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The Six Steps of the Loan Process:
Step 1: Before You Begin
Step 2: Choose the Right Loan for You
Step 3: Picking Rates, Points and APR
Step 4: Getting Pre-Approved
Step 5: Processing Your Loan
Step 6: Closing Your Loan
Step 1: Before You Begin
Before you begin the home buying process, there are several steps you need to take.
One: Figure Out What You Can Afford
Determine how much you can afford - and what your monthly payments will be. Use our calculators to figure out:
| How much home you can afford |
| The real monetary difference between renting and owning |
| How much you need to earn to qualify for a certain mortgage |
| What your monthly payments will be |
The traditional debt-to-income ratios are 28 and 36 percent. This means that your total monthly housing payment - including mortgage principal and interest, insurance, real estate taxes and any condo monthly assessments - should not exceed 28 percent of your before-tax monthly income. Then, when adding in all other consumer debt payments, the total figure typically shouldn't exceed 36 percent of your monthly income. However, each person's financial situation varies, so discuss what's right for you with your loan officer.
Two: Reduce Your Debt
The fewer credit cards you carry - and the lower the balances - the better. That's especially true if you have other debts such as a car or student loan. However, don't pay down or pay off balances with cash intended for a down payment. Even if you choose a low-down payment option, you're going to need cash available to pay the down payment and closing costs.
The easiest way to improve your debt picture is to close all dormant credit card accounts. Contact card issuers and ask for instructions on closing the accounts (for instance, you may be asked to cut up your card and return it by mail). Instruct the card issuer in writing to enter into your credit report, "Closed at request of cardholder." That way, there won't be any reason to suspect that a credit problem caused the account to be closed.
Three: Solidify Your Savings
If you're like most people planning on buying a home, you need to reduce your spending to save up for a down payment and closing costs. It's never too early to review your spending, cut out excess spending and set a budget.
Four: Review Your Credit
It's important to understand if there are problems or errors that could affect your ability to qualify for a loan. To do this, you'll want to get a copy of your credit report. Because these reports contain your credit history, it's important that you're aware of what they contain - and whether the information is accurate. You might have excellent credit, but odds are 1-in-4 that you'll find an error in your report. Look for mistakes, such as accounts that are not yours. When you find errors, contact the creditors by phone or mail to correct the error. Then get another copy of the report 30 to 60 days later to make sure the corrections have been made.
To make it easier, we've broken the whole process into six steps, which are listed at the top of this page.
Step 2: Choose the Right Loan for You
To find the best loan for your needs, think about your short- and long-term plans, your financial goals and your risk tolerance. Here are some scenarios to consider, along with the best home loan types for each. If you…
Plan to live in your home for many years.
Look for a low interest rate over a long period of time. Since you're going to be making payments for many years, your best strategy may be a fixed rate loan and pay points to get your rate as low as possible.
Plan to sell or refinance your home in just a few years.
You may wish to avoid points and closing costs, since the difference in interest payments won't typically make up for your out-of-pocket expenses at closing. Also, look for a loan that enables you to commit to a smaller down payment. An ARM is usually a good choice for holding rates down for a set number of years.
Want to pay off home loan by the time you retire or your kids are in college.
Shorter-term loans such as a 15-year fixed-rate home loan are an excellent way to ensure that you can use your income for other goals later in life. Another benefit is that you build equity faster.
Want to budget for a fixed payment each month, or don't want to risk paying higher interest rates.
A fixed-rate loan has a principal and interest payment that stays the same for the entire term of the loan. Avoid adjustable-rate or balloon loans.
Are comfortable with the risk of higher interest rates if it means you can qualify for a larger mortgage right now.
Adjustable rate mortgages are a great solution for people with incomes that are going to grow and who will quickly refinance or be able to afford a larger payment in a few years if interest rates rise.
Step 3: Picking Rates, Points and APR
At first, making sense of interest rates, points and annual percentage rates (APR) can be daunting. But it doesn't need to be. Like choosing the right loan type, it's all about choosing the down payment and monthly payment that fits your needs and lifestyle.
See How Your Interest Rate Affects Your Payment
The interest rate on a loan is used to calculate your monthly payment. The higher the interest rate, the higher your monthly payment. The lower the interest rate, the lower your monthly payment. Use the What will my monthly payment be? calculator to see how this works.
Lower Your Rate and Payment with Points
Also know as a loan's "origination fee," points are fees paid to the lender at closing. Each point is equal to one percent of the loan amount. For a $100,000 loan, a point equals $1,000. Two points would be $2,000.
So if you have the cash to put toward a down payment, it's a good way to save money on interest over the life of your loan. See how points affect rates. If you're low on upfront cash, then go for fewer points. All the points you pay on a purchase mortgage are deductible in the year you pay for them.
Use the APR to Compare Loans
The APR expresses the annual cost of a loan as a percentage, factoring in its rate, as well as the points and other charges over the life of the loan.
The Truth-in-Lending Act requires that all advertisements for home loan credit terms include the APR. The APR is intended to enable you to compare terms of loan products from different lenders. To make an accurate comparison, compare loans with the same terms, interest rates and points. Then look at the APR. The loan with the lower APR is the less expensive loan.
Lenders also provide the APR along with a loan's interest rate in the Truth in Lending Disclosure Statement. This document will be mailed within three days of your application submission.
Know When to Lock
If you're afraid rates are headed up, protect your buying power by locking in the rate at the time you apply for your loan.
What should you look for in a rate lock? Make sure it allows enough time for your loan to be processed. This is important because some lenders offer rate protection for just a week or 10 days - not long enough for many loans or home sales to be completed. If you exceed the lock-in period and your rate expires, you may see your loan rate go up.
Think rates might drop while your loan is being processed? At the time of your application, you might want to take a risk and let it "float" instead of locking. You can watch rates and lock in at any time until the day before your loan closes. The moment you tell your lender to lock the rate, that's the rate you'll get. But be careful. Rates are as difficult to predict as the stock market. And if rates suddenly shoot up, you could find yourself with a higher monthly payment than you planned or, even worse, unable to afford the home of your dreams.
Step 4: Getting Pre-Approved
Getting pre-approved is a strong first step if you're buying a home. It lets you show the sellers that you're serious. Many buyers find that they have increased negotiating clout if they are pre-approved when they conduct their home search. Plus, if you're pre-qualified, it's a snap to apply for full approval once you've found your dream home - or want to begin building one.
How to Begin
To begin the process, contact the following:
Dave will review your application, documentation and check your credit report. After he has determined that you're able to repay the loan, and subject to a full underwriting review, he will send you a letter of pre-approval.
To apply for pre-approval, you'll need the following information:
Names, current addresses, and Social Security Numbers for all borrowers
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Previous addresses for the last two years
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Pay stubs for the last month
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Two cycle's worth of bank statements for all assets
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W-2 forms for the last two years
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Tax forms for the last two years
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Step 5: Processing Your Loan
What You Need to Provide
Before we can underwrite your loan application, you will need to supply your Lender with certain personal documentation. This may include:
W-2 Forms: These allow the underwriter to scrutinize income and job history, which directly affect applicants' buying power and help reveal how great a risk they might be to the lender.
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Profit-and-Loss Statements (for the past two years): These help self-employed individuals substantiate their income. Gross income may appear low, but business expenses are often "written back" in tax deductions. Lenders usually require profit-and-loss statements, at least for the current year (year-to-date).
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Pay Stubs: These help confirm current income level and verify the applicant's employment. Upon closing, most lenders reconfirm employment, especially if much time has passed since the loan was underwritten.
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Bank Statements (three months' worth): Statements for checking, savings and other accounts indicate the applicants' resources. Underwriters generally hope to establish that the average amount required for a down payment has been maintained over time, not recently obtained.
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Other Assets: These include the value of bonds, stocks, life insurance, retirement funds, jewelry, automobiles, etc.
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Investment Statements: Statements include these for stocks, bonds and other investments.
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Tax Returns (two years' worth): A borrower's returns provide a wealth of financial information. Underwriters look for red flags that could reveal an unforeseen debt in the case of an audit.
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Liabilities: These include creditor names and outstanding balances for all debts including notes payable, 401(k) loans, life insurance loans, stock pledges and alimony.
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Telephone Numbers and Addresses of Your Workplace: These allow the lender to verify your income.
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Real Estate Owned: This includes property address, market value, outstanding liens, rental income, mortgage payments, taxes, insurance and maintenance dues.
Property Information
You'll also need to provide information about the property you plan to buy. This includes:
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Purchase Contract
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Planned Unit Development (PUD), Condominium or Co-Op
Name of development or project
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| Phone number of the homeowner's association (if available) |
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New Construction:
Year the land or lot was acquired
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Original cost of land/lot
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Amount of liens
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| Estimated cost of construction |
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Refinance Loans:
Year property was acquired
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Original cost of the home
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Cost of improvements
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Amount of liens
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| Description of improvements |
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What Goes on at Our End
After you submit the property information for approval, we'll order your title and escrow settlement. If you cancel the loan after title work has been ordered, you may be responsible for preliminary title fees charged by the title company.
Next, a qualified appraiser will look over the property and submit a report to us. This lets us determine if the home is worth enough to support your loan.
A final underwriting will take place that involves analyzing the appraisal report and your ability to repay the loan to determine our risk as a lender.
Once your loan has been pre-approved, the next step is to decide whether you will lock your rate with your loan officer. Locking in your rate ensures that your interest rate won't increase before you close your loan. Rate lock options include 30, 45, or 60 days. However, locking may not be the right choice for you, so you should consult with your loan officer.
Step 6: Closing Your Loan
The closing (or settlement) is the actual transfer of ownership from the seller to the buyer. At the closing, you will sign the paperwork, pay the final closing costs and finally take ownership of your new home. Your loan officer will work with you to schedule a closing date, which is indicated on your purchase agreement. Although the closing process varies by state, many activities are standard. For the closing costs, you'll need to obtain a certified or cashier's check, since personal checks usually aren't accepted by the title or escrow company.
What Happens at Closing
Closing costs and practices vary depending on your location, the type of property you're buying (house, condo or co-op) and individual circumstances. In some states, a neutral third party, usually an escrow company that is mutually chosen by the buyer and seller, transacts the entire closing process. In others, title companies customarily oversee the process. In the remainder, attorneys are engaged. Your loan officer can tell you what to expect.
The closing, typically held at a title and trust company, is the final hurdle to calling the house your home. You, the seller, real estate agents, the lawyers, the lender and any other interested parties will attend.
The steps below explain what usually happens during and after closing:
- The closing agent reviews the settlement sheet with you. Both you and the seller sign the settlement sheet.
- Signatures are collected for loan documents, such as the mortgage or deed, note and Truth-in-Lending statement. Evidence of the required insurance and inspections is presented.
- If everyone agrees that the papers are in order, you submit a certified or cashier's check to cover your down payment and closing costs. (Or, in some proceedings, it is drawn from an escrow account established for your home purchase.)
- The lender provides check funds covering the home loan amount to the closing agent.
- If your monthly payments are to include property taxes and insurance, a new escrow account (or reserve) is established.
- You receive the keys to your new home!
Key Closing Documents You'll Receive
HUD-1 Settlement Sheet
This itemizes the services provided and the charges to the buyer and the seller. You should be allowed to review this form shortly before your closing meeting so you know your closing costs in advance.
Truth-in-Lending (TIL) Disclosure
You should be mailed your initial TIL disclosure within three business days of applying for a home loan. It outlines the costs of your loan and discloses the annual percentage rate (APR) and other terms of the loan, including the finance charge, the amount financed, the payment amount and the total payments required. Since it's possible that the APR calculated at the time of your loan application will change a little before closing, your lender is required to give you the final version of your TIL disclosure at or prior to the closing meeting.
Deed of Trust or Mortgage (also known as the Security Instrument)
These documents convey a lien in your property as security for repayment of your home loan. (This means that if you default on your loan, your lender has the right to foreclose your ownership interest and take possession of the property.)
The Note
The mortgage (or promissory) note represents your promise to pay the lender according to the agreed terms. It includes the dates on which your home loan payments must be made and the location to which payments must be sent.
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