Overview
Learn the basic do’s and don’ts of applying for a home loan. Before completing a mortgage application take time to develop an understanding of what the mortgage lending process involves. In the Wall Street Survivor video to the right, an explanation of what a home loan mortgage is provided. In addition, general information is provided related to down payments, interest rates, mortgage contracts and refinancing.
What to Consider When Getting a Home Loan
Applying for a mortgage to purchase a new home or to refinance a mortgage on an existing property is a process. It is important to be mindful of a few details when starting and/or during the mortgage process
Obtain & Review Credit
Obtain credit reports from each of the three major credit bureaus, and examine them carefully. Avoid closing current accounts or applying for new ones
Income Management
Avoid changing jobs or quitting right before submitting a mortgage application. Lenders will be looking for steady income provided by a steady source
Manage Debt Ratios
Carry low credit card balances, or pay them off, along with any other outstanding bills before applying for the mortgage. Your debt ratio will have a significant impact on the amount of home you potentially qualify for
Down Payment
Down payments help to provide equity in your home. In addition, they show lenders that the borrower is vested in the purchase. Be sure to save for a down payment or seek available down payment assistance programs
Interest Rates
Stay up to date on current mortgage interest rates. You may need to make a decision on whether to lock or float your rate during the mortgage process
Savings & Reserves
Look to have funds set aside to demonstrate reserves and/or to cover closing costs. Avoid major purchases that may deplete any available funds prior to purchasing a new home
Are You Ready to Apply for a Home Loan
Once you have taken the appropriate preparation steps to obtain a mortgage and have found a suitable lender, it is time to apply. There are many steps in the overall mortgage application process. However below are the main eight items that take place once a decision to apply has been made:
- Submit a mortgage application (click here)
- Documents are obtained (credit report, appraisal, etc.)
- Loan program chosen
- Lender request required documents from borrower
- Documents and loan file sent to processing for review
- Processing sends file to underwriting for initial approval
- Conditions are cleared; file sent back to underwriting fro final approval
- File goes to closing & closing date is confirmed
Credit Review and Underwriting Decision
When you apply to get pre-qualified for a loan, a credit report will be obtained. The credit report will show your record of payments on loans, charge cards and other similar debts. In addition to your ability to pay for a mortgage (based on income), lenders will look at your ability to repay a loan based on information included on your credit report. Your willingness to repay will be judged by your credit report records. Whenever you borrower money (credit cards, auto loans, student loans, etc.) you are making a commitment to that creditor to pay them back on the terms mutually agreed upon. If you are late making the payment then you broke the commitment and the lender can indicate this on your credit report. The lender does not know why you are late; they just know that you broke the commitment agreed upon.
This is why your credit is very important in qualifying for a home loan. Although credit requirements can be strict, there are programs available that will allow for minor past credit issues, as long as there is a “reasonable” reason why there was an issue. Lenders will take a comprehensive review of your credit history. If there are some credit issues, you may be able to overcome them with sufficient explanations and supporting documents of why the issues occurred. Some items that lenders will review while analyzing your credit include:
Bankruptcy
Some loan programs allow for lending approval two years from the date of discharge for a bankruptcy (FHA). Some programs will take in consideration bankruptcy payment plans.
Foreclosure
Typically lenders will require a minimum of three years from the date of foreclosure (FHA).
Judgments & Outstanding Collections
Many lenders will typically require that any outstanding collection accounts, judgments, and/or charge offs be paid in full
Federal/State Tax Liens
Typically these do not have to be paid off in full but you must be able to qualify with the monthly payment of the repayment agreement. “State Tax Liens” typically must be paid in full prior to closing a FHA loan
Funding Your Loan
After your loan documents have been prepared, signed, dated, notarized, and returned, they will go into funding. This is when the investor checks to insure that everything is signed correctly and reviews all of the signed documents
Quality Check
At this point, they will also do a final back-up quality control check of your credit and employment to insure nothing has changed since the loan was approved
Investor Funding
Once everything has been verified and checked, the investor will fund the loan
Funds Wired
The funding of the loan is when the monies you are borrowed are wired to the title / escrow or closing attorney for disbursement. This is when the actual exchange of money is completed
Timing of Wire
This is completed usually through an electronic wire transfer that must be sent before 12:00 p.m. to insure same day confirmation
Funding
Depending on the loan type, the funding will usually take place 1-4 days after the loan documents have been returned to the investor by escrow / title
Home Loan Servicer
Your loan servicer typically processes your loan payments, responds to borrower inquiries, keeps track of principal and interest paid, manages your escrow account