The Life of a Loan…
Preapproval –
What a lender asks? A smart move for anyone who is looking to buy a home is to get preapproved. This determines the price range in which you should shop and if there are credit issues to address prior to a home purchase. There are four main areas that a lender will focus on which can be remembered by the acronym “P.A.I.L.”
Property- an appraisal is ordered by the lender to determine the market value and condition of the property. An appraisal is usually ordered once you are under contract and your loan is being processed.Assets- do you have enough cash for a down payment and for closing costs? Do you need a gift from a relative? Will you have a cushion left after your home purchase or will you spend your last penny at closing?
Income- do you have the ability to repay the debt? Lenders ask for employment information, including your occupation, how long you’ve worked, and how much you earn. They will also want to know your expenses, such as how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.
Liabilities- will you repay the debt? Lenders look at your credit history to determine how much you owe, how often you borrow, whether you pay your bills on time, and whether you live within your means.How long does it take? A lender will help you fill out the loan application. This process usually takes no more than 10-20 minutes, and generally speaking, a decision on the type of financing that can be provided is rendered within an hour.
The Approval process –
What documents will I need? In addition to filling out a complete loan application, the required documentation a lender will ask for is as follows:
- Past 2 years residency history
- Past 2 years employment history
- Most recent pay stub(s) with year-to-date earnings covering the past 30 days
- W2’s for the past 2 years, or if you are self-employed, tax returns for the past 2 years
- Most recent bank statements (i.e. checking, savings accounts, cd’s) covering the past 2 months
- Most recent investment/retirement account statements covering the past 2 months
What criteria will an underwriter look for? Lenders primarily use two qualifying guidelines to determine the size of the mortgage for which you are eligible.
- Your monthly costs (including mortgage payments, property taxes, insurance, and condominium or cooperative fee, if applicable) should be no more than 28% of your monthly gross (before tax) income
- Your monthly housing costs plus other long term debts should total no more than 36% of your monthly gross income
Lenders and financial advisors recommend that you spend no more than 25-28% of your income on housing and not more than 33-36% on total debt (housing, credit cards and other debts). However, keep in mind, in certain situations, you can exceed these amounts, but they are a good start especially for a first-time homebuyer.
How long does it take before I hear back? When your loan is approved, the lender will send you a commitment letter. This is the formal loan offer. It will state that
- the loan amount (the purchase price less the down payment)
- the term of the loan (the number of years you have to repay the loan)
- the annual percentage rate (APR…the actual finance charge taking into account the interest rate and fees) and monthly charges (principal and interest, taxes and insurance)
Generally speaking, it takes 15 business days to receive a commitment letter.
Q&A section…
How much will I need for a downpayment? Lenders usually require borrowers to make an initial payment toward the price of the home – the down payment. The amount of the down payment depends on the type of mortgage that you get. Now, it is possible to obtain a mortgage loan with as little as 3.5%-5% down, if you qualify and meet certain conditions. However, there are certain government sponsored programs, such as the Federal Housing Administration (FHA) that allow for 3.5% down payment. The Veterans Administration (VA) loan does not require any down payment at all.
Can I ask the seller for the downpayment? At one time, the Federal Housing Administration (FHA) allowed for seller funded down payment assistance. Now, this is not allowed. The down payment typically has to come from the borrowers own funds or in the form of a “gift” from a relative/family member.
Can I ask the seller to pay closing costs? In many cases, coming up with closing or settlement costs can be difficult. Certain fees associated with closing can be negotiated with and paid for by both the lender and/or the seller. Depending on the mortgage that you get, the seller can pay anywhere from 0-9% of the purchase price of the home towards closing or settlement fees.
What happens if I have credit card balances? The lender will order a credit report on you and the other purchasers. The credit bureau report will show how you have handled past debt and credit accounts, such as car loans, student loans, charge accounts with stores, and any purchases made on credit. Having credit card balances is ok; however, if the existing debt is what’s creating a roadblock to financing, you may need to pay down or pay off some of your debts or choose a less expensive house.
Are Student Loans included? Student loans are included when calculating your overall monthly long term debt. However, depending on the mortgage that you get, student loans that are deferred for more than 12 months may not be counted against your total debt.
Can I consider bonuses/overtime as part of my pay? Bonus pay can be used to calculate your monthly income as long as:
- There is no restriction as to the minimum length of time the income has been received provided the job profile fits the type of employment that regularly requires bonus/overtime (i.e. postal worker, police man, salesperson, management)
- If the borrower does not meet the referenced employment profile, documented receipt of overtime or bonus income for a minimum of 2 years is required
- If the earnings show a decline, there must be strong compensating factors for it to be acceptable
Alimony/Child support? Alimony or Child support can be used to calculate your monthly income as long as:
- It continues for at least 3 years
- The verifying document (i.e. divorce decree, formal separation agreement, court records, etc.) must specify the amount of the reward and the period over which it will be received
What if I am getting divorced and I am on another loan? Your lender and you can discuss options.
Once I'm approved, is it okay to make purchases? No. During the loan process you should hold off on adding purchases to your credit cards or purchasing other items on credit. Remember, the lender will review your credit report to determine if you will repay the debt? The credit report shows how much you owe, how often you borrow, whether you pay bills on time and whether you live within your means. If your debt payments are excessive for your income level this may adversely affect the outcome of your loan and cause your loan to be denied. Once your loan has closed, you are free to make any purchase you would like. However, keep in mind that future purchases can effect future financing opportunities.
What happens after loan commitment? When your loan is approved, the lender will issue you a commitment letter. This is the formal loan offer. You will be given a set amount of time to accept the loan offer and to close the loan.
Closing. The next step in the loan process after the commitment letter has been issued is the closing (also known as “settlement”). This is a formal meeting typically attended by the buyer, seller, listing and selling agents, and representatives of the lender and title company. This meeting is where your loan is finalized, your mortgage is issued, and you get the keys to your new house.
1. Buyer
- Calls loan officer for information on loan programs
- Gathers information needed for application
- Starts looking for new home
2. Loan Officer
- discusses qualifying, monthly payments and cash needed for closing
- Shows you different loans available and quotes interest rates
- Fills out loan application with you
3. Processor
- Communicates with you on items necessary for your loan closing
- Pre-underwrites and prepares loan for approval
- Works with all parties (i.e. insurance agent, title company, etc.)
4. Underwriter
- Final decision maker on your loan
- May need additional documentation from you
- Works directly with loan officer and processor
5. Closing Dept at Mortgage Company
- Closer – assembles package for your closing day
- Sends package to escrow agent or attorney’s office
6. Escrow Agent/Closiing Attorney
- May contact you for homeowners insurance information
- Prepares settlement statement and emails it to processor for review
- Processor emails or faxes settlement statement to all parties 48 hours prior to closing
- Loan officer or processor calls you to review the settlement figures and cash for closing 48 hours prior to closing
7. Closing at Title Agency or Attorney's Office
- Bring a certified check to closing (made payable to the title company)
- Bring homeowners insurance with paid receipt for one year
- Bring Drivers licenses
CONGRATULATIONS!!! – You are now a homeowner!
