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Two Key Factors in Qualifying for a Home Loan
When a lender makes a decision about a mortgage application, they consider two basic factors: your ability and willingness to repay the loan.
Ability to repay the mortgage is determined by verifying your current employment and analyzing your total income. Lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years. Your proposed monthly payment will be compared to your monthly gross income and your monthly credit payments to see how much you can afford.
Willingness to repay is influenced by how you have paid previous loans and by examining how the property will be used. Willingness can be gauged by your credit report and previous commitment to rent or utility bills. There is also a greater tendency to stick with your payments if you live in a house as opposed to a rental property or vacation home.
It is important to remember that there are no set rules and each applicant is handled on a case-by-case basis. Many applicants come up a little short in one area, but make up for it with other strong points. These compensating factors may include a large down payment, solid employment, extensive educational background or overall financial health.
For applicants who need to make a lower down payment, mortgage insurance is protection for the lender in case you stop making payments. This allows low and moderate income families become homeowners with low down payment programs. (Top)
Your Initial Meeting With a Mortgage Professional
The loan approval process generally begins with an initial interview where you and the mortgage professional meet to discuss the potential loan. You will need to bring information to verify your income and long-term debts.
You may prefer to meet with the mortgage company before house hunting to determine in advance how much you can afford and the mortgage amount for which you can qualify. This step is called pre-qualification and can save you time and trouble by making certain you are looking in the correct price range.
To complete the 1003 Mortgage Application (.pdf), you will need to gather:
- A purchase contract for the house (if you are purchasing one)
- Your bank account numbers and the address of your bank branch,
- Checking and savings account statements for the previous 2-3 months
- Pay stubs
- W2 withholding forms
- Tax returns for two years, or other
- Proof of any other employment and income verification (if needed)
- Credit card bills for the past few billing periods
- Canceled checks for rent or utility bill payments, to show
- Payment history and amount of revolving debt (Sears, Foley’s, etc.)
- Information on other consumer debt such as car loans, furniture loans, student loans and retail credit cards
- Balance sheets and tax returns, if you are self-employed
- Any gift letters, if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. (This letter simply states that the money is in fact a gift and will not have to be repaid.)
Having these items on hand when you visit the mortgage company will help speed up the application process. Usually an application fee and the appraisal fee will have to be paid when you submit the mortgage application. After the initial meeting with the mortgage company, you should have a general idea if you qualify for the size and type of loan you want. After the mortgage application, the mortgage company should let you know if you qualify for the loan within days. (Top)
After The Mortgage Application
Your mortgage company will begin the work of verifying all the information you've provided. This process can take anywhere from one to four weeks, depending on the type of mortgage you choose, whether you're buying a home outside your local community, or a host of other factors.
Within three business days after your application, the mortgage company must give you a good faith estimate of your closing costs. You'll also get a statement that shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.
Stay in touch with your mortgage company to speed up the application process. Some home buyers find the closing process to be one of the most intimidating aspects of buying a home because it's so unfamiliar. If so, ask your mortgage company what to expect at your closing.
Once you receive your approval, and you're waiting to close on the sale of the home, don't go on a shopping spree. The mortgage lender may do a final check of your credit report or bank accounts to make sure you're not assuming more debt or spending your cash reserves. There are steps you can take to move quickly if your loan is denied. (Top)
Speed Up The Mortgage Process
Once complete, your application will be given to a processor in the mortgage company who will organize your paperwork and may verify your employment, bank balances, and other information. Be sure to respond promptly to requests for information while processing is taking place.
Commonly requested items during processing that may not have been collected during the application include:
- The final purchase contract for the house (if applicable).
- If you're self-employed, the mortgage company may require your personal and business tax returns for the previous two years and your company's year-to-date Profit and Loss statement.
- Divorce settlement papers, if applicable
- Updated account statements for listed assets in the application that may have changed in value.
- Information about debts or credit report items that may have been delinquent or not accurate.
- Evidence of your mortgage or rental payments, such as canceled checks.
- An irrevocable gift letter if you are receiving a monetary gift from a relative.
The processor is collecting this information before presenting it to an underwriter. An underwriter reviews all the information in your loan file to determine if the application meets the lender guidelines. With approval, a lender should give you a letter of commitment, which is a promise from the lender to make a loan based on specific terms and conditions. (Top)
Annual Percentage Rate (APR)
In comparing any type of loan, whether it be a fixed rate loan to a fixed rate loan, adjustable rate loan to adjustable rate loan or fixed rate loan to adjustable rate loan, there is one way that can be used to compare apples to apples and even apples to oranges.
APRs are designed to do just that. APRs are a way to calculate the annual cost of loans, taking into consideration loan origination fees (points) and the other costs associated with securing a loan. The additional costs include appraisal and credit report fees as well as processing and document fees.
One confusing aspect of APRs is that the APR on 15 year loans will carry a higher relative rate due to the fact that the points are amortized over the 15 year term rather than the 30 year term. When a Regulation Z (Reg Z, the mortgage companies disclosure of cost for the loan) is prepared for a buyer/borrower the prepaid interest is also included in the APR calculation. For our illustrations we will use only the points, appraisal, credit report, processing and document fees.
As a means of protecting consumers from companies who did not disclose the fees associated with a particularly low start rate on an adjustable rate loan or below market rate on a fixed rate loan, APRs give consumers a way to check the true cost of a loan.
One common situation that occurs when a borrower receives a Reg Z, and a copy of their note, is the column that indicates the amount financed is less than the loan amount the borrower is actually financing. It is here that many borrowers leap before they look and call to find out why they are only receiving a $146,925 loan when they applied for a $150,000 loan. It is here that APRs enter the picture.
Let's look at how APRs are calculated. For our illustration we will assume a 8.50% fixed rate interest. For a 30 year loan the monthly payments for a $150,000 loan are $1,153.37.
In order to calculate the APR for this loan we subtract $2,250.00 (1.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 - $3,0750 = $146,925). The $146,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $146,925 loan with the same payment of $1,153.37, the APR is calculated as 8.73%.
How does this compare to a 30 year fixed rate loan with a 8.00% interest rate and 3.50 points? The monthly payments for this loan is $1,100.65.
In order to calculate the APR for this loan we subtract $5,255.00 (3.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 - $6,075 = $143,925). The $143,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $143,925 loan with the payment of $1,100.65 the APR is calculated as 8.44%. (Top)
Escrow Account Basics
Mortgage escrow accounts are special accounts set up in which money is held to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items. Escrow accounts ensure that these items are paid in a timely fashion. They are a guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.
Guarantee that bills are paid on time. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.
Unexpected increases are taken care of. It is the responsibility of the mortgage company to allow for possible increases in tax or insurance premiums.
Mortgage companies typically cover shortages when tax or insurance payments increase. It is very common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.
Mortgages have lower rates and downpayments because of escrows. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.
Local governments save money. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection. (Top)
Real Estate Settlement Procedures Act
This law protects consumers from abuses during the residential real estate purchase and loan process and enables them to be better informed shoppers by requiring disclosure of costs of settlement services.
The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) administers several regulatory programs to ensure equity and efficiency in the sale of housing. One of these programs, under the Real Estate Settlement Procedures Act (RESPA), applies to almost all mortgage loans and mortgage companies, not just FHA-insured mortgages. RESPA’s purposes are (1) to help consumers get fair settlement services by requiring that key service costs be disclosed in advance, (2) to protect consumers by eliminating kickbacks and referral fees that would unnecessarily increase the costs of settlement services, and (3) to further protect consumers by prohibiting certain practices that increase the cost of settlement services.
RESPA protects consumers by mandating a series of disclosures that prevent unethical practices by mortgage companies and that provide consumers with the information to choose the real estate settlement services most suited to their needs. The disclosures must take place at various times throughout the settlement process:
Disclosures at the time of loan application. When a potential homebuyer applies for a mortgage loan, the buyer must receive (1) a Special Information Booklet, which contains consumer information on various real estate settlement services; (2) a Good Faith Estimate of settlement costs, which lists the charges the buyer is likely to pay at settlement and states whether the buyer is required to use a particular settlement service; and (3) a Mortgage Servicing Disclosure Statement, which tells the buyer whether the loan will be kept or transferred for servicing, and also gives information about how the buyer can resolve complaints. RESPA does not specify penalties when these three items are not provided, but bank regulators can impose penalties.
Disclosures before settlement (closing) occurs. (1) An Affiliated Business Arrangement Disclosure is required whenever a settlement service refers a buyer to a firm with which the service has any kind of business connection, such as common ownership. The service usually cannot require the buyer to use a connected firm. (2) A preliminary copy of a HUD-1 Settlement Statement is required if the borrower requests it 24 hours before closing. This form gives estimates of all settlement charges that will need to be paid, both by buyer and seller.
Disclosures at settlement. (1) The HUD-1 Settlement Statement is required to show the actual charges at settlement. (2) An Initial Escrow Statement is required at closing or within 45 days of closing. This itemizes the estimated taxes, insurance premiums, and other charges that will need to be paid from the escrow account during the first year of the loan.
Disclosures after settlement. (1) An Annual Escrow Loan Statement must be delivered by the servicer to the borrower. This statement summarizes all escrow account deposits and payments during the past year. It also notifies the borrower of any shortages or surpluses in the account and tells the borrower how these can be paid or refunded. (2) A Servicing Transfer Statement is required if the servicer transfers the servicing rights for a loan to another servicer.
Along with these disclosures, RESPA protects consumers by prohibiting several other practices: (1) Kickbacks, fee-splitting, and unearned fees: Anyone is prohibited from giving or accepting a fee, kickback, or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan, which covers almost every loan made for residential property. RESPA also prohibits fee-splitting and receiving unearned fees for services not actually performed. Violations of these RESPA provisions can be punished with criminal and civil penalties. (2) Seller-required title insurance: A seller is prohibited from requiring a homebuyer to use a particular title insurance company. A buyer can sue a seller who violates this provision. (3) Limits on escrow accounts: A limit is set on the amount that a borrower is required to put into an escrow account to pay taxes, hazard insurance, and other property charges. RESPA does not require an escrow account on borrowers, but some government loan programs or mortgage companies may require an escrow account. During the course of the loan, RESPA prohibits charging excessive amounts for the escrow account. And each year, the borrower must be notified of any escrow account shortage and return any excess of $50 or more. (Top)
Real Estate Forms
- Mortgage Application(33k)
- Good Faith Estimate(77k)
- Truth in Lending Disclosure(88k)
- Credit Authorization and Release(59k)
- Deed of Trust(116k)
- Itemization of Amount Financed(63k)
- Mortgage Loan Disclosure(91k)
- Tax Information Disclosure(93k)
- Self Employed Income Analysis(86k)
- Disclosure Notices(17k)
- Equal Credit Opportunity Act(25k)
- Fair Lending Notice(17k)
- Notice of Right To Cancel(23k)
- Notice of Special Flood Hazard(17k)
- Owner Occupancy(20k)
- Appraisal Disclosure(9k)
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Download Mortgage Application
To assist you in your mortgage process, we have provided a mortgage application for you to download and print. The application should be completed with the assistance of a mortgage professional. You will need a browser compatible with PDF files or you will need to download Adobe Acrobat Reader to view and print PDF files on all major computer platforms. (Top)
PDF forms available for download:
- Mortgage Application(33k)
- Spanish Mortgage Application(1.23m)
- Good Faith Estimate(77k)
- Truth in Lending Disclosure(88k)
- Credit Authorization and Release(59k)
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