Home Finance

The broad steps to getting a loan

Getting Pre-approval for your mortgage can be affected by many aspects of your lifestyle. Note: All fees and percentages are for guidance only.

US Average Mortgage Rates
30 Year Fixed 4.70% +0.02
15 Year Fixed 4.18% 0.00
5/1 ARM 3.43% +0.01

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The Pre-qualification Process

Being pre-qualified means you have the conditions necessary for taking the mortgage. Primarily pre-qualification enables you to determine albeit approximately how much can you borrow and the necessary documents you need to submit for availing such. You may be employed or you may be working for yourself (self-employed). If you are employeed, you need to show w-2’s of the last two years from your employer. And if you are self-employed, you need to provide your tax returns for the last two years. These documents will help the mortgage lender to establish your income stability.

Pre-approval

When you are pre-qualified for the mortgage, the next step is to get pre-approved. The amount arrived in the pre-qualification process may be altered during this process due to the factors such as your credit history etc. This is a more formal process involving many documents that are gathered presented presented to your lender.

You need to provide them proof of your income, most recent pay stubs, and the last 2 years W-2’s. In case you are self- employed, you will need to provide the last 2 years of tax returns. Also you will need to show them the source from where are you going to pay the amount required for down-payment. Further, you need copies of last 2 months bank statements, and, if you are getting or arranging your down-payment from somewhere else, you will need to document where this money is coming from.

When you are ready with the required documents, submit them to your mortgage lender, the lender in turn, will submit your ‘packet’ of documents to an automated underwriting system. This process should take not more than 5 minutes.

Credit Report

This is the single most important factor affecting the loan amount or rather the loan itself. Credit Report will show all your credit history. This will include information of your income, debts, credit payment (for the past several years), if you have filed for bankruptcy earlier, your accounts have been sent to collections, or judgments filed. Any credit counseling that you may have utilized will also report on your credit history. Depending on the credit reports, a credit score is calculated, that would take into account factors like, number of creditors, the amount of outstanding debt, payment history and conducting number of inquiries. And the better the credit score the better are your chances of getting loan at better terms – your terms. Under the Fair Credit Reporting Act, you have the right to receive a copy of your credit report. The credit report contains all the information in your file at the time of your application. It will also have the name of anyone who inquired about your credit history for any purpose in the last two years

Payment History

If you pay your bills on time – no problem; if not – payment of any of your bills will become an important factor for determining your credit history negatively. If you have not paid your bill on time only once, then there will be a negative impact on the credit score. Also if you are late in paying your bills – same case. Further any collection agency that has been given your case or you have been declared bankrupt – all these factors affect your credit score negatively.

Number of Creditors?

You have too many creditors and you don’t pay them on time – negative score. Timely paying in this case also is an important factor in improving your credit worthiness.

Outstanding Debt

The total amount that you are eligible to take a loan will be negatively affected when you have outstanding amounts to pay for. Hence more negative the credit score.

Number of Inquiries

The number of inquiries would indicate the state of finances. If you inquire more, then it would tell you are anticipating a negative credit score. Therefore, the more inquiries you make the more negative your credit score. The exception for this would be frequent inquiries for the same purpose, say home loan.

Bankruptcy/Collections/Judgments

Any of these three – Bankruptcy/Collections/Judgments singularly or combined with other will have a negative impact on the credit score. To repair your credit score could take a good 2-4 years of good credit history. There are some loan products that offer more flexible guidelines to enable a borrower to be approved even with negative credit history. If you pay off the collection accounts and judgments prior to loan closing, you may be considered for loan approval.Note that every payment made or new debt incurred, your credit score may change.

Credit Report Errors

There are times when the Credit Report is negative without your fault. Usually it is very difficult to get it rectified. If your Credit Report is negative and you believe that it is only an error, then you have a recourse. Under the Fair Credit Reporting Act, both the Credit Reporting Agency and the company that provided the information to the Credit Reporting Agency, have the responsibility for correcting the inaccurate or incomplete information in your credit report.

To start the process of rectifying the error in your credit report, the first step is to write to the Credit Reporting Agency what specific information you believe is incorrect. You must include all the necessary documents that would support your position along with your complete name, address and social security number. Note that – you need to clearly indicate each item on your credit report that you think is not correct with a request that it be corrected. (It may help if you include a copy of the credit report.) Send your letter by certified mail with return receipt requested so that you can document that the Credit Reporting Agency received your letter and when. You may need the copies of letters and enclosures, so be sure you have the copies in a safe and a place easy to remember. The credit reporting agency investigates your dispute, usually within 30 days.

If the credit report agency concludes your case a trivial one, it may take up a full fledged inquiry. The credit reporting agency then forwards your dispute to an information provider who will investigate the matter thoroughly. It also helps you to send your copy of disputed letter to the information provider. The information provider after investigating the case, notifies all the nationwide credit reporting agencies stating the case and inaccuracy at the relevant points, and asking them to correct the inaccuracies.


Discount Points

0 to 3% of loan amount

Mortgage Insurance

0 to 1.14% of loan amount

Homeowners Insurance APR

$3.50/$1,000 varies

Locking In

To lock in a rate means sticking to a particular rate of interest that you would pay for mortgage. This can be done in two different ways – you can choose to ‘lock in’ your rate, or float your rate. If you lock in your rate, then that particular rate of interest you need to pay or you can also float your rate by asking your broker to watch the rate and lock it as soon as rates dip. The disadvantage with floating rates is that they may never dip and could increase

Loan Types

You have the options to choose from three different kids of interest to pay after locking in – Fixed rate, Adjustable Rate and Balloon Mortgage. You also have the choice of deciding the period or term of amortization for the loan.

Appraisal Fee

You need to pay for an appraisal for an estimation of the value of the property you want to purchase. You need to pay for this at the time of application. $150 to $400

Credit Report

Also paid at the time of application, this fee takes care of getting your Credit History. If you have more than one borrower then this fee may be more. $20 to $50

Title Insurance

Usually paid at the time of closing, this charge is for two things, first one is to examine the ownership of the property and the second one is for insuring the policy holder in a specific amount for any loss caused by discrepancies in the title to the property. The amount is sometimes split up between the buyer and seller. This varies widely with the buyer paying the entire amount if the property is in much demand or the seller paying the whole amount if he is in a hurry to sell of , they may also arrange to split up the costs in any other manner – equal or some other ratio. $50 seller usually pays the rest.

Flood Determination

Paid at the time of closing, this is required on all kinds of loans. The lender will order this when the property location is determined. $12 to $20.

Recording

For documentation and recording you need to incur some costs. Paid at the time of closing, you will have to sign a Deed of Trust and the current owner of the property will sign a Warranty Deed transferring title to you. This cost varies from county to county and may also fluctuate depending on the number of documents that are to be recorded. $80 to $100.

Loan Origination Fee/Points

In case of some lenders you may have to incur an origination fees and/or points. Origination fees are typically one percent of the loan amount though it can be as high as two. On the other hand, you can also pay points (each point being one percent of the loan amount) which would enable you to buy down the interest rate. This fee would be paid at closing. 1 to 2% of loan amount.

Fixed Rate

Fixed rate can be for 15 years or 30 years with the 30 years being the most popular product. The rate of interest remains unchanged throughout the term of the amortization of mortgage. However, you can choose to make more than the minimum payment each month, which will allow the loan to be paid off sooner than the usual term.

Adjustable Rate

Compared with the Fixed rate , Adjustable rate is lower in the beginning. This is because it has the facility to adjust to the market after a certain time. This means what you need to pay in the future depends on the market conditions at that time in the future. Hence this is sometimes known as a “teaser” rate mortgage.

WBO Credit

Balloon Mortgage

The usual time period of a balloon mortgage is 30 years, and the monthly payments are not high with only the interest amounts you will be paying. At the end of the balloon term, you need to pay off entire principle amount either by selling off the property or by going for refinancing.

Closing Costs for a Purchase

(an approximate)

The typical closing costs you could expect are indicated below. These figures are mere estimates and vary case depending on several factors such as the area, lender, and credit history etc.

Now they would calculate the average income, which is the average of the last two years of your earnings. If you do not have steady income in the last two years, then they may consider any other programs. After establishing your average income, they need to deduct your average monthly debts. That means the calculations would give them what will remain with you after you pay all your debts other than the mortgage repayment. This final figure is taken into consideration and is the basis for calculating the amount you are eligible for taking a mortgage.

This automated system will return either an “accept” or a “refer”. If the response is – “Accept” this means you are lucky to get a loan mortgage for a lesser rate of interest as Freddie Mac or Fannie Mae will buy the loan from the mortgage lender. And if you get – “refer”, getting a loan is still possible , but you may not be getting it a lower rate of interest as you would have got had it been an –“accept”. The reason is fairly simple to understand. Fannie Mae, the US government body, if is satisfied your mortgage is eligible For it to repurchase from the mortgage lender, the effective cost for your lender will decrease and he can give the mortgage for a lower rate of interest than otherwise.