Buying a home is not something the average American does every day. While the purchase process is second nature to real estate and mortgage brokers, it is somewhat mysterious to the rest of us.
When asked how to eat an elephant, a wise person once responded, “one bite at a time.” While the home loan process seems like a gargantuan task, it’s easier to understand when it’s broken down into smaller pieces.
Act Like a Boy Scout - Prepare!
Wouldn’t it be great if there were a one-stop shop where you could price-compare without having to run all over town? While a mortgage broker rather fits this bill, if you’re more of a hands-on type of shopper, you’ll need to do some legwork. Before you go lender shopping, or, before you visit the lender you’ve chosen, get your paperwork in order so that you know exactly where you stand financially and how much house you can afford. Submitting all of the required paperwork in an organized fashion also helps speed along the approval process.
Although the lender will order your credit reports, if you’re curious about where you stand, credit-wise, it’s a good idea to order your own reports from all three credit reporting agencies. You are entitled to one free credit report annually and the Federal Trade Commission cautions consumers to order those reports from the only authorized source, AnnualCreditReport.com.
Obtain your FICO score from the Fair Isaac Corporation (FICO). This is the score lenders use and it’s compiled from your credit reports. With the FICO score and credit reports, you should be able to ascertain what type of mortgage loan you’ll be offered.
Then, gather up the necessary paperwork for the lender. Ask the lender exactly what you need to bring with you to the application appointment. Although this list is far from exhaustive, when you apply for mortgage loan the typical lender requires:
- copies of your last two tax returns
- bank and investment account statements from the last two months
- a copy of your current mortgage papers or your landlord’s contact information if you are a renter
- written explanations for any late payments or other negative marks on your credit report
- a copy of your Social Security card and driver's license
- account numbers, balances and payments on any loans, credit cards, car loans, personal loans, student loans or other obligations
- verification of your income, such as pay stubs
- divorce information if you're making or receiving alimony or child support payments
- veteran certificate of eligibility and DD214, if applicable
- copies of bankruptcy papers, if applicable
- a copy of your purchase agreement if you've made an offer on a new home
Steps to Mortgage Loan Approval
Depending on the housing market in your area and the lender's policies, getting a mortgage loan can be surprisingly quick, or it can be a somewhat lengthy process. Some mortgage loans may even get same-day approval if your credit is good and you meet requirements for the down payment and income-to-debt ratio.
Applying for a mortgage loan typically involves the following steps:
Application: You submit a home loan application form, along with documentation
Verification: The lender turns your loan package over to its processing department where all of the information included in the application is verified. From there, it goes to the underwriter who makes the decision whether or not to approve the loan.
Good Faith Estimate: The lender has three days after your application is submitted to supply you with a Good Faith Estimate (GFE), outlining the costs of the mortgage loan. You will also receive a Truth In Lending Disclosure, outlining the expected monthly payment, the APR and a list of all finance charges.
Approval: Once the loan is approved, the lender will send a commitment letter. This letter basically reiterates the information contained in the GFE and the Truth in Lending Disclosure. It also contains a deadline, or commitment period, after which the terms may change. The borrower typically needs to return a signed copy of this to the lender before the end of the commitment period. Read the letter carefully before doing so. If you have any questions about anything in the letter, run it by your attorney.
The time period from application to approval is stressful for the buyer. There may be requests for more information or other delays. Being fully prepared when you apply for a mortgage loan goes a long way in alleviating future problems and toward relieving your stress.
Preparation and patience - good words to live by whether eating an elephant or applying for a home loan.