You walk into the local bank and ask to see a mortgage specialist. Palms sweating, heart leaping – you are about to apply for what may be the largest loan in your life. A lot is riding on an approval: the ability to purchase a home, a new start in life, or the first steps toward a life that is moving in a new direction.
You probably don’t realize that the lady sitting behind the desk actually wants to help you. Like your real estate agent, she doesn’t get paid until the deal is consummated: until you take out a mortgage loan. Naturally, then, your first contact in the mortgage loan process is going to want to put your mortgage application in the best light possible.
Unfortunately, the loan officer doesn’t have the final word on approval. To get to that great big “yes” requires work on your part, long before heading out the door to see a lender.
Grab your calculator and that stack of bills off the kitchen counter – you’ve got some number crunching to do.
If you live within a budget, congratulations – this part of the process will be a cinch for you. If you don’t, it’s time to determine how much money you have coming in and how much goes out. Once you know this, you can determine the amount of money you can comfortably afford to pay for a house every month. Remember, this amount needs to cover homeowners insurance, property taxes, and HOA fees if you move to a managed community.
Lenders pull your credit reports as part of the loan process, but the wise mortgage loan pursuer will get out in front of the process and know where he stands with FICO, the corporation that determines consumers’ credit worthiness.
By law, you’re entitled to one free credit report each year, from each of the three major credit reporting agencies. The Federal Trade Commission recommends that you order the credit reports from AnnualCreditReport.com, the only source it authorizes.
Lenders use a score aggregated from all three credit reports and calculated by the Fair Isaac Corporation (FICO). Known as your FICO score, it largely determines whether you will be approved for credit and the interest rate you’ll be offered.
Dispute anything on your credit reports that is questionable. Even removing one negative entry can move your credit score in a positive direction.
Piles of Paperwork
Finally, all those piles of paperwork lying around the house will come in handy. Although you’ll need to ask your lender exactly what she needs to see, lenders typically want the following:
- Copies of tax returns.
- Investment information.
- Bank account statements.
- Your landlord’s name and phone number, if you rent. If you currently own a home, bring your mortgage papers.
- Your driver’s license and social security card.
- Paperwork, including the account numbers, pertaining to loans and credit cards.
- Pay stubs or other information that verifies your income.
- Court papers verifying your responsibility for support payments or bankruptcy, if applicable.
The Mortgage Loan Process
Here’s what happens during the mortgage process:
- You fill out the application.
- Your loan package goes to the processing department where everything is verified.
- The underwriter receives your package from the processing department and decides whether or not to give you a loan.
- If the underwriter decides in your favor, the lender sends you a commitment letter.
These are the basic steps in the mortgage loan process, and they may vary depending on your situation.
While you wait for word of approval, the lender is required to send you, within three days of application, a Good Faith Estimate – commonly called the GFE. This form discloses the costs of the loan.
Expect a Truth in Lending Disclosure as well, which will let you know your monthly payment, the annual percentage rate of the loan, and a disclosure of all finance charges.
The loan commitment letter repeats the information in the GFE and the Truth in Lending Disclosure. If the terms meet with your approval, sign the letter and return it before the deadline.
While waiting around for loan approval is stressful, and there may be delays while the lender acquires additional paperwork from you, the more you are prepared going into the process the quicker and easier it will be.