The Loan Process
Because there are many types of loans available, educating yourself about mortgages and financing a home is a good place to begin the loan process. It's also important to understand how much you can afford to spend on a home and on monthly payments and other housing costs- - yes, there's more to owning a home that just the mortgage payment. Along with your mortgage payment, don't forget related insurance, taxes, homeowner association dues and any other costs rolled into the mortgage payment.
Types of Lenders
When you are ready to shop for a loan, there are two basic funding sources -- direct lenders and mortgage brokers.
Direct lenders have money to lend. They make the final decision on your application. Brokers are intermediaries who, like you, have many lenders from which to choose. Lenders have a limited number of in-house loans available. Brokers can shop many lenders for each lender's store of loans. If you have special financing needs and can't find a lender to suit them, an experienced broker may be able to ferret out the loan you need. Mortgage brokers, however, are paid with a slice of the amount you borrow, some more than others, some less. Internet brokers today perhaps receive the smallest cut, sometimes none at all, and can prove to be a real bargain.
Along with shopping the source, you'll also have to shop loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal and a host of others.
Applying for a Loan
To apply for a loan you will need to gather documents necessary to validate information included on the loan application. The application will ask for information about your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses and others). Additional documentation includes paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation.
Check Your Credit
In addition to the checking your credit score, lenders review your credit history to check for delinquencies and liens, among other factors.
Make sure you review your credit reports before applying. If you find errors, dispute them. But keep in mind that disputes filed right before the mortgage application process will not make a good impression with lenders. Most lenders require an undisputed record of credit, and since it takes at least 60 days for credit bureaus to respond to disputes, it's best to check up on your credit well in advance.
Lenders use a debt-to-income ratio (DTI) to judge your capacity to repay the loan. Your DTI ratio is the percentage of your total monthly obligations, such as existing car loans and credit cards, including the home loan you are applying for, out of your total income. The standard DTI ratio requirement today is 38%; however, lenders will accept solid borrowers who are approved, with a DTI up to 41%. Most lenders are looking for a DTI that is lower than 45%. Factor in hard costs that include your home's appraisal, the fees to buy copies of your credit report, and home inspection fees. This will also include fees paid to the government for the transfer of the home's title, known as title costs.
Also, expect to pay processing fees, which are the cost for a loan processor to order the title, insurance, the appraisal, and put it all in order for the lender. This fee should not exceed $400.
Real costs also include the first year of homeowner's insurance and taxes on the property, pro-rated for the amount of time you will own it for that year. You will also have to pay some interest on the home upfront. If you close on March 25, for example, you would be charged six days of "prepaid interest" for the remainder of that month.
Commission costs, on the other hand, are negotiable. Commonly, lenders earn an origination fee (one point) and one additional point. (One point equals 1% of the loan amount.) It is not unusual for lenders can earn up to three or four points more to offer borrowers a discount on the interest rate.
Don't forget the down payment. Depending on your credit, income and the cost of the home, you will generally need a down payment of 10% to 20% of the home's value. Keep in mind that when you apply for a mortgage, lenders will want to see that you also have three months of mortgage payments in savings, or "cash reserves." Finally, most lenders will want to know where your down payment is coming from, limiting how much can come as gifts from family and friends.
About the Loan Process
Pre-qualification occurs before the loan process actually begins, and is usually the first step after initial contact is made. The lender gathers information about the income and debts of the borrower and makes a financial determination about how much house the borrower may be able to afford. Different loan programs may lead to different values, depending on whether you are qualified for them, so be sure to get a pre-qualification for each type of program you are suited for.
The application is actually the beginning of the loan process and usually occurs between days one and five of the loan. The buyer, now referred to as a "borrower", completes a mortgage application with the loan officer and supplies all of the required documentation for processing. Various fees and down payments are discussed at this time and the borrower will receive a Loan Estimate (LE) and a Truth-In-Lending statement (TIL) within three days that itemizes the rates and associated costs for obtaining the loan.
Processing occurs between days 5 and 20 of the loan. The "processor" reviews the credit reports and verifies the borrower's debts and payment histories as the VODs and VOEs are returned. If there are unacceptable late payments, collections for judgment, etc., a written explanation is required from the borrower. The processor also reviews the appraisal and survey and checks for property issues that may require further discernment. The processor's job is to put together an entire package that may be underwritten by the lender.
Lender underwriting occurs between days 21 and 30 or sooner. The underwriter is responsible for determining whether the combined package passed over by the processor is deemed as an acceptable loan. If more information is needed, the loan is put into "suspense" and the borrower is contacted to supply more documentation.
Mortgage insurance underwriting occurs when the borrower has less than 20% of the loan amount to put towards a down payment. At this time, the loan is submitted to a private mortgage guaranty insurer, who provides extra insurance to the lender in case of default. As above, if more information is needed the loan goes into suspense. Otherwise it is usually returned back to the mortgage company within 48 hours.
Pre-Closing occurs between days 25 and 30. During this time the title insurance is ordered, all approval contingencies, if any, are met, and a closing time is scheduled for the loan.
Closing usually occurs between days 25 and 45 of the loan (depending upon the designated length of your escrow). At the closing, the lender "funds" the loan with a cashier's check, draft or wire to the selling party in exchange for the title to the property. This is the point at which the borrower finishes the loan process and actually buys the house