Getting The Loan: Table Of Contents

• What Home Loan Lenders Want
• Pre-approval Gives You An Edge
• Steps In The Application Process
• Popular Questions Lenders Ask
• Home Loan Documents To Prepare
• Closing: Sealing the deal

What Home Mortgage Lenders Look For

There are a lot of hoops to jump through when you apply for a home loan so I have broken down the process into its most fundamental steps.

A home mortgage lenders task is to judge whether you can be trusted to pay back a home loan. To help them with their judgment they often look to “the three Cs” when they go over your application.

1. Capacity: Capacity is your current and future ability to make payments. Home mortgage lenders will look at your income, employment history, savings, and monthly debt payments.

2. Collateral: The principal collateral for a loan is typically the proposed mortgaged property. In addition, if you have savings, land, property, or other valuable assets, they can be used to secure loans.

3. Credit: Home mortgage lenders look at your credit and on-time payment history to see your record of paying bills and debts.

Home mortgage lenders will ask to see your financial statements (pay stubs, W-2 forms, credit reports etc) to help judge your capacity, collateral and credit.

A good strategy for getting the home you want is to get pre-approved for a home loan.

Continue: Getting pre-approved

Getting The Loan: Table Of Contents

• What Home Loan Lenders Want
• Pre-approval Gives You An Edge
• Steps In The Application Process
• Popular Questions Lenders Ask
• Home Loan Documents To Prepare
• Closing: Sealing the deal

Pre-approval vs Pre-qualification

Getting pre-approved for a home loan can bring some major benefits. Most notably you will have more bargaining power and clout with home sellers.

Before I get into further detail about the benefits of pre-approval let me explain that there is a difference between pre-approval and pre-qualification.

What does it mean to be pre-qualified for a home loan?

Getting pre-qualified for a home loan means you submit your financial info (gross income, credit score, debts etc) to a home mortgage lender so they can evaluate what size home loan you are eligible for.

It’s kind of like a test run for a mortgage application because the lender does not follow up to verify your financial info.

Pre-qualification is nonbinding since they essentially take your word that the financial info you submit is true.

Why get pre-qualified for a home loan?

Getting pre-qualified is free and (if you’re honest) gives you a good idea of what you can actually afford. There are no obligations and knowing your financial parameters is crucial to making prude decisions.

What does it mean to get pre-approved for a home loan?

Getting pre-approved is one step better than getting pre-qualified. You submit your financial info (income, assets, credit score, debts etc.) to a home mortgage lender who then contacts your employer, bank, credit agency etc. to verify your information.

If everything checks out, the mortgage lender issues you a “statement of approval” for a mortgage size that best fits your financial info.
For example, a home mortgage lender may analyze your financial info and deem you fit for a home loan of up to $200,000.

Why get pre-approved for a home loan?

Pre-approval lets you know exactly what your financial parameters are. This gives you bargaining leverage with home sellers since they know you have buying power.

If a home seller is presented with two offers, one from a pre-approved borrower and one from a non-pre-approved borrower, they will gravitate towards the one who is pre-approved. You may even be able to negotiate a cheaper home purchase price since the home seller knows you will be approved for your home loan.

Real estate agents love working with pre-approved borrowers since it allows them to target homes that truly “fit”.

Keep in mind…

Pre-qualification and pre-approval indicate the maximum amount a lender feels you can afford.

If you get approved for a $200,000 home loan it does not mean you have to go out and spend $200 grand on a new pad.

Many new buyers run out and grab biggest house they can afford… this doesn’t leave much wiggle room to do things like furnish the place or pay for home maintenance costs (utilities, land scaping etc.) It is also prude to leave yourself some outs in case your financial situation suddenly turns for the worst.

Continue: Steps in the application process

Getting The Loan: Table Of Contents

• What Home Loan Lenders Want
• Pre-approval Gives You An Edge
• Steps In The Application Process
• Popular Questions Lenders Ask
• Home Loan Documents To Prepare
• Closing: Sealing the deal

The 3 Basic Home Loan Application Steps

1. Your mortgage lender will get an appraisal.
The appraisal will determine the market value of your new home, which will be used as collateral for your loan. You’ll be charged a fee for this service which will probably be included in your closing costs.

2. Your mortgage lender will inspect your credit report.
Your lender will look at your credit report to verify your credit history. You’ll be charged a fee for this document as well. If you’re pre-approved, this step may have already been completed.

3. Your lender will verify your personal information.
Your mortgage lender will verify your bank account and employment information (If you’ve been pre-approved this step may have already been completed). Your mortgage lender may ask you for your 2 most recent monthly bank statements or pay stubs. If you can’t provide them, a Verification of Employment (VOE) and Verification of Deposit (VOD) will be mailed on your behalf to verify the last 2 years of employment and banking information.

Home Loan Documents For You

To protect you from getting ripped off your mortgage lender is required by law to provide you with the following documents:

• Truth-in-Lending disclosure: this disclosure includes a summary of the total cost of credit, such as the Annual Percentage Rate (APR) and other specifics of the loan.

• “A Home Buyer’s Guide to Settlement Costs.”: This guide is a government publication that describes the closing or “settlement” process, associated costs, and your rights.

• Adjustable-Rate Mortgage (ARM) disclosure: If you select an Adjustable Rate Mortgage, this disclosure includes information about terms and costs associated with ARMs, past performance of the index to which the interest rate will be tied, and the “Consumer Handbook on Adjustable-Rate Mortgages.”

• Annual Percentage Rate (APR) information: This is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fee and any other charge you’re required to pay in order to obtain your mortgage loan.

Be prepared to meet with your home mortgage lender in person. I have outlined some common questions mortgage lenders ask borrowers in the next section.

Continue: Popular Questions Home Loan Lenders Ask

Getting The Loan: Table Of Contents

• What Home Loan Lenders Want
• Pre-approval Gives You An Edge
• Steps In The Application Process
• Popular Questions Lenders Ask
• Home Loan Documents To Prepare
• Closing: Sealing the deal

How to get approved

Home mortgage lenders don’t mess around with their money and they will thoroughly investigate your ability to pay back a home lone.

Here is a list of common questions home mortgage lenders ask.

Employment and income

• Who do you work for?
• What is your gross annual income?
• How long have you been employed in your current position?
• Is your income steady, irregular or seasonal?

If your income is irregular or seasonal you may have to provide more details to get good rates on your home mortgage.

Current Outstanding debts

• Do you have recurring debts?
• Are you paying back an auto loan(s)?
• Do you have credit card debt?
• How much of your monthly pretax income do these debts consume?

Cash reserves and assets

• How much money do you have in the bank?
• How much will be left after you pay your down payment and closing costs?

Down payment

• How much money are you putting down?
• Is this your own money?
• If not, is it a gift from your parents?
• A nonprofit agency grant?

Loan purpose

• Is this mortgage for a home buy or refinance?
• If it’s a refinance, do you want to take cash out at closing to pay off other debts?
• If so, how much?

Property use

• Do you plan to live in the house?
• Is it investment property?

Property type

• A condominium?
• A duplex?

Home mortgage lenders with look favorably upon you if:

• You are steadily employed (two or more years) with the same employer or in same line of work.
• You have low debt: no recent major buys (such as automobiles) and a debt-to-income ratio of 36 percent or less.
• You use your home loan strictly for buying a home (or rate-and-term refinance).
• You use your home as a single-family primary residence.
• You put a down payment of at least 5 percent (of the purchase price) with your own money.
• You have at least two months’ worth of mortgage payments in the bank after closing.

Home mortgage lenders will tend to avoid you if:

• You are self-employed or doing contract work.
• You have high debt: ie. credit cards maxed out, total debt-to-income ratio more than 36 percent.
• You intend to use your home as a vacation house or rental.
• You have no cash left after home purchase and closing costs.
• You put a down payment of 3 percent or less (of the purchase price) and the money is borrowed.

When you meet with your home mortgage lender you will need to have your paperwork in order.

Continue: Home Loan Documents To Prepare

Getting The Loan: Table Of Contents

• What Home Loan Lenders Want
• Pre-approval Gives You An Edge
• Steps In The Application Process
• Popular Questions Lenders Ask
• Home Loan Documents To Prepare
• Closing: Sealing the deal

A home mortgage lender will want proof of your assets, income, credit report, debt situation and or other financial information.

I have outlined some documents you should prepare in case your mortgage lender needs them.

Documents To Prepare

• Your federal tax returns and W-2 forms from the past two years.
• You should have one or more recent paycheck stubs. Your name, Social Security number, name and address of your employer and year to date earnings should all be printed in the stub.
• If you have other income streams bring documented proof of each. Other income streams could stem from a second job, overtime, commissions/bonuses, interest and dividends, Social Security disbursements, VA and retirement benefits etc.
• Your most recent credit report from a certified credit agency (Equifax, Experian or Trans Union are the big names).
• Your list of current creditors including credit card issuers, student loans, car loans, child support and alimony. You may be asked to show proof of your minimum monthly payments and total balances, too.
• Your investment records: mutual fund statements, real estate and automobile licenses, stock certificates and proof of other investments or assets.
• If you have found the home you want to buy produce a home sales contract, including the purchase price.

Not all home mortgage lenders will require you to produce these documents. If you have very strong credit they may not ask you to produce much at all. Nonetheless, it doesn’t hurt to be prepared.

Continue: Closing: Sealing the deal!

Getting The Loan: Table Of Contents

• What Home Loan Lenders Want
• Pre-approval Gives You An Edge
• Steps In The Application Process
• Popular Questions Lenders Ask
• Home Loan Documents To Prepare
• Closing: Sealing the deal

You’re almost there! The last step before you get the keys is to finalize the closing requirements on your home mortgage.

To explain how to close a home I have found a fantastic article written by Bill Yeager, Vice President of Realty Services for LendingTree.

What’s involved in closing on a home?

Closing consists of all the necessary final steps involved in sealing the deal on a home purchase. It includes:

The offer to purchase
There’s no foolproof way to make an offer that’s guaranteed to be accepted by the seller. But once you find your perfect home, it’s wise to move fast. A good rule of thumb is to make an offer that’s eight to 10 percent below the asking price, though that might not work in some areas based on trends in the market. This gives you some room to negotiate, but don’t top what you’ve predetermined to be the highest price you can afford.

The deposit
Also known as earnest money, this is a demonstration of good faith and commitment by the buyer to the seller. It is usually one percent of the home’s purchase price and is included in an offer to purchase. Either the real estate agent or the seller’s lawyer holds the deposit in trust until the deal closes. If you decide not to close on a deal once your offer has been accepted, you may lose your deposit and be sued for damages. If the seller does not accept your offer, your deposit will be returned. If the sale proceeds, your deposit is usually applied to your down payment.

Contingencies
These are certain requirements specified in a contract that need to be met before the buyer is required to close. Typical among them: the buyer’s securing of financing and an acceptable house inspection. Generally speaking, an inspection contingency covers a 10-to-14-day period from the acceptance of the contract, and financing contingencies run for 30 days. But in a seller’s market, buyers may be asked to fulfill their contingency requirements in shorter time frames.

Home inspection
In a home inspection, a professional conducts a thorough examination of a property to assess its structural and mechanical condition. The idea here is that a trained home inspector will be able to catch potential problems that a buyer might not detect.

The contract
This follows the acceptance of an offer by the seller, and it is a legal and binding obligation, on the part of the buyer, to purchase the property if any contingencies are met. It outlines the details of the transaction, including: a description of the property, the selling price, the date of closing, the possession date and any applicable contingencies.

Settlement sheet
Also called a “closing statement” or a “settlement statement,” this is a document that the Department of Housing and Urban Development requires to account for all financial aspects surrounding the sale and purchase of a home. It provides an enumerated list of the funds that were paid at closing. Items on the statement include real estate commissions and initial escrow amounts (money or securities deposited with a neutral third party — the escrow agent — to be delivered upon fulfillment of certain conditions). The Real Estate Settlement Procedures Act requires that a copy of the settlement sheet be distributed to both parties at least one day prior to settlement.

Closing documentation
Before you can close on a house, some paperwork must be completed. This includes a title search to make sure the title is clear, title insurance to protect the buyer and the lender from an oversight regarding a claim on some aspect of the property and an application for homeowner’s insurance (necessary for securing a mortgage).

Closing costs
The total amount of closing costs varies, but may include: a loan origination fee, an appraisal fee, the cost of a credit report, a lender’s inspection fee, the cost of title insurance, a mortgage broker fee, taxes and a fee for document preparation. Your lender is required to give you prior notice of fees associated with your loan.

Final arrangements
Before the deal is closed and you take possession, you must make some practical arrangements regarding utility service and first mortgage payment.

Settlement
Settlement describes the payment of the balance of the purchase price the buyer owes on the property, and the transfer of the title. It takes place on the possession date specified in the agreement.

How To Lower Home Loan Bills: Table of Contents

• What Affects Your Home Mortgage Payments
• Why Credit Matters
• Advantages Of Discount Points
• Big Down Payments Pay Off
• Working With Small Down Payments

Getting A Home With A Small Down Payment

Having little to no savings these days is not the hurdle it used to be when it comes to getting a home loan. The past few years have seen an increase in home mortgages with low 3 percent down payments according to the Mortgage Bankers Association.

There are many programs out there that specifically help first time buyers and low-income families get approved for a home loan.

Check with home mortgage lenders in your area to see if you qualify for local home loan assistance programs.

The Big Time Home Loan Helpers

Federal Housing Administration: Part of the Department of Housing and Urban Development the FHA insures home mortgage loans made by private lenders. They will help you buy a home with a down payment of from 3 percent to 5 percent of the FHA appraised value or the sale price, whichever is lower.

Fannie Mae: A major corporation, Fannie Mae buys mortgages from lenders and sells them to investors. They offer a home loan for modest income borrowers that requires a 3 percent down payment on either a 25- or 30-year fixed mortgage. The stipulation is that you must take a homebuyer education session to qualify for this loan.

Veterans Administration: The VA will assist qualified veterans in buying a home that costs up to $203,000. Respectfully, the qualification guidelines for VA loans are more flexible than those of FHA and conventional loans.

Rural Housing Service: Part of the Department of Agriculture the RHS assists farmers and other qualified borrowers obtain low interest home loans for property in rural areas. This program is intended for low to moderate-income borrowers who live in small towns or rural areas.

State and local government programs: Many states or local housing agencies sponsor programs to help first-time homebuyers who meet specified income guidelines. These programs offer home loan terms with a low down payments and/or low interest rates. Some state and local programs also may offer down payment and closing cost assistance. Check with your state or local housing authority.

Continue: Getting The Loan!

How To Lower Home Loan Bills: Table of Contents

• What Affects Your Home Mortgage Payments
• Why Credit Matters
• Advantages Of Discount Points
• Big Down Payments Pay Off
• Working With Small Down Payments

Down Payments Explained

The dreaded down payment is the biggest obstacle between most homebuyers and a home loan according to Steve O’Connor, senior director of residential finance at the Mortgage Bankers Association of America.

People in low-income brackets, and those who have low accumulated savings struggle with down payments the most.

A down payment is a lump sum of cash you pay up front when you get a home loan. A home mortgage usually requires a cash down payment of 5 percent, 10 percent or 20 percent of the home purchase price.

The good news is home mortgage lenders are starting to embrace small to no down payment loans. (See my article on 100% loans).

Big Down Payments Pay Off

The benefit of making a substantial down payment - lets say 25 percent to 30 percent of the purchase price - is that your lender may turn a blind eye to past credit problems. They may even approve your loan without conducting an income check.

In addition to lowering your principal payments, putting a large down payment can also decrease your interest rates.

If you have the cash and know you can afford the monthly payments then paying a big down payment could help you buy more house.

Small Down Dayment? You Have To Pay Home Mortgage Insurance.

If you put less than 20 percent down on a home mortgage then you will have to get private mortgage insurance (PMI).

PMI protects the lender (not you!) in case you cannot pay your home mortgage bills.

PMI typically costs 0.50% of the loan size and is billed monthly.

Continue: Working with small down payments

How To Lower Home Loan Bills: Table of Contents

• What Affects Your Home Mortgage Payments
• Why Credit Matters
• Advantages Of Discount Points
• Big Down Payments Pay Off
• Working With Small Down Payments

Discount Points Reduce Your Home Loan Monthly Interest Rate

Yes, discount points reduce the interest rate on your home loan… but, you have to buy them.

A discount point is a fee you can pay (when you purchase your loan) that will reduce your interest rate for the life of the home loan.

One discount point typically costs 1% of the purchase price of the home.

One discount point typically reduces your interest rate by .250% for a fixed home loan and .375% for an adjustable rate home loan.

Should You Buy Discount Points With Your Home Loan?

It depends. If you plan to stay in your home for a while and have some extra coin to burn then putting up money for discount points will help you save in the long run.

If cash is tight and you need the lowest possible closing costs then scoring a 0 point home loan will suit you best.

For example, let’s say a home mortgage lender offers you a 30 year fixed rate mortgage of $165,000 at 6 percent interest with no points. The monthly principal and interest payments would be $989.

If you pay 2 discount points at closing for $3,300 you could bring your interest rate down to 5.5 percent. This yields a monthly payment of $937 and you would save $52 a month. If you keep your home for the whole 30 years you would save $15,420.

If you plan on selling your home before 5 years then buying 2 discount points wouldn’t make sense since it would take you 64 months (just over 5 years) to earn back the $3,300.

If you have extra capital to spend you may consider paying a large down payment.

Continue: Big Down Payments Pay Off

How To Lower Home Loan Bills: Table of Contents

• What Affects Your Home Mortgage Payments
• Why Credit Matters
• Advantages Of Discount Points
• Big Down Payments Pay Off
• Working With Small Down Payments

Understand Your Credit And Lower Home Mortgage Bills

Home mortgage lenders will probe every page of your financial history when they go over your home loan application.

They primarily focus on your credit report, which outlines your debt history and other financial information.

Your credit report will give you a credit score: a number that rates how good you are at paying people back.

This number typically ranges from 300 (bad) to 900 (uber spectacular!) with most people falling in the 600 – 700 range.

Your credit score is determined by the following:

Your past delinquency: If you have failed to make payments in the past the assumption is you will fail to make payments in the future. Recent delinquencies are considered more seriously than past ones.

Your length of credit: The longer you have had credit, the better.

Your credit use: If your credit limits are brimming you will be viewed as risky, even if you make all your payments on time.

Your credit mix: If you have a combination of revolving and installment debt you are considered less risky than someone with only a secured credit card.

The better your credit score the more leverage you have to negotiate good home mortgage terms with your lender.

Leveraging Your Credit Report To Get A Low Interest Rate

An estimated four out of five credit reports contain errors. So check out your report and clean up the mess.

Get copies of your credit report from the big three reporting agencies: TransUnion, Equifax and Experian. Go over each report and look for differences and or anomalies.

If your report has some late payments on it be prepared to explain what happened. Home mortgage lenders are human and can be persuaded or sympathetic just like anyone else.

If you have any outstanding bills pay them off! Every day you wait increases your rate and decreases your potential home loan amount.

The longer you can demonstrate timely payment habits the better your credit score becomes. It is never too early to start building your credit.

If You Have Poor Credit

Start improving your credit score (by making payments on time!) at least 6 months before you apply for a home loan.

If you don’t want to wait six months you can still take measures to create the effects of good credit… but it will cost you.

If you have extra cash to burn then paying a sizable down payment will influence home mortgage lenders to ignore credit blemishes.

If you have a little extra cash but not enough to splurge on a huge down payment then you can reduce your interest rate slightly by purchasing discount points.

Continue: Discount Points Reduce Your Rate