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A mortgage loan is the best way to the American Dream of owning your own home. Additionally, it can also be a great way for real estate investors to finance their properties. No matter which one of these categories you fall into, the steps below will help you learn how to obtain the financing you need.
- Your mortgage loan journey needs to begin at least 3-6 months before you plan to talk to lenders. At this time, you need to pull all three of your credit reports and all three of your FICO scores. The scores you buy need to come directly from the FICO website. Purchasing these numbers from a credit reporting agency or other website will not do you much good, as they do not use the FICO formula to calculate the scores they sell. Likewise, the credit reports that you purchase should come directly from each of the three credit reporting agencies, as they will be most accurate. This is not the time to skimp out on the right way to do things in order to save some money.
- Once you have your reports and scores, you need to go through them several times to determine your credit standing. It is important to make sure that each item is reporting correctly. Just because you do/did owe a debt that is listed, does not mean that the entire entry is reporting as it should be. Keep in mind that credit reporting agencies have a very high discrepancy rate. If there are inaccuracies, you will need some time to get them corrected.
- Next, you will want to do a little research to see what kind of mortgage loan you could possibly qualify for. This includes conducting an Internet search to obtain unofficial quotes, without allowing the companies to pull your credit report. Typical questions you will be asked include what your income is, how much you owe toward debt each month, and what your average FICO score is. Give fair and truthful answers to receive the most accurate initial quote to work from. Although this will only be an estimate of what you may be able to expect, you can still use it to help you plan during steps #5 and #6.
- Once you know what kind of rate to expect, you can use this number to help determine what kind of monthly payment you can reasonably afford. This monthly payment amount can then help you determine what kind of home you should look for, depending on how many years you plan to carry the loan. This may also be a good time to make a list of currently available homes that you are interested in.
- Calculate how much you will need at closing and if this is a number that you can afford. These costs will include more than just your down payment, as there will also be many fees from the mortgage process that could add thousands of dollars onto your total. Additionally, if you have any outstanding debts on your credit report, you will likely be required to pay for those at closing. It is important to know that creditors and collection agencies monitor credit reports of debtors. Many times they will hold on to your debt until they see that you are looking for a mortgage (based on hard inquires from mortgage lenders appearing on your credit reports) and add the debt to your report before closing. Make sure you know what kind of potential debts could pop up and that you can afford to pay them at closing.
- Pre-qualify with the companies that you are most interested in borrowing from to see the rate each will be able to offer you. You can use these numbers to help determine which company you ultimately want to go through. Saving even 0.25% on your interest rate can save you thousands on a 30-year mortgage loan and may even save you $100+ on your monthly payment.
- Once you have decided on a lender, you can then fill out the official application. Since you have been in contact with the mortgage loan officer and they know the specifics of your credit and financial standing, you will likely be approved. However, your application still needs to be processed and underwritten before the offer is finalized.
- Closing is your last step before you receive funding for your home. At closing you will need to sign the final papers with the seller of the home, pay your down payment and closing cost fees, and have the title of the home legally transferred to you.
Sometime between steps #6 and #8, you will need to make a final decision on the home that you want to buy. You also need to be in contact with your realtor at this time, so that you can have a deal finalized with the seller of the home by the time you have completed your mortgage loan search. This will allow you to move as quickly as possible from being approved for a loan to living in your new home.
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Organize Your Documents
A properly documented loan application makes your loan process go smoothly. This checklist will help you gather your paperwork.
- Complete and sign the residential loan application, Form 1003, and the attached loan info sheet, credit authorization and fair lending notice. Page 5 of the application is a continuation page in case you need additional space for your assets or liabilities. If you make a mistake while filling out the application cross it out, and make a change. Do NOT use whiteout.
- If you are salaried: provide W-2's for the previous two years and one month of paystubs. If you are self-employed, provide tax returns for the previous two years, including all schedules, and a YTD profit and loss statement. (Note: provide copies of all requested documents. Do not provide original documents.)
- If you own rental property, provide recent rental agreements and tax returns for the previous two years, including all schedules.
- To speed up the approval process, provide bank statements for the most recent three months, and recent statements for stock, mutual funds and IRA/401K accounts.
- If you are requesting a cash out refinance, provide a letter explaining how you will use the refinance proceeds.
- If applicable, provide a copy of your divorce decree and settlement agreement.
- If you are NOT a US citizen, provide a copy of your green card (front & back). If you are NOT a permanent resident provide a copy of your H-1 or L-1 visa.
- If any borrower has filed bankruptcy, provide the Discharge Notice, Filing and Schedule of Creditors.
- If you are applying for a home equity line of credit or loan (second loan), also include your first mortgage note. (This should be with your closing loan documents.)
Get Qualified
Getting qualified before you apply for a loan can help you understand how much you can borrow.
When buying a home, you may be pre-qualified or pre-approved. You can be pre-qualified over the phone or on the Internet in a few minutes. Pre-qualification is not as useful as pre-approval. Pre-approval requires a more rigorous process, including verification of your credit, income, assets and liabilities. It is highly recommended that you be pre-approved before you start looking for a home.
Being pre-approved will:
- Inform you of your maximum affordable home value, and save you from previewing properties outside your price range.
- Put you in a stronger negotiating position with the seller, because the seller will know your loan is pre-approved.
- Help you close quickly, since your loan is pre-approved.
Shop Loan Programs and Rates
What loan program is best for your situation? Lenders offer many different loan options:
- Think about how long you plan to keep the loan. If you plan to sell your home in a few years, you may want to consider an adjustable rate or balloon loan. If you plan to keep your home for a longer time, you may want to consider a fixed rate loan.
- Understand the relationship between rates and points. Points are considered prepaid interest and may be tax deductible. Each point is equal to 1 percent of the loan. For example 1 point on a $150,000 loan is $1,500. The more points you pay, the lower your rate.
- Compare different loan programs. With so many programs to choose from, it's hard to figure out which program is best for you. Consult an experienced loan officer who can help you find a loan program that best fits your short- and long-term plans.
Obtain Loan Approval
Once your loan application has been received, we will start the loan approval process immediately. This involves verifying your:
- Credit history
- Employment history
- Assets including your bank accounts, stocks, mutual fund and retirement accounts
- Property value
- Based on your specific situation, additional documents or verifications may be required.
To improve your chances of getting a loan approval:
- Fill out the loan application completely.
- Respond promptly to any requests for additional documents. This is especially critical if your rate is locked or if you plan to close by a certain date.
- Do not make any major purchases. Do not buy a car, furniture or another house till your loan is closed.
- Anything that causes your debts to increase might have an adverse affect on your current application.
- Do not move money into your bank accounts unless it can be traced. If you are receiving money from friends, family or other relatives, please contact us.
- Do not go out of town around the closing date. If you do plan to be out of town when your loan is expected to close, you may sign a power of attorney, to authorize another individual to sign on your behalf.
- Notify your loan officer before applying for any other credit, including credit cards, personal loans or even with another mortgage company. Some loan programs have strict guidelines regarding your credit score. Credit inquiries may lower your credit score and may have an adverse affect on your loan approval.
Close the Loan
After your loan is approved, you will be required to sign the final loan documents. This will normally take place in the presence of a notary public. Be prepared to:
- Bring a cashiers check for your down payment and closing costs if required. Personal checks are normally NOT accepted.
- Review the final loan documents. Make sure that the interest rate and loan terms are what you were promised. Also, verify the accuracy of the name and address on the loan documents.
- Sign the loan documents. The notary will require that you have your picture ID with you. Some lenders also require to see your Social Security card.
Your loan will normally close shortly after you have signed the loan documents. On refinance and home equity loan transactions, federal law requires that you have three days to review the documents before your loan transaction can close. Purchase transactions do not have a three day rescission period.
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