Obtaining a Home Mortgage

Once you have decided to go with a certain lender and signed a purchase contract, it is time for an actual credit approval verifying income, liabilities and your ability to repay the loan.

Most loan applicants go to their loan interview with a signed copy of purchase contract. A purchase contract for the house will specify the amount of your down payment, the price you will pay for your house, and your proposed closing date. When you go to apply for a mortgage, the lender will use all these data to calculate whether the house you want to buy can serve as collateral for the amount of money you wish to borrow.

Your ability to obtain a mortgage to a great extent depends on the information contained in your Credit Report. So, it's a good idea to get your credit report, before you apply for a mortgage, and correct errors.

To ensure that your mortgage application will be processed as quickly as possible, it’s important to bring all the proper information to your loan application interview. A list of documents most lenders will require in order to process your mortgage application.

This is a list of documents most lenders will require in order to process your mortgage application.

Verification of income

Earnings statements: W-2 forms, recent pay stubs and tax returns for the past two years:

If you are self-employed: profit and loss statements and tax returns for current year and previous two years.

Additional income: social security, overtime bonus, commission, interest income, veteran's benefits and so on.

Verification of your assets

List of bank account numbers, the address of your bank branch, checking and savings account statements for the previous 2-3 months;

List of savings bonds, stocks or investments and their approximate market values;

Copies of titles for any motor vehicles that are paid in full.

Information about the purchase

Copy of the ratified purchase contract

If you made a deposit to the seller to show that you are serious about buying the house, bring a copy of canceled deposit check on house.

Your debts

Credit card bills for the past few billing periods;

Other consumer debt such as car loans, furniture loans, student loans and other personal and cosigned installment loans with creditor addresses and phone numbers;

Evidence of mortgage and/or rental payments

Copies of alimony or child support.

If you have no established credit history, supply the lender with canceled checks for rent, utilities and other recurring obligations to show payment history and amount of revolving debt.

Lenders may also ask you about the origin of your down payment. If money for down payment is a gift from a relative, bring to the interview a copy of gift letter and copy of gift check. The gift letter states that the money will not have to be repaid.

Having these items on hand when you visit the lender will help speed up the application process.

Keep in mind that different lenders may have slightly different information requirements, so ask your lender what to bring to your initial loan interview.

Typically, you will complete the Uniform Residential Loan Application that is widely used in the mortgage industry, during the initial interview. Keep in mind that probably you will be required to pay an application fee, credit report fee and the appraisal fee when you submit the mortgage application.

There are plenty of fees that you’ll have to make during the closing. Depending on prior negotiations, the buyer or the seller could be responsible for these costs, although typically the buyer pays the most of it.

All closing costs are spelled out in the lender’s Good Faith Estimate. If you want to make sure you are paying the least amount possible in closing cost fees, you should get at least three Good Faith Estimates from mortgage lenders. This is only an estimate and the actual charges may differ. RESPA allows the borrower to request to see the HUD-1 Settlement Statement that shows all actual charges imposed on borrower in connection with the settlement one day before the settlement. If you see a charge that doesn’t make sense, or that no other lender has, it’s time to ask questions.

Here’s an example of what you can expect to pay (some costs vary widely from state to state, so you should determine exactly what you will have to pay)

Discount and Origination Points: Points are equal to a percent of the loan amount. 1.75 points is equal to 1.75% of the loan amount. Discount points represent additional money you can pay to the lender at closing. If you pay more points it will lower the interest rate. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point. Paying points can be good if you plan on living in the home for a long time.

Origination Points (or Loan origination fee) charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to 1% of the loan amount. Some lenders add origination points into their quoted points while other lenders add an origination point in addition to their quoted points.

Application Fee covers the lender’s cost to process the information on your loan. Usually, you must pay this charge at the time you file the application. Some lenders may apply the cost of the application fee to certain closing costs. Generally lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.

Appraisal Fee: This fee ($150 to $400 depending on the price of the home) pays for an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house for the loan. Factors to be considered in determining market value are: present cash value; use; location; replacement value of improvements; condition; income from property; net proceeds if the property is sold, etc. The appraisal is a critical factor in determining how much of a mortgage the bank or mortgage company will approve. After the appraisal is completed, the borrower is normally entitled to a copy of the appraisal from the lender.

Credit report Fee: Three major national credit bureaus (Equifax, TransUnion and Experian) supply lenders with the information on your credit behavior. Consumers typically pay $45 to $55 for this report.

Title search and title insurance: A title search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. The purpose of the search is to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.

A title search can show a number of title defects among these are unpaid taxes, unsatisfied mortgages and judgments against the seller. But there are some hidden defects that even the most diligent title search may never reveal. For instance, the previous owner could have incorrectly stated his marital status, resulting in a possible claim by his legal spouse. Other problems include things like fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the records. These defects can arise after you have purchased your home and jeopardize your right to ownership.

A certificate of title -- issued by a title company that did the title search -- offers no protection against any hidden defects in the title, which an examination of the records could not reveal. Title insurance protects against any tax liens, unpaid mortgages, or judgments missed in the research of the history of title on the property.  If a claim is made against your property, title insurance will, in accordance with the terms of your policy, assure you of a legal defense and pay all court costs and related fees. Also, if the claim proves valid, you will be reimbursed for your actual loss up to the face amount of the policy.

Basically there are two different types of policies - a lender's policy and an owner's policy. The lender's policy protects the lender's interest in the property as security for the outstanding balance under the buyer's mortgage. The owner's policy safeguards the buyer's investment or equity in the property up to the face amount of the policy. The cost of the policy is usually based on the loan amount.

It is required to obtain a lender's title insurance policy only. If you also desire the protection of title insurance you should purchase a buyer's title policy. This is a one-time premium, and usually the company that did the title search might offer the cheapest rate. It is also advisable to inquire about the seller's title insurance policies on the property, for it may be possible for you to obtain a policy at a lower reissue rate.

Survey fee: The title insurance company or lender may require a survey of the property. This is to verify official boundaries of the property and that your lot has not been encroached upon by any structures. Depending on the size of the property and what state you live in, this cost ranges from $225 to $350.

Escrow Account: Most lenders require you to pay for some items that will due after closing. These prepaid items usually include insurance premiums (for Homeowners Insurance -- also called Hazard, or Fire Insurance -- and Private Mortgage Insurance) and Real Estate Taxes. The HUD regulations limit the amount of money a lender may require the borrower to hold in an escrow account.

Flood Certification: Some homes require flood certification fees, amounting up to $30. It verifies that the property is not in a flood zone. If the property is located within a defined zone the lender will require a flood insurance policy.

Recording and Transfer Charges: A small fee (to $50 to $150) to cover the cost of the paperwork required to record your home purchase.

Documentary stamp tax on the mortgage varies from state to state and about 35 cents per $100 borrowed.

Interim interest: Accrued interest from closing date until the end of the month.

Lender's and Buyer's Attorney: This fee (to $500 to $1500) is to pay for preparing and reviewing all of the documents needed to close your loan.

Usually an application fee, credit report fee and the appraisal fee will have to be paid when you submit the mortgage application.

You can divide all closing costs into two basic groups:

Amounts paid to state and local governments. These include city, county and state transfer taxes, recordation fees, and prepaid property taxes.

Costs of getting a mortgage. These include title insurance, survey, appraisals, credit checks, loan origination and documentation fees, commitment and processing fees, hazard and mortgage insurance and interest prepayments.

Payments to local governments should be the same at every lender. So should fees for appraisals, credit reports and title insurance. Total costs you can expect to pay are from 3% to 6% of the amount of your mortgage loan.

After you apply the lender will begin the work of verifying all the information you've provided. This loan approval process, described in the next step, can take anywhere from one to eight weeks, depending on the type of mortgage your choose and other factors.