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The Mortgage Loan Process

So you have found the house of your dreams. Now what? Know the mortgage process before you apply for a loan and avoid any unpleasant surprises.

Buying a new home could be the single largest purchase you ever make, and applying for a mortgage may feel intimidating and seem like a daunting task. The best way to prepare yourself is to understand the mortgage process, know what questions to ask, and what your responsibilities are to get the loan you need. Whether you are purchasing a new home or refinancing your existing one, getting a loan does not have to be difficult or stressful.

The process can be broken down into three major steps: application, processing, and closing. If you think about it in those terms, it will seem a lot easier to tackle and master the mortgage loan process.

Before You Even Get Started

Before you start the loan process, you need to find a lender. There are a large number of reputable mortgage lenders to choose from. Shopping around for one that has the loan program you need, and offers competitive rates and fees, is an investment of time that you should make.

If you are wondering where to look for a mortgage loan provider, there are many options. Start by checking out what terms your bank offers. You can also find lenders by looking on the Internet through a search engine, a realtor referral, yellow pages, and, of course, through word of mouth. If someone you know has had a good experience with a lender, then it is definitely worth looking into.

When you start shopping around, compare the interest rates and lender related fees, such as document preparation, document review, management, administration, and loan processing fees, in order to make sure you are getting a competitive deal. When you compare interest rates, make sure you look at the origination and discount points associated with it. An origination point, sometimes referred to as a fee, is usually 1% of the loan amount. When you pay discount points your lender reduces your interest rate. In order to compare apples to apples, you have to get an actual percentage rate, which is often referred to as an "APR". The APR is based on the interest rate, points, and fees. Therefore, this allows you to compare which lender provides you with the best overall deal. Finally, make sure you like the loan officer you are dealing with. Having a loan officer you trust, who returns your phone calls promptly and answers all your questions, will make a big difference in your mortgage experience. For helpful information about mortgage shopping, see the U.S. Federal Trade Commission's publication Looking for the Best Mortgage.

Step 1: Getting Started by Applying for a Loan

So, you found the lender you want to work with. Now, you are ready to get started. Your loan officer will advise you on what type of loan best fits your needs. There are many loan types to choose from so make sure you understand all your options and why your loan officer is recommending a certain one. See the article on loan types in the related articles section.

You will be asked to fill out a comprehensive loan application and provide documentation that backs up the information you provide on the application. This may include a copy of your W2's, your most recent pay stubs covering a whole month of salary, bank statements, and any other documentation that has information on your assets and liabilities. If you are self-employed or receive bonus or commission income, you may also have to also supply a copy of your tax returns.

The amount and kind of documentation you will need to provide will vary by lender and type of loan you choose. Don't get overwhelmed. If you are prepared and collect this information before you are even asked for it, you will avoid the stress of searching for it at the last minute.

To Lock or Not to Lock

At this point, you will need to decide if you want to lock in an interest rate or float the rate until later. If you lock the rate, it means that the lender is reserving an interest rate for you. The rate will have a certain amount of points associated with it. So, if rates go up while your loan is in process, you are protected and you still get the lower locked-in interest rate. However, if the rates go down, you do not get the benefit of the lower rate; you still get the rate at which you originally locked in.

If you decide you don't want to lock in and want to wait until it's closer to the time of loan closing, then you are "floating" the interest rate. You may choose to float the rate if you feel that the interest rates are going to drop lower than the current rate. Keep in mind that, if the rates happen to increase during this time, you could be stuck with a higher rate.

Whichever you decide, it is important that you get it in writing from the lender. If you decided to lock, the written document should state at what interest rate and points you locked in and when this rate lock expires. This is often referred to as a "lock-in agreement." You will want to make sure the loan closes before the rate expires. Otherwise, you will lose this guaranteed rate and could be subject to higher interest rates. For more information, see the U.S. Federal Reserve Board's publication A Consumer's Guide to Mortgage Lock-Ins.

What's This Entire Process Going to Cost You?

After you apply, the lender is required by law to provide you with a Good Faith Estimate within three days of the application. This document is just that, an estimate of what this whole process is going to cost you. It details, line-by-line, what you are being charged. Although it will give you a good idea of how much money you will need at closing, it is not exact. You will find out the exact number a few days before closing.

The lender is also required to give you a disclosure statement, called the Truth in Lending, within three days of your application. This will show you the "Annual Percentage Rate" ("APR") and other payment information for the loan you have applied for. The APR takes into account, not only the interest rate, but also the points, mortgage broker fees, and certain other fees you have to pay. The Good Faith Estimate and Truth in Lending disclosure come under the Real Estate Settlement Procedures Act. See the U.S. Department of Housing and Urban Development's Frequently Asked Questions About RESPA for more information.

Step 2: Processing Your Loan

In order to start processing your application, the lender will often require that you pay an up-front fee that covers your credit report and appraisal of the property for which you are applying. When the lender processes your loan, they will verify your credit history, employment information, assets, and liabilities. .

Lenders have qualification guidelines for each product they offer. In other words, when they look at your application and documentation, they are making sure that you qualify for the loan program for which you applied. The type of things they will look at include:

  • Your creditworthiness
  • : The lender will pull your credit report to see if you have handled your debts responsibly in the past. Based on your credit report, the lender will try to determine how you will handle a mortgage obligation. CareOne Credit offers credit counseling services to help you with debt management.
  • Income
  • : The lender will want to verify that your income is sufficient to make the monthly payments and repay the loan. They will look at all the debt you have, plus the proposed new mortgage payment, and compare it to the amount of income you make. What they look for in this calculation depends on the type of loan program that you choose. Some loan programs are stricter than others. A loan officer can help you choose the loan type that best fits your particular situation. Additionally, a lender will want to see stable employment history. For instance, they prefer to see a borrower who has been with their current employer for at least two years.
  • Property appraisal
  • : While the lender verifies your information, your property is also getting a review. An appraisal is performed by an independent appraiser to estimate the market value of your home. The amount the property is valued at plays an important role in this whole process. A lender will generally loan you up to a certain percentage of the property value. For example, if a particular program requires that you pay 5% for a down payment, then if your house appraises for $100,000, the lender will require that you pay at least $5,000 for a down payment and will loan you a maximum of $95,000.

The last part in the processing step is having an underwriter review your loan package, which contains all the information that was verified during processing. The underwriter takes a last look to make sure you actually qualify for the loan program for which you applied.

Step 3: Loan Closing

You Are Approved!

The underwriter decided in your favor and now you are ready for the third and final step: closing. As soon as you receive firm approval or commitment from the lender, you should confirm the actual date of the loan closing. If you are purchasing a new home (not refinancing your existing one), an estimated closing date was probably specified in the sale contract, but a firm date needs to be set by you, the seller of the property, and your lender. You want to make sure that settlement will take place before your loan commitment expires, and before any rate lock agreement (guaranteed terms of the loan) expires.

At the loan closing, in the case of a purchase, title to the property changes hands from the previous owner to you. If you are refinancing, closing will include signing and agreeing to the terms of the new financing.

You should make sure that, at closing, you compare the Settlement Statement, which is the closing document that specifies the actual charges due, with the costs that were given to you up-front in the Good Faith Estimate. Although you will immediately notice that they will not match exactly, there should not be a huge discrepancy between the two. For a comprehensive guide to buying a home, see Fannie Mae's publication Becoming a Homeowner.

That's It?

That's it! Once you sign all the documents, you have completed the loan process. The once cumbersome process should now seem pretty simple. In fact, with the Internet and technology used by some lenders, the whole process could take as few as two weeks. This depends on the lender and the type of loan you choose.

The most important thing to remember about getting a mortgage loan is that, if you do your homework and get informed about the process, your experience will be smooth sailing.

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  • The Power of Pre-Approval

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