Getting a Mortgage - What's the Process?
A simple step-by-step view...

One of the most common current day issues is often the source of much confusion and stress. Getting a mortgage, either for a new home purchase or a refinance, follows the same basic process. Unfortunately, mortgage brokers and banks, all too often, do not clearly map out the process for customers at the start and even more importantly fail to keep them informed as the process unfolds. Here, we outline the steps in simple, detailed terms.

There are generally five factors that count most when lenders are determining whether you qualify for a mortgage loan, they are: a) Your income, b) Your debts, c) Your employment history, d) Your credit history, and e) The property’s value. Your mortgage request will be evaluated (and re-evaluated) at multiple stages of the mortgage application process (as well as possibly after closing of the mortgage) based upon these factors. With so many different mortgage products available and the increased flexibility and responsiveness of lending institutions, the following should be regarded simply as a sequence template with the actual time values for and between each step varying, depending upon the specific product, lender, property and customer situation.

THE MORTGAGE ACQUISITION PROCESS
The graphic outlines the step-by-step mortgage acquisition (to acquire, to get) process. As you can see, it involves seven basic steps.

Let's examine each step to gain a clearer idea of what's involved. You can click directly on the graphic to move to the given step, or sit back and scroll down to read each in order.

Here are the steps involved with securing a mortgage:

1. Choosing a Loan Program
2. Picking an Interest Rate
3. Applying for a Loan
4. Getting Pre-Approval
5. Processing the Loan Application
6. Final Approval --- The Credit Decision
7. Funding Your Loan (Settlement)
   

Terms and concepts you should know:

• Loan program is a term that describes whether the interest rate changes and how long the loan will last.
• Conventional loans are the most common type of mortgage. With low down payments, conventional mortgages are usually insured by private mortgage insurance companies such as GE. Private mortgage insurance adds a relatively small cost to your financing and allows you to buy a house with a lower down payment.
• FHA Mortgages also allow low down payments, and are insured by the Federal Housing Administration. The home buyer pays a significant up-front mortgage insurance premium at closing, and there is an additional annual fee. The one-time mortgage insurance premium and certain closing costs may be financed (included as part of the loan).
• VA Mortgages, insured by the Veterans Administration, are available to certain members of the U.S. military. If you qualify, this special government benefit to veterans might be a good option for you. Ask your local VA office for more details. Click here to go to the Veterans Administration Home Loan Guaranty Services homepage.
• Conforming loans "conform" to the criteria and limits set forth by the largest buyers of loans, Fannie Mae and Freddie Mac.
• Jumbo loans are bought by different investors. The loan amounts for jumbo loans exceed the conforming guidelines.
• Fixed rate loans have interest rates that can never change.
• Adjustable rate mortgages (ARM) have features that allow for future interest rate changes if rates in general change. There are many variations of ARMs so be sure to ask your lender to fully explain the features of the loans they offer.
• Loan-to-value (LTV) is one of the most often-used jargon terms. If you have a house valued at $100,000 with a $90,000 loan you have a 90% loan-to-value ($90,000 divided by $100,000 = 90%).

When you apply for a loan, you'll need to have a program in mind so the lender can pre-qualify you for a specific interest rate and term (the amount of time you want to spread the payments over - 30 years, 15 years, 10 years). Many lenders use the terms "pre-approve" and "pre-qualify" interchangeably. You can change your mind about your loan program after you apply - but let your lender know as soon as possible.

The best interest rate is the lowest interest rate - True or False?
Life would be easier if the answer was "True." Lenders would only have one interest rate to talk about for each loan program. But it's not that simple. Here's the situation: lenders lend money just like other businesses sell other products. They have to cover the cost of the product, including:

• Cost of the money lent
• Employment costs
• Overhead
• Profit

Not very mysterious, is it? Lenders have a couple of different ways to earn money:

• Fees
• Points

Points can be described in two categories, depending on your local market -- origination and discount. Origination points are meant to cover the cost of originating the loan. Discount points are used to reduce the interest rate on the loan.

The more discount points you pay, the lower your interest rate will be.

That's why lenders have so many pricing options to choose from. Here are some general rules for points.

Pay points when:
The seller is willing to pay them
Your company will pay them (relocation packages)
You plan on keeping the property more than about seven years
You need the lowest interest rate for qualifying purposes

Avoid paying points when:
You're short on cash reserves or cash to close
You don't intend on keeping the property for more than about seven years
You think you might refinance within the next seven years
You need all the cash you have to pay off bills to qualify

While this is an important decision to make, you can always change your mind later on, when your loan is in process. Just let your lender know in plenty of time so it can make the appropriate changes to your application.

Terms and concepts you should know:

• Points are fees paid up front that are used to lower the interest rate. It's like pre-paying the interest on your loan in one lump sum in order to reduce the amount you pay each month. Each point is 1% of the loan balance. So if your loan amount is $100,000, each point equals $1,000.
• Annual Percentage Rate (APR) is a way to compare different loan programs. The calculation is complicated to explain, but put simply the APR takes into account most of the fees paid to get the loan (such as the application fee, credit report fee, documentation fees, mortgage insurance premiums, etc.) and is stated as an interest rate (some would call it the "true rate").

Just like choosing a loan program, you need to decide how you want to price your loan when you apply. You can change your mind while your loan is in process, just be sure to let your lender know as soon as you can.

Terms and concepts you should know:

• Pre-approval is a process that lets you get approved for your loan before you find a house to buy.
• Rate lock is when you want the lender to guarantee the interest rate you want to be in effect when your loan closes.
• Floating means your interest rate is not locked -- it's floating based on the financial markets.
  Click here to view an application, complete with explanations of the items on the application. Position your mouse arrow over any field for an explanation of the information required.

When you submit your application you will have the option to either lock-in the current interest rate and points for periods ranging from 10 days to 6 months, or you may elect to float the interest rate with the market and lock-in at a later date. If you elect to lock-in, the interest rate and points on your loan will be fixed for the period of the lock-in regardless of changes to interest rates in the market either up or down. If you elect to float, the interest rate on your loan will be determined by the interest rates available when you do choose to lock-in and could be either higher or lower than the interest rates available on the day you apply. We recommend careful consideration in making this decision.

When you apply for your mortgage the lender may ask you to pay an application fee. You may also be asked to pay a credit report fee and/or an appraisal fee. The important thing to remember is that these fees may be negotiable so be sure to ask if fees can be waived or reduced.

The Loan Application Process
Traditionally, once you had selected a lender, the next step would probably have been a meeting with a loan officer or other lender representative, whose job was to begin the collection of information needed to approve the loan. Now, many lenders accept applications on the Internet or by phone.

When discussing the terms of the loan, make sure you understand how and when the interest rate and fees on the loan are going to be set. Most lenders will quote an interest rate and fee at the time the application is taken and then will guarantee, or "lock" the interest rate quote for a specified length of time. A rate lock protects you from rising interest rates while the loan is being processed, but it also typically commits you to close the loan at the interest rate and the fee even if interest rates decline prior to closing. Lock periods may run from 10 days to six months, with longer periods available in some cases at an additional fee. The lock period must be long enough to get you through the estimated closing date. A 30-day lock affords you no protection if closing is at least 60 days away.

You may have the option to let the interest rate "float" getting the final interest rate and fees set nearer the settlement date. If you elect to float, the interest rate on your loan will be determined by the interest rates available when you do choose to lock-in and could be either higher or lower than the interest rates available on the day you apply. If you believe interest rates are declining and are willing to run the risk that interest rates could rise during the processing of your loan, you may select this alternative. Before you take a floating interest rate, make sure that the rise in interest rates will not create a problem for you because you have insufficient income to cover the higher mortgage payments. In either case, make sure you understand exactly the terms of the lock-in agreement.

Completing the Loan Application
The full loan application asks for information on the property you are buying or refinancing, terms of the purchase contract and the employment and financial history of all loan applicants.

You can complete the loan application process much more easily and accurately if you prepare for it ahead of time. A great deal of detail will be asked about your personal finances, including bank account numbers and balances, current loan amounts and payments, and credit card account numbers. You may also be asked to provide copies of your income tax returns. You will want to be thorough and precise in your answers, so it will be to your benefit to assemble this kind of information before the speaking with the loan officer. The following is a summary of the major kinds of information required on the loan application, the documents that may be needed and the questions that you should be prepared to answer.

Details of Purchase Contract and the Property
Because the property is security for the loan, the lender will have an appraisal made of the property, and you need to have the following information available:

• A complete copy of the sales contract, including any addenda, signed by all parties, showing the full names of the sellers and buyers as they will appear on the new deed, the amount of the earnest money deposit and who is responsible for closing costs, origination fees, etc.
• If the house is to be built, or is still under construction, a set of plans and specifications.
• The complete mailing address of the property, its age and its full legal description.
• Name, address and telephone number of the real estate agent and/or the seller of the property who will assist the appraiser in obtaining access to the property. All of this information should be in the purchase contract; if not, consult the real estate agent or the seller.

Personal Information
The loan officer will want the following information for all loan applicants: social security number, age, number of years of schooling, marital status, number and ages of dependents and current address and telephone number. If you have lived at your current address less than two years, be prepared to furnish former addresses for up to seven years. You will also be asked to detail your current housing expenses, including rent or mortgage payments, real estate taxes and insurance (your mortgage payment may include tax and insurance funds). You will need the name and address of your landlord(s) or mortgage lender(s) for the past two years.

Employment History and Sources of Income
Your ability to make the regular payments on the mortgage and to afford the costs associated with owning a home are primary considerations in the lender's loan approval process and should be your primary concern. Required information includes:

• At least two years employment history with employer's name and address, your job title or position, length of time on the job, salary, bonuses, commissions and average overtime pay.
• Recent paycheck stubs and Federal W-2 forms for two years (some lenders may require full Federal tax returns).
  Records of dividends and interest received from investments.
• If you are self-employed, full tax returns and financial statements for two years, plus a profit and loss statement for the current year to date.
• A written explanation if there are gaps in your employment records because of circumstances such as illness or layoffs, or for any other reason.

The loan officer will have you sign a Verification of Employment (VOE) form. This will be sent to your employer to verify your employment and earnings. A VOE will also be sent to previous employers if you have been on the job less than two years. Many lenders now use a general authorization form that allows them to verify employment and other financial information on the application.

If you are relying on income from other sources, such as rental property, social security or disability payments, child support, etc., you must provide adequate proof that the source is predictable and consistent. Appropriate documents could include canceled checks, copies of leases, certification of benefits, divorce decrees and similar evidence.

Personal Assets
A detailed listing of your personal assets is required on the loan application form. You will need to have the following information available to complete the form:

• All bank accounts, both checking and savings, and money market accounts, with the name and address of the institution, name(s) on the accounts, account numbers and current account balances. Usually this information is taken from monthly or quarterly statements.
• Recent bank statements for at least two months.
• Current market value of stocks, bonds, CDs and other investments.
• Vested interest in all retirement funds, including IRAs and 401(k) plans.
• Face amount and cash value of life insurance policies in force.
• Make, model, year and value of automobiles owned.
• Address and market value of all real estate owned along with the amount of rents collected, the mortgage on the property and the monthly mortgage payments (a profit and loss statement will be required for investment properties).
• Value of other personal property such as furniture.

As with the Verification of Employment, the loan officer will have you sign Verifications of Deposit (VOD) for each of the institutions (or a general authorization) where you have savings or checking accounts. Differences between the account balances reported by the institution and the balance you give on the loan application have to be reconciled, so be sure you have your correct current balances.

The lender will look for the source of funds with which you will make the down payment and pay closing costs and fees. Gifts from a relative, church, municipality or non-profit organization may sometimes be used, but must be verified in writing. If you are providing less than 5% of the sales price, the donor must be a relative and must provide a letter stating the donor's relationship to you, the amount of the gift and the fact that no repayment is expected.

Personal Indebtedness
Liabilities are usually taken directly from your credit report. If you have had credit problems, you should inform the lender. Lenders recognize that unemployment, illness, marital problems or other financial difficulties can temporarily impair your credit rating. You may want to prepare a written explanation of the circumstances regarding the problem to be included with the loan application. The lender must consider such a written explanation as part of the underwriting analysis. If the problem has been corrected and your payments have been made on time for a year or more, your credit may be judged as satisfactory. Chronic late payments, judgments or loan defaults, however, severely damage your credit standing and may change the type of loan programs available or the interest rates charged.

If you have been through bankruptcy or foreclosure proceedings within the past seven years, be prepared to give full details and copies of applicable documents regarding them.

You will also be asked to explain the details if you are obligated to pay alimony, child support or separate maintenance. Such obligations are treated like debt payments by most lenders and will be part of the underwriting analysis.

You should not take on any new debts after you apply for your mortgage. Doing so could jeopardize the final approval of you loan or prevent your purchase from closing on schedule.

Additional Information
You will be asked to sign a section of the loan application form which contains your certification that the information you have provided is correct to the best of your knowledge; your promise to advise the lender of any material changes in the information; and your consent to (1) verification of the application data, (2) submission of account history to credit reporting agencies, and (3) transfer of the loan or loan servicing to successors to the original lender.

The last part of the application form requests information on the race and gender of the applicants. The Federal Government uses this data to monitor lenders' compliance with fair housing and equal credit opportunity laws. Providing this information is strictly voluntary on your part and has no effect on your loan application. The lender, however, is required by federal law to request the information.

Because of the particular circumstances surrounding a loan application, the lender may require additional information or documentation regarding you or the property after the application has been submitted for approval. Loan officers make every effort to collect all data at the outset, but cannot foresee every eventuality. Requests for additional information may occur and your primary concern should be in responding promptly with the information.

When you have completed your application, you may be asked to pay in advance for the appraisal and credit report.

Preliminary approvals are usually issued within 48 hours or less. Final approvals are only issued after all documents and information (including the title report and appraisal) have been received and verified.

After The Loan Application -- What Next?
After the loan application has been completed, it will be turned over to the loan processing department and then to the underwriter, where the decision to approve or reject the loan will be made. Loan processors send out the Verifications of Employment and Deposit and order the credit report, property appraisal and other documents. The time it takes to receive these documents affects the length of time required for approval of the loan. If you are transferring out of the local community, it may take longer to receive the credit and employment information. Processing times vary from one lender to another, but the loan officer should be able to give an idea of the processing time for your application.

Within three business days after completing the application, the lender must provide you with a Good Faith Estimate of the anticipated closing costs. It will show the estimated costs associated with the loan settlement, such as origination fees, mortgage insurance, title insurance, prepaid escrow and hazard insurance.

Within the same three days you will also receive a Truth-in-Lending disclosure statement. This statement shows, among other things, the estimated monthly payment. The total cost of all finance charges on your loan is also shown, stated as an Annual Percentage Rate (APR). The APR represents the dollar amount of finance charges you pay either up front or over the life of the loan, converted to an annual interest rate. Since the APR includes origination fees and other charges as well as interest on the mortgage loan, the APR is usually higher than the interest rate on the loan.

After the lender has approved the loan, you will usually receive a commitment letter which sets out the terms of the loan and the length of time for which those terms are offered. If the loan does not close within the specified commitment period, the terms are subject to change. You usually must accept the commitment by returning a signed copy to the lender within five to ten days and may have to pay part or all of the origination fees at this time. The commitment may contain conditions that you will have to satisfy, so you should read it carefully.

In cases where closing is scheduled soon after approval, the lender may give you verbal approval instead of a commitment letter. This is not unusual, but make sure you understand the terms of the approval.

Once the commitment letter or approval has been received, you are assured the financing you need to complete the purchase of your home and you need to turn your attention to completing the details required for settlement.

Reducing the Anxiety of Waiting
For many home buyers, the period of time between the submission of the loan application and receipt of the commitment letter is one of uncertainty and concern. Requests for additional information, unexpected delays and lack of communication all serve to increase the tension. There are a number of things that both you and the lender can do to reduce the stress.

Keep in mind that the lender wants to make the loan. Loan underwriters are looking for ways to approve loans, not reject them. If you have provided good documentation, you have done a great deal to assure prompt processing of your application and potentially a quicker approval of your loan.

You and the lender need to make sure that lines of communication are kept open. Your contact person may be the loan officer, but often it might be someone in the lender's loan processing department who can tell you the status of your application. Remember, however, that it may take several weeks to process the application and frequent inquiries from you prior to that time will not speed things up.

You should be accessible if the lender needs additional information or documents during processing. If you are relocating, use your real estate agent as a contact if necessary. Quick response to lender requests helps keep the process on schedule. In order to protect both you and the lender, mortgage loans require much more paperwork and legal documentation than an automobile or other installment loan, and lenders do not ask for more than is absolutely necessary.

That's it! You're done for now and on your way toward the settlement of your new mortgage, which can occur in as little as 30 days (or less!) at the office of the settlement agent you choose.

Terms and concepts you should know:

• Pre-approval means that your income and credit meet the underwriting guidelines for the loan you've chosen. This approval is typically in writing and contains any necessary conditions to provide the final approval (discussed in more detail later).
• Conditions (or stipulations) are tasks that must be completed before your loan can be funded.

Read your preliminary approval letter carefully and be sure to discuss all the conditions with your lender.

Terms and concepts you should know:

• Good Faith Estimate (GFE) of settlement costs is the legal format in which a lender has to disclose all the fees and charges associated with getting your loan. An estimate of any mortgage insurance costs to be paid by you at closing will also be included on this statement. In the case of third party fees like title insurance and homeowner's insurance, these are purely estimates.
• Truth in Lending (TIL) disclosure is the legal format in which a lender must describe your loan in detail including the interest rate, Annual Percentage Rate and any adjustable rate features that may apply.
• A Property Appraisal is a report written by an appraiser who visits the property to measure it, draw a simple floor plan and take photos. The appraiser also compares the property to other properties in the area that have sold recently. This is to determine the "fair market value", that is, an estimate of the property's value based on what others have paid for similar properties.
• Title Report (or Search) tells the lender who owns the property and what liens there are against it that must be paid prior to funding your loan. The title report will also include information about any easements or other rights that apply to the property.
• Verifications are sent to your bank, your employer and to your landlord, if you're renting, to verify the information you provided on the application.

Upon receipt of your file, the lender will order an appraisal on the subject property. Within three business days you will be sent a complete set of mortgage disclosure documents by your lender. These documents will include a Good Faith Estimate of settlement charges, a Federal Truth-in-Lending Disclosure, a Mortgage Program Disclosure and other information and documents pertinent to your transaction. If you have applied for an adjustable rate mortgage (ARM) you will also receive a copy of the Consumer Handbook on Adjustable Rate Mortgages (CHARM). You should carefully review these documents for accuracy; contact your lender directly to answer any questions.

Within the first week after you apply for a mortgage two other events should occur. First, an appraiser hired by your lender should have made an appointment with you or your real estate agent to perform a physical inspection of the property. Second, you should engage the services of a licensed settlement agent to perform the settlement and escrow process. If you have any difficulty with either of these two items, call your lender for advice and assistance.

Once the appraisal, credit report and completed disclosure and documentation package is received, your lender will prepare your loan for submission for final approval.

In reaching a decision on your application, the underwriter will take into consideration your income, credit, cash reserves and the property itself.

Terms and concepts you should know:

• Housing expense ratio is the percentage of your gross monthly income it takes to make your house payment including taxes and insurance. If you earn $4,500 and your house expense is $1,500, you have a 33% housing ratio (1,500 is one third of 4,500).
• Total expense ratio is the percentage of your gross monthly income it takes to pay your house payment plus other monthly payments you make, like car payments, credit cards, student loans, etc.
• Cash reserves is the money you have left in the bank after the loan closes. Cash in the bank is a very important factor -- you have to have some after the loan closes just in case you run into unforeseen circumstances. The usual requirement is at least two months worth of house payments.
• Credit history is the timeliness with which you've paid your bills in the past. Most important is the last two years.
• Loan-to-value (LTV) is one of the most often-used jargon terms. If you have a house valued at $100,000 with a $90,000 loan you have a 90% loan-to-value ($90,000 divided by $100,000 = 90%).

The underwriting process usually takes less than two days to complete.

The end of the lending process is usually called "settlement" because that's when everybody "settles up." Loan funds are either wired to an escrow account or the lender sends a cashier's check to the closing agent (in some states this may be a title company, in others an attorney or escrow agent).

While at settlement you will read and sign numerous documents relative to the purchase (or refinance) of your property. Several of these documents will be familiar to you as they were provided to you in the initial package you received from the lender. Your settlement agent will be able to answer any questions you may have regarding these documents.

Most settlements take an hour or less to complete depending on the transaction.

Congratulations! You have now completed the process. We sincerely hope that we have provided information that is helpful to you and takes some of the mystery and confusion out of getting a mortgage.

* * *

The information included at this site, or received from this site, may not be applicable to every situation. Every property, market and personal situation is unique. The formulation of an effective property marketing or purchasing strategy requires careful analysis and planning with a real estate professional. The authors make no representation or guarantees through the presentation of this information. Federal, New York State and local laws prohibit discrimination because of race, color, sex, religion, age, national origin, marital status, familial status or disability in connection with the sale or rental of residential real estate. Coach Realtors does not knowingly accept advertising on this website in violation of these laws. Coach Realtors will not be responsible for misinformation, misprints, typographical errors, etc., which appear on this web site. All offerings are subject to errors, omissions, prior sale, change of price, or withdrawal with or without notice. All facts should be independently verified by prospective purchasers.