase agreement is a contract that makes official  all terms of the deal that you and the seller have agreed on.  Typically the purchase agreement is composed by the buyer’s real estate agent.

Once the purchase agreement is signed, the lender and real estate agents will converse to set the closing date.  On the closing date, the sale of the property will close or become finalized, and your lender will transfer the finances over to the seller.

Evaluate Mortgage Loans

Once a purchase agreement has been signed, you will need to set an appointment to meet with your lender to discuss which particular loans that you should apply for.  Request that your lender present you with a minimum of 3-5 loan choices that are of the type, term and amount that you desire.  During the meeting, request that the lender assist you in comparing the variety of loans.  Specifically, focus on the following three features during your comparison.

APR

Ignore all interest rates quoted by your lender except for the annual percentage rate (APR) of each loan.  The APR includes all of the loan’s expenses in a single rate.  If you are measuring two 30-year loans against each other with APRs of 6.9% and 7.1%, the loan with the lesser APR will be the least expensive.

Terms

A loan’s terms are the rules and features associated with the loan.  (A loan’s terms are not the same as the loan’s term, do not confuse the two.) These terms would include things like prepayment penalties (please see below for more details), and for ARMs, the rate of occurrence of adjustment.

There are some loans that contain a prepayment penalty that specifically identify a period of time in which the borrower is not allowed to pay down the principal of the loan sooner than by way of the regular amortization of the loan.  This limiting period typically only lasts for the first couple of months of the loan, however, there are some loans that contain  prepayment penalties for the entire lifetime of the loan.  Never get a loan that has prepayment penalties of any variety.  In order to be completely confident that there is not a prepayment penalty contained in your loan, carefully read all of the loan documents prior to signing- dishonest lenders may attempt to introduce a prepayment penalty clause at the very last minute.  Do not be swindled into agreeing to it.

Closing Costs

Closing costs is a terms that refers to all costs associated with granting and processing a loan.  Closing costs are typically made up of appraisal fees, origination fees, and any points that can be paid on the loan (this is explained more fully in step 5).  The closing costs usually account for 2-5% of the loan’s principal and are generally tax deductible.  Besides the fees that the lender will charge for processing the loan application, you should expect to pay these additional closing costs:

• Credit report fee: This is a fee of approximately $40-60 charged by the lender to order and analyze your credit report.
• Appraisal fee: This fee is to cover the cost of the appraisal commissioned by the lender to determine the value of your property. The cost of the appraisal is primarily dependent on the size of the home.  The price for an appraisal is usually in the $150-500 range, depending on the size and market value of the property.  For further information on the appraisal, please refer to step 6.
• Title Search Fee: The word title refers to formal ownership of a piece of property, like a car or a home. Lenders carry out a title search prior to approving a loan.  They do this to confirm that the alleged property owner really does own that property, as well as to guarantee that there are no unsettled liens or other judgments relating to the property that could affect the transaction or price of the property.
• Title Insurance fee: Lenders acquire title insurance policies in order to protect themselves from any issues relating to the property’s title that were not detected during the title search.  This fee differs widely from one state to another – typically in the range of $100 to 1,000 or more.

During this point of the approval process, lenders will usually only provide very general estimations of closing costs.  You will be able to get a more precise closing cost estimation  in step 5.

Apply for the Loan

When you have decided on the particular loan you want to apply for, you will be required to complete a loan application and submit any documentation required by the lender.

• Loan application: The Uniform Residential Loan Application, also known as Form 1003, is a form, five pages in length, that the U.S. government requires to have completed by all loan applicants.  Completion of this form entails giving detailed information relating to the kind of loan that you are applying for, as well as the property you are looking to purchase, and particulars about your assets, income, and current debts.
• Documentation: The variety of documents needed at this stage differ between lenders.  It is most wise to have all of the documentation listed in step  4 of “Initial Preparation for a Mortgage” from earlier in the guide.  You will likely also be asked to sign a document allowing the lender your consent to contact previous landlords (if there are any) and employers,  as well as to acquire your credit reports.  This is all to verify the information contained in your documentation.

Get a Good-Faith Estimation

Your lender is legally required to provide a good-faith estimate (GFE) to you within three days of you filing for a loan.  The GFE presents and estimation of the closing costs associated with your loan, and denotes the interest rate that the lender is prepared to offer to you. Because the GFE is only an approximation, you should anticipate that your actual final closing cost will differ from the quoted numbers in the GFE.  The interest rate will also probably change, unless you pay additional to lock it in place.

Should You Lock Your Interest Rate?

An Interest rate lock will protect you in the event that the interest rates change between the time when you receive the GFE and when you actually get your loan.  The majority of lender will lock the GFE-quoted rate for free for  a period of 30 days, including adjusting your rate down in the event that the interest rates decrease.  For a fee equal to between 1/8 and 1/4 of a point (1 point = 1% of the principal), the lender will then guarantee your interest rate for up to 60 days and will modify the rate down if interest rates decrease.  It is usually a good idea to pay to lock in your rate if:

• You don’t anticipate being able to close your loan within the free 30 day window
• You are applying for a loan at a time of unstable interest rates, particularly if interest rates are continuously rising

Locking programs differ between lenders, so inquire directly with your lender if you are interested in locking your interest rate in place.

Should You Pay Points?

Lenders will frequently consent to lower the interest rate quoted in the GFE in trade for a cash payment up-front.  Every point that you pay is equal to 1% of your principal and will reduce your interest rate by a specific set amount, usually a portion of 1%.  As an example, paying two points on a $100,000, 30-year fixed-rate mortgage and  a 6%APR would cost you $2,000 and possibly lower your APR to 5.5%  There is a straightforward calculation that can aid you in your decision whether or not to pay points:

1. Determine the difference in your monthly payments that would result from paying points.  If we use the numbers from the previous example, paying those two points would reduce the monthly payment from $599.55 to $567.79, a difference of $31.67 per month.

2. Divide the amount of points paid ($2,000) by the monthly savings ($31.76).  The resulting number will represent the number of months it would take you to “break even” on the cost of your points.  From the previous example it would take 2,000 ÷ 31.76, or approximately 63 months.

3. It is important to contemplate how long you plan to reside at the property and/or the length of time you plan to keep this loan.  If you are planning to either sell the property or refinance the loan (to get a lower APR) prior to the time it would take you to break even on your points expenditure (63 month was the example), It would be very unwise to pay points.

Get Approved for Your Loan

Even now, it is not 100% certain that you will be approved for your loan.  The finishing preapproval stage entails handing off your loan to a loan processor (generally an employee of your lender) who will go over all of your documents to verify data in your loan application.  You should count on being contacted by the loan processor during this procedure if he or she runs into any difficulty confirming your records- If you do receive a phone call, it is necessary to reply without delay, so as to keep the process moving forward.

The Lender’s Appraisal

During the time that the loan processor is finishing work on your loan, the lender will schedule an outside appraisal of you prospective property.  The reason for the appraisal is to verify that the property is worth a minimum of the principal of the loan.  If the appraiser provides a report stating that the property is not worth at least the principal amount of the loan, the lender is very unlikely to approve the loan.  It is typical for a lender to include the appraisal fee in the loan’s closing costs, although there are a few lenders that will entirely cover the appraisal cost themselves.  In the case that you pay for the appraisal, you are permitted to receive a copy of the appraisal report.

The Lender’s Approval

Presuming there are no issues with either the appraisal or the investigation carried out by the loan officer, the lender will send out a :

• Letter of Commitment: An official letter from your lender explaining that your loan has been formally approved
• Truth-in-Lending disclosure Statement (TIL): A form that records the entire estimated expenses, major terms of your loan, and the amounts associated with your monthly payments.

Examine this information very closely.  If you discover any troublesome disagreement with loan terms or cost estimations that you have received earlier, make sure to discuss the discrepancies with your lender immediately.

If the Lender Rejects Your Loan Application:

In the event that the application for your loan is rejected, you have a right to know the explicit reasons why you application was rejected.  The most frequent reasons for your application to be rejected are that the appraiser’s determination of the value of the property is less than the principal amount of the loan, you may have failed to provide adequate information, or new problems are discovered with your application that were previously missed, for instance, undisclosed income- or credit-related  problems. When you are aware of the reasons why your loan was rejected, you can ask you lender to propose other alternatives. Dependant on the precise reasons for you rejection, there may be other types of loans  for which you qualify or, perhaps, a loan with a smaller principal.

Seller Financing

If you have been rejected by lenders on more than one occasion and think that you are out of options, you may want to consider looking at properties that offer seller financing.  Seller financing is a different type of home loan, where the seller offers the buyer a direct loan to finance the purchase of the property.  The buyer will then pay the seller interest on the direct loan.  This is done to avoid the conventional loan approval and payment processes all together.  Seller financing has some advantage over standard forms of financing- the approval process is far more lax, also many sellers are willing to excuse credit issues and other problems that lender could not disregard.

Supply Evidence of Insurance

Once your loan has been approved, the last stage prior to receiving the loan and closing on your property is to supply your lender with evidence that you have acquired homeowner’s insurance.  Homeowner’s insurance is to cover losses pertaining to property that come about as a result of a disastrous incident, like a tornado or fire.  Generally, mortgage lenders demand that you procure enough homeowner’s insurance to cover the total replacement value of the property- the amount required to entirely replace the home in the event that it was completely demolished.  The cost of homeowner’s insurance is dependent on the location and value of the property- the majority of insurance policies cost a minimum of several hundred dollars annually.  Two of the most common homeowner’s insurance providers are:

• State Farm: www.StateFarm.com
• Allstate: www.Allstate.com

Once you have procured an insurance policy, ask the insurer to fax over a proof of insurance form to your lender to verify that you have a standing  homeowner’s insurance policy.

Private Mortgage Insurance (PMI)

If your lender requires you to obtain PMI, it will be necessary for you provide proof of your PMI policy before the lender will be willing to supply you with a loan.  Request that either your lender or homeowner’s insurance provider assist you in contacting PMI providers.  The price of PMIs can differ based on a number of factors, the amount typically ranges from about 0.5-1% of the principal (spanning the entire lifetime of the loan, because PMIs are paid in addition to homeowner’s insurance and monthly mortgage payments)

The law requires that homeowners are allowed to cancel their private mortgage insurance once more than 20% of the principal has been paid off of the property’s original purchase price (or the appraised value of the property at the time that you acquired the loan, whichever is less).

Go to the Home Sale Closing

The closing is a conference that completes your real estate deal.  This is the point when money transfers from you (and your lender) over to the seller, the seller will provide the keys for the property, and you will become the new owner.  An agent from your lender will attend the conference to present the seller with a loan check .  The loan check is to cover the remaining amount of the of the property’s purchase price minus your down payment.  It is common that the loan “check” be deposited electronically at the point of closing.

It is also during the closing that you need to sign an assortment of paperwork to make the reassignment of property (and the loan) complete.  Included in the paperwork will be the mortgage contract, which secures the loan to the new real estate property, as well as other documentation, like the HUD-1 form,  that clearly identifies the loan’s closing costs.  Make sure that you read all of these document thoroughly to ensure that none of the major terms or fees of the loan have changed dramatically.