Home-Buying Process:
The Mortgage Process
Loan Application Process
When you begin the loan application process the first thing you will do is meet with the loan officer for an initial interview. During this interview you can expect to fill out a loan application. This is the time to voice your concerns, ask questions and learn about loan options.
Prepare for this session by bringing in a list of questions you may have regarding your loan and all the documents and information needed to fill out the loan application.
Information Borrower Provides
The following are common items the loan officer will need to complete the application. Because this is a general list, the loan officer may request additional information depending on the selected loan program.
- Purchase contract for the house
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Personal Identification
- Driver's license
- Social Security card
- Certificate of eligibility (VA Loan)
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Present and former addresses (last two years)
- Whether you rented or owned
- Year and months at each address
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Most recent bank account statements
- Checking
- Savings
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Employment Information
- Pay stubs
- Names and addresses of employers (last two years)
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Additional forms of income verification
- Part-time jobs
- Overtime
- Bonuses
- Commissions
- Rental income
- Child support
- Social Security
- Pensions
- Disability
- Income tax returns for the last two or three years
- List of current liabilities (debts) and balances owed
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Information about assets
- Stocks
- Bonds
- CDs
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Jewelry
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Vehicles
- Year
- Make
- Model
The Application
Most financial institutions use a standard loan application, the Uniform Residential Loan Application, also called the 1003 Application. Your loan officer can fill out a copy of this application by hand or on the computer during the loan interview. See the sample Loan Application.
Information Lenders Provide
Once the loan application has been completed federal law requires the financial institution to comply with the Real Estate Settlement Procedures Act (RESPA). Enacted in 1974, RESPA protects consumers from abuses by lending institutions. It mandates lenders to fully disclose an estimate of all closing costs, lender servicing, escrow account practices and business relationships between closing service providers and other parties to the transaction. This act requires financial institutions to provide the above documents within three days of processing the loan application.
Good faith estimate — The good faith estimate is a required document in which the lender outlines the costs the applicant is responsible for at closing. Federal law requires lenders to issue the Good Faith Estimate within 48 hours of the time you apply for the loan. Some lenders may purposely under quote the cost on this document. Although not illegal, this tactic is used to encourage the buyer to take the loan. This is why it is important to research the institution before committing to a loan product.
Some of the closing costs you will see in your Good Faith Estimate include:
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Appraisal — Having an independent appraiser determine the market value of a house.
- Most lending institutions require an appraisal before establishing a new loan. The buyer frequently pays for the appraisal.
- VA or FHA appraisals are required for VA or FHA mortgage loans.
- Loan application origination or processing fee — This charge covers the expenses of preparing mortgage documents, legal service, borrower credit investigation, notary charges, appraisal fee and any other fees. These expenses are sometimes itemized. When FHA or VA financing is obtained, the origination fee is limited to 1 percent of the mortgage. Other expenses will be added to this fee.
- Title examination or search and title insurance — Title insurance is usually paid by the seller because he or she guarantees the title to be good. The buyer usually pays for the mortgagee title policy. This protects the lender against unrecorded title defects.
- Abstract of title — Another method by which evidence of a clear and marketable title can be shown is a summary of all recorded documents affecting a particular piece of real property.
- Survey — The survey determines the precise legal boundary lines of a property, location of improvements, easements, right of ways, encroachments and other physical features. Sometimes, the seller may incur this expense if he or she is requested to do so.
- Deed recording fee — The county clerk's office charges this fee to legally record your deed.
- Attorney's fee — This fee is charged by the attorney for legal advice during the various stages of buying.
- Unpaid special assessments (vary greatly) — Any assessment for streets, sidewalks, sewers, etc. that are levied or pending against the property before closing usually must be paid if mortgage financing is obtained. If the buyer obtains FHA or VA financing, the seller is required to pay these assessments. However, when the buyer assumes the seller's mortgage or obtains conventional financing, the buyer and seller may negotiate these payments. These can vary greatly.
- (Discount) Points — A point is 1 percent of the mortgage value. Thus, the borrower who must pay one point on a $90,000 mortgage would pay $900. Points are interest paid up front. They can be used as a fee to cover the costs of originating a loan and as a way to buy down the interest rate of a mortgage loan. Points can be negotiable depending on the loan product.
- Prepaid property taxes — At the time of closing, the lender will often require the buyer to deposit one to six months' property taxes in an escrow account.
Although some of the costs vary at closing the variation should not be extreme. A few days before closing the loan officer will provide a settlement statement, also known as a HUD-1 form, which is an itemized list of all expenses incurred by the buyer during the house purchase. More information on the settlement statement is in The Closing section. The information on the settlement statement should be comparable to the Good Faith Estimate.
If you get to the closing of your loan and your Good Faith Estimate does not reasonably match the fees listed, ask questions. If you do not feel comfortable or satisfied with how your questions are answered, it may be best to walk away and close at a later date.
Truth in lending — The Truth In Lending document requires lenders to fully disclose to the consumer all the terms and conditions of the loan. Some of the terms required to be disclosed include:
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Rate of interest — This is the largest single determinant of the cost of your loan. There may be variances of ¼ percent or more in some areas. Such a small percentage seems insignificant, but over the term of the loan (which could be up to 30 years) it can amount to a sizable sum of money. Do not be misled. A lender could promise a lower-than-market interest rate because the difference may be made up through other financing charges.
6.0 % Loan Results Principal Payment APR Total Interest Total Loan Value $100,000.00 599.5 6.0000% $115,838.00 $215,838.00 6.25 % Loan Results Principal Payment APR Total Interest Total Loan Value $100,000.00 $615.72 6.2500% $121,659.20 $221,659.20 Total Difference: $5,821.20
- Annual percentage rate (APR) — The APR is the cost of your loan expressed as a yearly percentage rate, such as 6 percent or 8 percent. In the Truth In Lending disclosure you will notice the APR may differ from what your loan officer disclosed to you. This is because the APR includes all fees and costs associated with the loan. It is normal to see a slight difference between the interest rate and the APR because of the normal costs of the loan. Some lenders may take advantage of people by offering a competitive interest rate and adding extra fees after the normal costs of a loan. This increases the disclosed APR of the loan. If the APR is extremely different from the original quoted interest rate, do not be afraid to question this.
- Points — A point is interest paid upfront and is equal to 1 percent of the loan balance paid to the lender for processing your loan. It is common to pay one to two points on a loan, however, if it is unregulated by your state, some lenders can charge an excessive amount of points. On a $90,000 loan, one point will equal $900, two points will equal $1,800, and so on. Points are a one-time charge and are paid at closing.
- Finance charge — The finance charge is the total dollar amount the loan will cost. Like the APR, this includes all fees and costs associated with the loan.
- Schedule of payments — This document will tell you the exact date of your first and last payment. It also will state when the payment is considered late. Additionally, it states the number of monthly payments you will be making throughout the life of the loan (Ex: 180 or 360 payments).
- Penalty for late payment — Many lenders offer a grace period of about 10 days after the payment due date, before a late fee is charged. The amount of the late fee varies with the lender; however, 2 to 5 percent of the monthly payment is a common penalty. FHA and VA loan late charges are 4 percent of the monthly payment.
- Prepayment penalties — Some mortgages include a fee if the loan is paid off early. Although this type of penalty is not as customary in special, government-insured or conventional loans, it may be more common with companies that do sub-prime lending. This is an important fee to consider. If interest rates fall a few years after you close on your mortgage loan and you want to take advantage of a lower rate by refinancing, it could cost you several thousand dollars. This could make it financially impractical to refinance your current home loan.
- Application and origination fees — Other fees during the loan application process include lenders fees to administer the loan, also referred to as origination fees or application fees. To protect yourself, look into all of these fees before you agree to them. Also, compare these fees line by line from one lending institution to another. By law, the lender must disclose all fees on the Good Faith Estimate. Other things you may encounter during the loan application process are listed below.
- Lock-ins — During the application process your loan officer may ask if you want to lock in. A lock-in allows the borrower to guarantee that the interest rate will not change (increase or decrease) before the loan closes. Many financial institutions have different options when you lock in your rate. Some may allow you to float the rate, while others may require that you lock in at the time you submit the application. By floating the rate, you will be allowed to lock in at any time during the application process. Another option is to float your rate and points. Because the market is constantly changing you never know when the rate and points may go up or down. Once you make the decision to lock in your rate and points it is extremely important that you get it in writing. This will guarantee that the rate quoted is exactly what you are going to receive.
- Escrow account operation and disclosures — This disclosure requires lenders to inform the consumer whether they require an escrow account to pay property taxes and insurance. If it is required, this document will disclose the specific amounts to be collected and when they are to be paid.
- Servicing disclosure statement — Lenders usually do not service their own loans, but instead sell them on the secondary mortgage market. Lenders are required to give the buyer written notification as to whether they anticipate servicing the loan themselves or whether someone else will be servicing the loan. This disclosure is usually given within the first three days of the loan application.
- “Buying Your Home” booklet — The loan officer will give you this booklet within three days of processing your application. This booklet can serve as a pocket guide to assist you in the home-buying process. It provides unbiased information on topics such as how to choose the best mortgage and advice on how to negotiate during the home-buying process. This booklet also is available at the HUD Web site: http://www.hud.gov/offices/hsg/sfh/res/stcosts.pdf.
The loan application process may seem like a long process but be patient. All of this information is necessary for the financial institution to make a decision. In addition to the documents listed in this section, each financial institution may give you additional papers to sign. If you do not understand these or have questions, ask the loan officer to explain. The loan officer is there to help you. It is important to keep in mind that when additional documentation is requested, you need to complete these tasks as quickly as possible. Many times a loan officer cannot continue your loan application without these items and failure to bring these items in a timely manner may delay your loan application.
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