The process of applying for and getting a conventional mortgage loan usually takes just a few weeks. Government loans, and conventional loans issued to borrowers with serious credit problems, can take up to a few months to process. Once you’ve chosen a lender to work with, the process should include the following steps:
- Get prequalified or preapproved for a loan.
- Find a home that you’d like to buy.
- Compare loans with your lender or broker.
- Complete an application for the loan you want.
- Get a good-faith estimate from your lender.
- Get approved (or rejected) for your loan.
- Provide proof of homeowner’s and mortgage insurance.
- Attend the closing to finalize the transaction.
1. Get Prequalified or Preapproved
Once you’ve chosen a lender and a size and type of loan, the next step is to get prequalified or preapproved.
- Getting prequalified: To get prequalified, you provide the lender with information about your income, assets, and debt. The lender then generates an estimate of what size mortgage you likely can get. Once you have an estimate, you’re prequalified for a loan, a much less formal version of preapproval.
- Getting preapproved: To preapprove you for a mortgage, the lender conducts a thorough analysis of your financial documents. You’ll likely need to provide pay stubs, tax returns, and copies of account statements. Some lenders charge a fee of about $50 in order to preapprove you for a mortgage.
Prequalification and preapproval indicate that you’re likely to qualify for a mortgage of a particular type and size, but neither guarantees that you’ll be approved when you actually apply for a loan. Even so, it’s always helpful to get preapproved, not just prequalified, for a mortgage.
2. Find a Home that You’d Like to Buy
Once you’ve been preapproved, you’re ready to shop for a home. As you shop, remember that you’ve been preapproved for a loan of a certain size. That doesn’t mean you absolutely must stick within that price range, but choosing a significantly more expensive home will require you to start all over with your lender. After you find a home, you’ll:
- Make an initial offer to the seller: Your offer should be 10–15% below the total of the loan amount for which you’ve been preapproved plus the down payment that you expect to pay. That way you’ll still have wiggle room if the seller demands a higher price.
- Negotiate a final deal with the seller: Once the seller receives your initial offer, he or she will likely make a somewhat higher counteroffer. You’ll then negotiate other terms of the deal, such as whether the seller will pay for repairs or upgrades to the property.
- Sign a purchase agreement: A purchase agreement is a contract that formalizes the terms of the deal to which you and the seller have agreed. Usually the buyer’s real estate agent drafts the agreement.
3. Compare Mortgage Loans
After you’ve signed a purchase agreement, set up an appointment to meet with your lender to discuss specific loans to apply for. Ask your lender to present you with at least 3–5 loan options that have the type, term, and amount that you want. At the meeting, ask your lender to help you compare the various loans. In particular, pay close attention to the following three factors as you compare:
Disregard any interest rates your lender quotes except the annual percentage rate (APR) of each loan, which includes all of the loan’s costs in a single rate. If you’re comparing two 30-year fixed loans with APRs of 6.9% and 7.1%, the loan with the lower APR will have the lower total cost.
Not to be confused with a loan’s term, a loan’s terms are its various features and rules, such as prepayment penalties (see below) and, for ARMs, the adjustment frequency.
Some loans include a prepayment penalty that specifies a period of time during which the borrower cannot pay down the principal faster than through the normal amortization of the loan. The restrictive period usually lasts only for the first few years of the loan, but some loans have prepayment penalties for the entire term. Never get a loan with prepayment penalties of any sort. The only way to be 100% sure that your loan doesn’t include one is by reading all of your loan documents carefully before you sign—unscrupulous lenders may try to introduce a prepayment penalty clause at the last minute.
Closing costs refer to all of the costs associated with approving and processing a loan, including origination fees, appraisal fees, and any points you pay on the loan (explained in step 5). Closing costs typically amount to 2–5% of the principal and are usually tax deductible. In addition to the fees that the lender charges for processing your loan application, expect to pay these closing costs as well:
- Appraisal fee: This fee covers the appraisal that the lender commissions in order to assess the value of your property. The cost varies based primarily on the size of the home. Appraisals usually cost $150–500 depending on the size and market value of the home. For more info on the appraisal, see step 6.
- Credit report fee: A fee of $40–60 that the lender charges to order and review your credit report.
- Title search fee: The term title refers to the official ownership of a piece of property, such as home or car. Lenders conduct a title search before approving a loan to confirm that the seller of the property actually does own the property and to ensure that no outstanding liens or other judgments involving the property exist that could potentially impact the value or transaction of the property. Title search fees usually cost $250–500 based on the value of the property.
- Title insurance fee: Lenders take out title insurance policies to protect them from any problems with the property’s title that the title search did not detect. This fee varies widely by state—from $100–1,000 or so.
At this point in the approval process, most lenders will offer you only a very rough estimate of closing costs. You’ll get a more accurate estimate in step 5.
4. Apply for the Loan
Once you’ve selected a specific loan to apply for, you’ll need to complete a loan application and submit documentation that the lender requires.
- Loan application: The Uniform Residential Loan Application, also called Form 1003, is a five-page form that the U.S. government requires all loan applicants to complete. Completing the form involves providing specific information about the type of loan for which you’re applying, the property you’re interested in buying, plus details about your income, assets, and existing debts.
- Documentation: The specific types of documents you need to provide at this stage vary from lender to lender. It’s a good idea to have all of the documents listed in step 4 of “Initial Preparations for a Mortgage” earlier in this guide. You should also be prepared to sign a document that gives the lender permission to contact your employers and previous landlords (if any) and to obtain your credit reports, in order to confirm the information in your documents.
5. Receive a Good-Faith Estimate
Your lender is required by law to provide you with a good-faith estimate (GFE) within three days after you apply for a loan. The GFE provides an estimate of your loan’s closing costs and specifies the interest rate that the lender is willing to offer you. Since the GFE is only an estimate, expect your final closing costs to vary somewhat from the numbers quoted in the GFE. The interest rate will also likely change, unless you pay to lock it.
Should You Lock Your Interest Rate?
An interest rate lock protects you from changes in interest rates that occur between when you receive your GFE and when you actually get your loan. Most lenders will lock the rate quoted in your GFE for free for 30 days, including adjusting the rate downward if rates fall. For a fee of 1/8–1/4 of a point (1 point = 1% of your principal), the lender will guarantee your rate for up to 60 days and adjust the rate downward if rates fall. It usually makes sense to pay to lock your rate if:
- You don’t expect to close on your loan within 30 days
- You’re getting a loan at a time of volatile interest rates, especially if rates are rising steadily
Locking programs vary, so inquire with your lender if you’re interested in locking your rate.
Should You Pay Points?
Lenders often will agree to lower the interest rate quoted in your GFE in exchange for an up-front cash payment. Each point you pay is equal to 1% of your principal and reduces your rate by a certain fixed amount, usually a fraction of 1%. For example, paying two points on a $100,000, 30-year fixed mortgage with a 6% APR would cost $2,000 and might lower your rate to 5.5%. A simple calculation can help you decide whether to pay points:
- Calculate the difference in monthly payments that will result from paying points. Using the numbers in the example above, paying two points will reduce the monthly payment from $599.55 to $567.79, a difference of $31.76 per month.
- Divide the amount paid in points ($2,000) by the monthly payment savings ($31.76). The result will indicate how many months you will need to “break even” on the cost of your points. In the above example, it would take 2,000 ÷ 31.76, or about 63 months.
- Consider how long you plan to live in the property and/or how long you expect to keep your loan. If you plan to sell the house or refinance your loan (to get a lower rate) within less than the time it takes to break even on your points (63 months in this example), you should not pay points.
6. Get Approved for Your Loan
Even at this point, you are still not definitively approved for your loan. The final preapproval step involves turning over your loan to a loan processor (usually an employee of your lender) who reviews all of your documentation to confirm the information in your loan application. Expect the loan processor to call you during the process if they run into any difficulties verifying your information—if they do call, it’s essential to respond immediately in order to keep the process on track.
The Lender’s Appraisal
While the loan processor is working on finalizing your loan, the lender will arrange for an independent appraisal of the property you intend to buy. The goal of the appraisal is to confirm that the property is worth at least as much as the loan principal amount—if the appraiser’s report concludes that the property is not, the lender will most likely not approve the loan. Most lenders include the appraisal fee in the loan’s closing costs, though some lenders cover this cost themselves. If you pay for the appraisal, you’re entitled to receive a copy of the appraiser’s report.
The Lender’s Approval
Assuming all goes well with the appraisal and the loan officer’s investigative research, the lender will send you a:
- Commitment letter: A letter from your lender stating that your loan has been officially approved
- Truth-in-Lending disclosure statement (TIL): A form that lists the estimated total costs, monthly payment amounts, and main terms of your loan
Review these documents carefully. If you uncover any problematic discrepancies with earlier cost estimates or loan terms that you’ve received, discuss them with your lender as soon as possible.
If the Lender Rejects Your Loan Application
If your loan application is rejected, you’re entitled to know the specific reasons why. The most common reasons you might be rejected are if you fail to provide sufficient information, the appraised value of the property is insufficient, or problems arise with your application that had so far gone undetected, such as undisclosed credit- or income-related issues. Once you know exactly why your loan was rejected, ask your lender to recommend alternative options. Depending on the specific reasons why you were rejected, you might still qualify for a different type of loan or a loan with a lower principal.
If you’re rejected by lenders more than once and don’t know what to do, consider looking for properties that offer seller financing. Seller financing is an alternative home loan arrangement in which the seller offers the buyer a loan directly to finance the purchase of the property. The buyer then pays the seller interest on the loan, circumventing the ordinary loan approval and payment process entirely. Seller financing has certain advantages over regular financing—the approval process is less stringent, and sellers are sometimes willing to overlook credit problems and other issues that lenders could not ignore.
7. Provide Proof of Insurance
After you’ve been approved, the last step before you receive your loan and close on your property is to provide your lender with proof that you’ve obtained homeowner’s insurance. Homeowner’s insurance covers property- related losses that result from catastrophic events, such as fires and hurricanes. Mortgage lenders typically require you to obtain an amount of homeowner’s insurance equal to the total replacement value of the property—the amount it would cost to replace the home if it were completely destroyed. Homeowner’s insurance costs vary based on the value and location of the property—most policies cost at least a few hundred dollars per year. Some of the most popular homeowner’s insurance providers include:
- Allstate: www.allstate.com
- State Farm: www.statefarm.com
Once you’ve obtained a policy, ask your insurer to fax your lender a proof of insurance form to certify that you have a homeowner’s insurance policy in place.
Private Mortgage Insurance (PMI)
If you’re required to buy PMI, you’ll need to provide proof that you’ve obtained a PMI policy before your lender will agree to issue your loan. Ask your lender or your homeowner’s insurance provider to put you in contact with PMI providers. PMI costs vary depending on a variety of factors, but they usually amount to 0.5–1% of the principal (spread out over the term of the loan, since you pay PMI on top of your monthly mortgage and homeowner’s insurance payments).
Lenders are required by law to allow you to cancel your private mortgage insurance once the amount of principal you’ve paid off exceeds 20% of the property’s original purchase price (or the property’s original appraised value at the time you obtained the loan, whichever is less).
8. Attend the Closing
The closing is a meeting that finalizes your real estate transaction. Money changes hands from you (and your lender) to the seller, and the seller delivers the keys to the property to you, the new owner. A representative from your lender attends the meeting to provide the loan check to the seller to cover the balance of your down payment and the property’s purchase price. The loan “check” is often delivered electronically at the time of the closing.
At the closing, you also sign off on a variety of documents to make the transfer of property (and the loan) final. These documents include the mortgage contract, which secures the loan with the new property, and several other documents, such as the HUD-1 form, which specifies the loan’s final closing costs. Take the time to read through all of these documents carefully to make sure none of the loan’s main terms or fees have changed substantially.
How to Choose a Mortgage Lender - Realestatejot · December 2, 2021 at 6:34 am
[…] Preapproval: Sellers feel more comfortable selling to buyers who have been preapproved for a loan. If you’re preapproved, you’ll have more leverage in your negotiations with the seller. You’ll also stand out in situations in which several other buyers are bidding. For more on the process of getting prequalified and preapproved, see The Mortgage Application Process. […]
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