Buyer’s Guide to Homeownership
A home loan may seem complicated, but it doesn’t have to be. The following overview of the mortgage process will review the process, go over the required paperwork, and help you learn some of the terminology involved. You’ll see that, with a little preparation, your mortgage journey will be smooth and easier than expected.
Getting Started With a Pre-Approval
The mortgage application begins with letting your lender know that you’re ready to start the pre-approval process. You’ll want to be credit approved for a mortgage before you begin shopping for a home. A pre-approval will give you the peace of mind that comes with knowing that you qualify for a mortgage large enough to finance your home of choice. You will also become familiar with monthly payments and other financial requirements. Most importantly, a pre-approval will give you an edge with sellers when you’re ready to make an offer.
When your application for mortgage credit has been approved, you can begin to look seriously at homes with your Realtor. When you find a home that’s right for you and you’re ready to write a contract, your lender will send a pre-approval letter to your Realtor to be presented with your purchase offer. A strong pre-approval letter ensures the seller that you are financially prepared to buy their home and may give you an advantage over other potential buyers.
Applying for Your Loan
Your loan application may be completed in person, over the phone, or even online. For a first-time purchaser, an in-person application may be preferable. In addition to answering your questions, the lender can explain each document that you’ll be asked to sign.
Your lender will ask for documentation that will verify your ability to repay the loan. You will be asked to provide information that will support your income, assets, and credit worthiness. You will likely be asked to provide the following:
- Residence address(es) for the last 2 years
- Copy of driver’s license or passport
- Employment history for the last 2 years, including employment dates and name, address and phone number of employer
- Most recent month’s pay stubs
- Last 2 years’ W-2s
- For self-employed or commission income, last 2 years’ complete 1040 personal tax returns with corporate returns, if applicable
- Award letters for pension, social security or other incomes, if applicable
- Most recent, complete bank statements for all asset accounts to include checking, savings, investments and retirement accounts. The statement must contain at least 30 days history of activity, your name, the account number, and the logo of the financial institution. Please be sure to include all pages.
- Divorce decree and property settlement, if applicable
- Permanent Residence Alien card, if applicable
- Signed purchase agreement and property listing, if applicable
Keep in mind that Loan Officers ask questions because they want to help you get approved for a mortgage. Fully disclosing everything about your finances is helpful in getting your loan approved in a timely manner - incomplete or inaccurate information can significantly slow the process.
Within three days of submitting a completed application for your loan, you’ll receive the following:
Worksheet of Estimated Costs: Whether you’re applying for Pre-Approval or for financing on a specific property, you’ll receive a worksheet detailing your estimated monthly payment and an estimate of the total cost of the purchase transaction. This worksheet will show the amount of your mortgage and the total amount of funds you’ll need to purchase your home. Funds required at settlement will include the down payment and all required costs paid to the closing company, local jurisdictions and the lender. It will also show prepaid interest and funds needed to establish your escrow account for property taxes and insurance. Your escrow account holds funds that you pay each month as part of your mortgage payment to pay your taxes and insurance as they come due.
Your monthly payment will likely consist of:
Interest owed to the lender from the closing date through the end of the month is prepaid at the time of settlement. In most cases, you’ll be asked to pay for the appraisal for your new home and your credit report at the time of application.
Truth-in-Lending Statement: This statement provides information about the costs of your loan and discloses the annual percentage rate (APR) at which your loan will be financed. Your APR is almost always higher than your actual interest rate as the calculation takes into account certain financing costs paid at or before settlement. This document also shows if there is a prepayment penalty for paying your loan off early. Most loans do not have a pre-payment penalty, but it’s important that you have this in writing.
Good Faith Estimate: The Good Faith Estimate (GFE) is a document you receive only after you have a ratified contract or are refinancing your home. Like the worksheet, this document will list fees associated with the financing and closing. However, the GFE goes a step further by guaranteeing some of the estimates. The estimates on your GFE will be detailed side-by-side with the final fees on your closing statement.
Your loan officer will submit your completed application, including your documentation and credit report, is turned over to a loan processor. The processor checks the file for completeness and may contact you regarding any missing information. Be sure to respond quickly to requests from the processor to avoid delays in loan approval. The processor will contact your employers (to verify employment history) and your landlords (to verify rent payment history). When verifications are received and you have forwarded any missing documentation, the processor prepares your file for underwriting.
Once you have finalized your purchase contract with the seller, the processor will order the appraisal. The appraisal is an independent review of the property’s value. The appraiser analyzes recent sales of comparable homes to determine the current market value. The lender’s underwriter will review and approve the accuracy of the appraisal.
Locking in Your Interest Rate: When your contract is finalized, you will be eligible to lock in the terms of your loan. You will be given the option to “float” your loan terms or lock them in. Locking in your loan guarantees that the interest rate and associated closing costs won’t change prior to closing. A lock-in is guaranteed for a specific number of days. If your closing is delayed and the guarantee needs to be extended, you may be responsible for additional costs related to extending your lock. If you choose to “float,” the interest rate and associated closing costs may vary up or down until you choose to lock the terms. Interest rates change often and without notice, so “floating” requires the understanding that your monthly payments and closing costs can become more expensive overnight. You will be required to lock your interest rate prior to your closing date.
In the lender’s Underwriting Department, your complete file will be reviewed to determine if you qualify for the loan. The underwriter is specifically looking to see that your application meets these four basic criteria:
Your Ability to Repay the Loan: Is your income adequate to make the new mortgage payment and your other monthly expenses? Is your work history stable?
Your Willingness to Pay the Loan: Your payment history and credit score are indicators to lender of your likelihood to make payments in the future. Do you have a history of meeting your financial obligations?
The Source of Funds: The underwriter must verify that you have sufficient funds for your down payment and closing costs. Gift funds must be properly documented, as well as unidentified deposits to your account.
The New House Value: In addition to credit approval, the underwriter must also “underwrite” the property that will be the security for the mortgage. Does the appraisal properly support the value of the property? Is it an acceptable type of property, and does it meet building code and zoning restrictions?
Typically the approval process will take one to four weeks. Lenders that complete the processing and underwriting in their local office are often able to complete the process in a matter of days. It is a good idea to discuss these details with your lender upfront.
After you have finalized your contract with a seller, you will agree to a settlement date. Your loan processor and underwriter will work to complete your file in a timely manner that takes into account your settlement date. After the initial approval, you will likely be asked to submit additional paperwork or explanations. After all of the documentation is pulled together, the underwriter will give their final approval and your file will be moved into the Closing Department.
Hazard Insurance: Your lender will require that your home is properly insured. For this reason and your own protection, you will need to purchase hazard insurance, also known as homeowners’ insurance. You may choose to insure your home through the company of your choice. You will often receive a discounted premium when your home and cars are insured with the same company. After you have selected your company, your loan processor and insurance company will exchange information to satisfy the lender and insurance company requirements. The lender will escrow the monthly payments for hazard insurance.
Preparing for Closing
Prior to your settlement, you’ll receive a copy of the HUD-1 Settlement Statement. This document will review all monies collected from the buyer and seller. It will show you the final amount of your closing costs and the actual cash due at closing. Review it carefully before settlement, so you have time to discuss any questions with your lender or Realtor before you close.
After you review the HUD-1 closing statement, you will need to prepare a cashier’s check with your bank. Be sure to allow enough time to clear deposits and prepare the check. If you prefer, you may have your bank wire funds directly to the settlement office.
In the days prior to closing, you and your realtor will revisit the property for a “final walk through.” At this time, you will inspect the property to ensure that any applicable repairs required after your home inspection have been completed. You’ll also make sure that the condition of the property has not materially changed since the sales agreement was signed.
Closing the Loan
It all comes together at closing. You, your Realtor, the seller, their agent and a settlement agent or attorney may be present for the signing of the paperwork. As the purchaser, you will be signing mortgage documents as well as documents transferring ownership of the property from the seller to you. Your realtor and the settlement agent are there to assist you, so feel free to ask questions as they arise. When the document signing is complete, you’ll give your cashier’s check to the settlement agent. Settlement concludes with the presentation of the keys to your new home!
When you are ready to get started with your mortgage process, or if you have any questions, contact a home loan specialist at Presidential Mortgage Group today!