The Loan Process
Your contract will typically require that you make “loan application” within a specified time period. The licensed real estate agent can provide you with information on reputable lending institutions, which offer loan programs, suited for your purchase. Call each lender for information regarding interest rate quotes, estimated charges and approval time and general requirements.REMEMBER—the lender with the lowest rates may not be the one best suited to your needs.
Once you have selected a lender, you will need to complete your loan application promptly. You are well advised, therefore, to be prepared to provide copies of bank statements for the most recent three (3) month period and copies of tax returns for the previous two (2) years. You will also be asked to provide account numbers and information on all existing loans (i.e., student loans, auto loans, etc.), credit cards and other revolving credit accounts. A copy of a standard form 1003 mortgage loan application follows this section.
In addition to the basic information which you provide, the lender will attempt to establish your credit profile based upon mortgage industry guidelines. Before committing to make a loan to you, most lenders will consider the following information:
- Employment and Income.
- The lender will need information about your past and present income and employment. In addition to the amount of money you earn, the lender will be interested to know if you have a consistent and stable job history.
- Debts and Expenses.
- Your lender will need to know what you owe and whether your bills are paid on time. Most of this information will be verified in a credit report provided to your lender by an independent credit bureau. If you are aware of a problem in your credit history, don’t wait until the last minute to address it. Often minor or rare problems can be explained away or cleared in advance of or during the application process. However, such matters take time and may delay your plans to settle if not addressed and resolved early in the process.
- Down Payment and Closing Costs.
- You will need to show your lender that you have enough money to pay the balance of the down payment required to complete the transaction and closing costs. Most lenders require that a certain percentage of the purchase price be paid by you, from your own funds. This amount will depend on the loan product you have selected. Your lender will also want to know the source of your funds (i.e., sale of stocks, savings, inheritance or gifts). Most lenders have very definite rules about this requirement; please ask your lender about your specific situation.
- Debt Ratios.
- Debt Ratios are commonly used by lenders to determine if you can afford to pay the mortgage each month. It is important to both you and your lender that you do not over-extend your financial ability. Two (2) indicators commonly used to determine your budgetary limits are the following:
- Housing expense ratio. The lender will compare your total proposed housing costs to your income.
- Long-term debt ratio. The lender will compare the total of all your monthly payments on long-term debts, the repayment of which will extend beyond ten (10) months (including most credit cards) together with your housing costs to your income.
When applying for the loan you will probably be asked for a check in the amount of $350-$500 to cover the costs for a property appraisal and credit report. Additional deposits or fees may be required to “lock-in” a specific loan program or a particular interest rate. The appraisal indicates to the lender whether the property is valuable enough to serve as collateral (see glossary) for the full amount of the loan you are requesting.The percentage of the property value that the loan amount covers is known as the Loan-To-Value (“LTV”) ratio. The applicable interest rate and other loan terms may vary depending on the Loan-To-Value ratio.
After you submit all required information and documentation, the lender compiles all of the items required for submission. Your file is then given to loan underwriting personnel for final loan application review and approval. After approval, the file is transferred to the loan closing processor who is responsible for making certain all the outstanding conditions have been met. At this point, the processor prepares all of the loan documents for settlement and sends them to the title company for your signature at closing.