Home Loan Approvals
Before you apply for a loan, you will need the following:
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, your real estate sales professional has 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. 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 Program(SM), FHA and VA 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 prequalification 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 Program(SM) 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 — Mortgage interest rates may increase between the day you apply for your mortgage and when you actually close on your home. That’s why many mortgage lenders offer loan applicants a rate lock-in, which guarantees a specified interest rate for a set period of time. If you opt for a lock-in, make sure the expected closing date is well within the lock-in period. 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.
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 combines the interest you will pay with certain closing costs, any points, and other finance charges and divides the total amount by the term of the loan. The result is your “effective rate of interest.” 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