Getting a Mortgage
Knowledge equals power
When it comes to the loan process, there are several steps that one must go through. By making yourself familiar with it, you will better understand what is required of you and how you need to prepare. After all, the more knowledgeable you become the more comfortable and in control you’ll feel.
1. Organize Your Documents
In order to obtain a mortgage, your lender will require certain documentation from you to make sure that you will have the ability to repay the loan you take out. Such documentation includes proof of employment, credit history, tax returns, pay stubs, bank statements, divorce and child support statements if applicable, and any other information that the lending company feels might be necessary.
2. Qualification
Before you apply for a loan, getting qualified will help you establish how much you can borrow. When purchasing a home, there are two options one may choose from to qualify for a loan. The first option, pre-qualification, is a quick process that usually happens in a matter of minutes. You are asked specific questions about your income, assets and liabilities. Based on this information, you will be provided with an amount for which you may qualify. This process can be done strictly on a verbal level or electronically over the Internet. While pre-qualification is helpful, your other option – pre-approval – you are actually approved for a loan of a certain amount. The pre-approval process is much more involved. You will need to provide proof of income, assets and liabilities and this information will be verified by the lender. Because of this verification, pre-approved buyers are much more attractive to sellers than pre-qualified buyers and gives you better leverage when negotiating with the seller. Getting pre-approved also lets you focus on homes within your price range instead of wasting time looking at homes that you won’t be able to afford. Finally, when it comes time to close, the process will go rather quickly since your loan has already been approved.
During the qualification process when dealing with borrowers, lenders’ main concern is risk.
Lenders proactively manage these risks by requiring four things from a borrower:
* Down Payment – statistics have proven that borrowers who put down 10% or more unlikely to default on a loan.
* Excellent Debt to Income Ratios – borrowers with high debt and low income are a high risk because they are using too much of their income to pay their current debt; e.g. credit card debt, car loans, and so on. We describe a person with high debt and low income as having a high DTI (debt to income ratio).
* Job History – long term employment is a good predictor that a borrower will have a steady stream of income, which will not be interrupted by a career change or termination.
* Excellent Credit – a credit score tells an underwriter a great deal about a borrower. Lenders take a close look at FICO scores. FICO stands for Fair Isaac Credit Organization, the organization that developed the formulas used by credit bureaus to calculate credit scores. (Go to www.myfico.com to learn more.)
Why do credit scores vary? And what do lenders like?
The three major credit bureaus are: Experian, Equifax and TransUnion. Credit scores will vary from bureau to bureau because each bureau puts different emphasis on different factors; these factors are delinquencies, too many credit cards, balances that are too high, too many recent credit inquiries, tax liens, judgments, bankruptcies, length of credit history, and so on.
Credit scores are calculated using a scorecard that allocates points for each of the above factors; however, lenders do not get to see the entire scorecard, all they see are the final scores. FICO scores can range from 300-850. Here’s how lenders typically react to FICO scores:
| FICO Scores |
How Lenders Typically React |
|
| 560 |
Lenders will not consider extending a conventional loan, but they thoroughly evaluate the borrower and may have other types of loans that meet his/her needs.
|
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| 580 |
| 600 |
| 620 |
Lenders will thoroughly evaluate the borrower. Loans to borrowers with credit scores in this range will take longer to process. |
:| |
| 640 |
| 660 |
| 680 |
| 700 |
Lenders will do a basic evaluation – these loans process faster and don’t have as much paperwork.
|
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| 720 |
| >= 740 |
3. Find the Right Loan Program
While searching for the right loan program, there are many things to take into consideration. For example, you might want to think about how long you plan on keeping the loan. The length of your residence will determine the type of loan you want to get (i.e. adjustable or fixed). To figure out which loan program is the best, one will need to compare different programs and everything that each one involves such as rates, fees and points. The whole process can be tedious and difficult at times, which is why a qualified loan officer can help you make the right decision.
What are the main types of loans?
All of the numbers are subject to change, particularly Maximum Loan Amount.
Use these numbers simply for the purpose of comparing the different types of loans:
| Conventional |
FHA (Federal Housing Administration) |
VA (Veterans’ Administration)
|
| Loan Term: 15, 20, 30 years |
Loan Term: 15, 20, 30 years |
Loan Term: 15 and 30 years |
| Occupancy Requirements: None |
Occupancy Requirements: Owner occupied |
Occupancy Requirements: Owner Occupied |
| Maximum Loan Amount: $333,700 |
Maximum Loan Amount: $177,800 |
Maximum Loan Amount: $240,000 |
| Minimum Down Payment: 0-5% |
Minimum Down Payment: 3.5% |
Minimum Down Payment: 0%
|
| Loan to Value (LTV): Up to 100% |
Loan to Value (LTV): 97% |
Loan to Value (LTV): 100% |
| Assumable: No |
Assumable: No |
Assumable: No |
Eligible Properties:
1-4 family residential |
Eligible Properties:
1-4 family residential |
Eligible Properties:
1-4 family residential |
Eligible Borrowers:
People with good credit |
Eligible Borrowers: US citizens |
Eligible Borrowers: Veterans |
| Acceptable Debt Ratios: 28/36% |
Acceptable Debt Ratios: 33/41% |
Acceptable Debt Ratios: 29/41% |
| Advantages: Lower interest rates |
Advantages: Not credit score driven |
Advantages: No down payment |
| Disadvantages: Credit score driven |
Disadvantages: Lower loan amounts |
Disadvantages: Only for veterans |
4. Obtain Loan Approval
The process of obtaining loan approval involves the following steps:
* Review of loan application (Be sure to fill it out completely).
* Underwriting Process – Verification of credit history, employment history, assets such as bank accounts and mutual funds, property value (APPRAISAL) and any additional information that the lender might require.
There are also a few things that you can do to improve your chances of getting the loan approved.
* For any requests of additional documents and information, respond promptly.
* Do not make any major purchases such as a car or new furniture until the loan is closed. Increasing your debt can have the opposite affect on your application. For more tips on what no to do see 11 Commandments When Applying For A Loan.
* Make sure you will be in town for the closing date. If you cannot be there for the closing of the loan, you can carry out a power of attorney to authorize someone to sign on your behalf.
5. Close the Loan
Once the loan is approved, your next step will be to sign the final loan documents, which usually takes place in the presence of a notary public. Be sure to verify the information within the document, especially the interest rate and loan terms. Also check to see if your name and address are correct. Finally, don’t forget to bring a cashier’s check for your down payment and closing costs.
