The Guide to Homeownership
A home loan may seem complicated, but it does not have to be. The following overview of the mortgage process will review the procedures, 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-Qualification
The mortgage application begins with letting your lender know that you are ready to start the pre-qualification process. You’ll want to be credit approved for a mortgage before you begin shopping for a home. A pre-qualificationl 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-qualification 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-qualification letter to your realtor to be presented with your purchase offer. A strong pre-qualification 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 (with landlord contact information, if applicable)
- 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 or 1099s
- 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 income, if applicable
- Most recent bank statements, complete with all numbered pages, for all asset accounts to include checking, savings, investments and retirement accounts. The statement(s) must contain at least 60 days history of activity, your name, the account number, the account number and the logo of the financial institution. If printed online, please select "Statement" format.
- Divorce decree and property settlement, if applicable
- Permanent Resident Alien card, if applicable
- Signed purchase agreement, when available
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 upfront is helpful in getting your loan approved in a timely manner. Incomplete or inaccurate information may significantly slow the process and may result in a request for additional documentation or Letters of Explanation.
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-qualification 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. In addition to your down payment, funds required at settlement will include costs paid to the closing company, local jurisdictions and the lender. It will also show prepaid interest (interest owed from the closing date through the end of the month) 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. The mortgage company uses these funds to pay your taxes and insurance as they come due.
Your monthly payment will likely consist of:
Collectively, these four parts of your mortgage payment are often referred to as PITI.
If you are purchasing a property with a Homeowner’s Association (HOA) or Condo Owner’s Association, the HOA or Condo Fee will be paid directly to the association. However, it will show as part of the monthly housing expense and calculated in the debt ratios used in approving you for the mortgage.
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 your application for a mortgage has been approved, you will start working with your realtor to find a home. When you and a seller agree to the terms of your purchasing the seller’s home, all parties involved will sign the purchase agreement, and this becomes a ratified contract. You or your realtor will forward a copy of the ratified contract to your lender so your loan officer can prepare documents specific to your home purchase.
Within three days of receiving your ratified contract, your loan officer will provide the following:
Loan Estimate (LE): The Loan Estimate is an important 3-page disclosure you receive after you have a ratified contract. It replaces previous documents known as the Good Faith Estimate and Truth-in-Lending Statement. The Loan Estimate will be based on the exact terms of your contract and will show whether or not you have chosen to lock your interest rate. Page 1 wlll show the terms of your loan as well as your projected monthly payment. Page 2 will show your Closing Costs, Prepaids, and Estimated Cash to Close. Page 3 of the Loan Estimate shows the Annual Percentage Rate (APR) which is a measure of your costs over the life of the loan. Although expressed as a rate, the APR is usually a bit higher than your interest rate as it includes certain costs of obtaining the mortgage such as discount points and mortgage insurance.
Intent to Proceed: When you have reviewed the Loan Estimate and are ready to move forward with your lender, you express your “intent to proceed” by signing the “Intent to Proceed” disclosure. Until you have expressed your Intent to Proceed, the lender may not collect an Appraisal Fee or most other fees from you.
Appraisal: When the lender has received your signed Intent to Proceed, the processor will order the appraisal, and you will be asked to pay for the appraisal at this time. The appraisal is an independent review of the property during which the appraiser analyzes recent sales of comparable homes to determine the current market value. When the lender receives the completed appraisal, the processor will forward a copy to you. 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.
After your appraisal and all verifications are received, your complete file will be reviewed for final approval. 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.
Your ratified purchase contract will show the settlement date agreed to by you and the seller. 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
At least three days prior to your settlement, you’ll receive a copy of your Closing Disclosure (CD). This 5-page document sums up the terms of your loan and what you pay at closing. The Closing Disclosure will reflect 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. It’s a good idea to compare the Closing Disclosure to the Loan Estimate you received earlier.
After you review the Closing Disclosure, you will need to have your bank prepare a cashier’s check made out to the settlement office for the total amount due. You’ll find the amount due at the bottom of Page 1 of the Closing Disclosure on the line showing “Cash to Close.” 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. If your settlement office has specifically requested that funds be wired, be sure to follow their instructions.
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 First County Mortgage today!