This section explains the information you will need to
fill out a loan application,
the various decisions you will need to make when you
apply for a loan, and the information your lender is
required by law to give you at the time of your loan
application.
Before completing a mortgage loan application, home
buyers typically have made an offer on a house, decided
what type of mortgage they wish to get, and selected a
lender with whom they wish to do business.
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,
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.
The Mortgage Loan
Interview Application Checklist and the Special
Situation Application Checklist cover most of
the types of information you and any co-borrower will
need to supply. 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 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.
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