The Loan Process

Buying or refinancing a home may be the most exciting, confusing and stressful financial transaction you ever undertake. Even if you have done it several times you can still find the process complicated and intimidating, particularly when it comes to getting a mortgage loan. Countless loan documents, unfamiliar terminology and uncertainty serve to temper the joy of buying a new home.

As soon as the sales contract is signed, obtaining the financing for the purchase becomes paramount for all but a very few buyers. If you understand the steps required to qualify for a mortgage loan 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.

Our application process is not as complicated as other lenders make it out to be. With 'Loan Prospector ©' and 'Desktop Underwriting ©', an application is all we usually need to begin the process. These new computerized underwriting programs review your information electronically, allowing for answers in 24 hours or less. Once we have your approval, we will tell you what documents that you have to provide. You may be surprised at how little documentation may be required.

Typical requirements are:

1. If you are salaried: provide two years W-2 and one month of current paystubs OR if you are self-employed: provide two years tax returns and a YTD profit and loss statement.
2. If you wish to speed up the approval process, please also provide three months bank statements for each bank, stock and mutual fund account.  For MHFA, you'll need the past 3-years of tax returns too.
3. Provide recent copies of any stock brokerage or IRA/401K accounts that you may have.
4. Provide copy of divorce decree and bankruptcy papers (if applicable).

Click here for a Full List of Items Possibly Needed for Complete Approval

The Loan Interview

We will explain the types of mortgage loans available to you, the interest rates and fees for each type and the qualification requirements, complete the required application and disclosure forms, and collected the required documentation.

Completing The Loan Application Form

The loan application form asks for information on the property you are buying, terms of the purchase contract and the employment and financial history of all loan applicants, including your spouse and/or other co-borrowers. The lender will verify this information, so it is very important to make sure that it is complete and accurate.

You can complete the loan application process much more easily and accurately if you prepare for it ahead of time. A great deal of detail will be asked about your personal finances, including bank account numbers and balances, current loan amounts and payments, and credit card account numbers. You will want to be thorough and precise in your answers, so it will be to your benefit to assemble this kind of information before the meeting with the loan officer. The following is a summary of the major kinds of information required on the loan application, the documents that may be needed and the questions that you should be prepared to answer.

Details of Purchase Contract and the Property

Because the property is security for the loan, you will have to have an appraisal made of the property, and you need to have the following information available:

• A complete copy of the sales contract, including any addendum's, 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 and its full legal description.
• 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.

All of this information should be in the purchase contract.

Personal Information

Your loan officer will want the social security numbers of you and your spouse (or other co-borrowers), age, 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 two FULL 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). You will need the name and address of your landlord(s) or mortgage lender(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 and should be your primary concern. Required information includes:

• At least two years employment history with employer's name and address, your job title or position, length of time on the job, salary, bonuses, commissions and average overtime pay. Recent paycheck stubs and Federal W-2 forms for the past two years.
• 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.
• A written explanation if there are gaps in your employment record, because of circumstances such as illness or layoffs, or for any other reason.

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. If you are using child support for income, you will be required to PROVE that you are actually receiving it.

Personal Assets

A detailed listing of your personal assets is required on the loan application form. You will need to have the following information available to complete the form:

• 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 may be required for investment properties).
• Value of other personal property such as furniture.

As with the Verification of Employment, the loan officer may have you sign Verifications of Deposit (VOD) for each of the institutions (or a general authorization) where you have savings or checking accounts. Differences between the account balances reported by the institution and the balance you give for the loan application have to be reconciled, so be sure you have your correct current balances.

The lender will look for the source of funds with which you will make the down payment and pay closing costs and fees. Gifts from a relative, church, municipality or non-profit organization may sometimes be used, but must usually be verified in writing. With most programs, 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. FHA loans now require that we verify the donor actually had the money to give.

We also have newer 3% percent down programs. One requires the down payment money to be verified as your money. One allows for the 3% down payment to come from cash, secured loan; such as 401(k), CD's, cash value of life insurance, or other real estate, gift from a relative, non-profit organization, or the borrowers employer. Another requires you provide at least $500 of your own money, the rest can be a gift from a relative, non-profit organization.

Personal Indebtedness

You will be asked to itemize all of your current bills, loans and other debts, including current balances and monthly payments. Debts include automobile loans, credit cards such as Visa, MasterCard and other retail store accounts, finance company, bank and credit union loans and existing mortgages, including 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.

The information you provide on the loan application will later be verified by a credit report. Like employment and deposit information, differences between your figures and those on the credit report will raise questions and may delay the approval of your loan. It is to your advantage to take time to get your data right prior to filling out the loan application.

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 'best rate' loan financing you need to complete the purchase. Bruised credit loans are always an alternative. While they do carry higher interest rates, we can usually get everyone a mortgage loan. Ask your loan officer for details.

If you have been through bankruptcy or foreclosure proceedings within the past seven years, be prepared to give full details and full 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 form 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 on; 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 form 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 voluntary on your part and has no effect on your loan application. The lender, however, is required by federal law to request the information.

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?

Loan processors send out the Verifications of Employment and Deposit and order the credit report, property appraisal and other documents. The time it takes to receive these documents affects the length of time required for approval of the loan. If you are transferring from out of the local community, it may take longer to receive the credit and employment information.

If you apply by phone, mail, or Internet - within three days you will also receive a Truth-in-Lending Disclosure statement and a Good Faith Estimate. These 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 a commitment letter which sets out the terms of the loan and the length of time for which those terms are offered. If the loan does not close within the specified commitment period, the terms are subject to change. You usually must accept the commitment by returning a signed copy to the lender within five to ten days and may have to pay appraisal and credit report fees at this time. The commitment may contain conditions that you will still have to satisfy, so you should read it carefully.

In cases where closing is scheduled soon after approval, the lender may give you verbal approval instead of a commitment letter. This is not unusual, but make sure you understand the terms of the approval.

Once the commitment letter or approval has been received, you are assured the financing you need to complete the purchase of your home and you need to turn your attention to completing the details required for settlement.

Reducing The Anxiety of Waiting

For many home buyers, the period of time between the submission of the loan application and receipt of the commitment letter is one of uncertainty and concern. Requests for additional information, unexpected delays and lack of communication all serve to increase the tension. There are a number of things that both you and the lender can do to reduce the stress.

Keep in mind that the lender wants to make the loan. Loan underwriters are looking for ways to approve loans, not reject them. If you have come to the interview with the loan officer fully prepared and have provided good documentation, you have done a great deal to assure prompt processing of your application and approval of your loan.

You and the lender need to make sure that lines of communication are kept open. Your contact person may be the loan officer, but often it might be someone in the lender's loan processing department who can tell you the status of your application. Remember, however, that it may take several weeks to process the application and frequent inquiries from you prior to that time will not speed things up.

You should be accessible if the lender needs additional information or documents during processing. If you are from out of town, use your real estate agent as a contact if necessary. Quick response to lender requests helps keep the process on schedule. In order to protect both you and the lender, mortgage loans require much more paperwork and legal documentation than an automobile or other installment loan, and lenders do not ask for more than is absolutely necessary.

Obtaining a mortgage loan need not be an ordeal that dampens the thrill of acquiring a new home. If you understand the lending process and are prepared to do your part, it simply becomes a key step in owning a home.

Closing

Finally, the day has come! Click here for 10 Tips to a Smooth Closing.