Obtaining a Loan

Steps 1 and 2: Organize Your documents and get pre-approved

As you begin the process, you will want to locate and organize the following documents (below). This will also be the time to obtain a pre-approval letter which will be necessary to make an offer on a property.

  • Account statements: Three months of any bank or relevant asset amounts
  • Gift letters: If money for a down payment or closing costs was gifted to you.
  • Paystubs: At least one month’s worth, preferably the most recent month.
  • W2s: Your employee tax statements for each of the past two years.
  • Self-employment income: complete tax returns for each of the past two years.
  • Proof of additional income: Alimony, recurring bonuses, or other reliable income.
  • Job Verification: Provide contact information for the lender to verify employment.
  • Credit Report: The lender will pull this to verify credit score and history.

Depending on your circumstances, the lender may ask you for additional information, so don’t pack that paperwork just yet!

Step 3: Shop loan programs and rates

Before you commit to a lender, ask these questions. If you do not like the answers you receive, continue shopping for a loan until you find a mortgage broker/lender with whom you feel comfortable.

Which Type of Loan is Best for You?

Reputable lenders will find out more about you before throwing out loan options. Choose a lender who gathers enough information from you before she suggests a certain type of loan. Don’t be afraid to ask a lender to explain the pros and cons about:

  • Fixed-rate loans
  • Adjustable-rate loans
  • Interest-only loans

Look at the point spread between the interest rates offered on fixed-rate loans versus those on adjustable-rate loans. If the difference is small, say, around .5%, you would be better off with a fixed-rate mortgage. Interest-only loans are a popular option if you decide to stay in the property for a long period of time, more than five years. Otherwise, the property may not appreciate enough to provide you with adequate equity to sell if you choose this option for a short-term residency.

What is the Interest Rate & Annual Percentage Rate?

The annual percentage rate (APR) is derived by a complex calculation that includes the interest rate and all the other related lender fees divided by the loan’s term. However, bear in mind that:

  • Many lenders do not compute APR correctly.
  • There is no way to accurately compute an APR rate for an adjustable loan.
  • It does not account for early payoffs.

Typically, the costs of your loan over the maximum length of the loan are figured into the annual percentage rate (APR). If a lender advertises an APR identical to the interest rate, you are paying a higher interest rate than the market will bear.

APR rates are higher than interest rates because they include costs. If you see a significant spread between the APR and interest rate, you are being charged too much for the loan. Normal spreads for a loan at par (zero points) are generally less than .5.

Once you apply for a loan, the lender will provide you with a clear accounting of the loan specifics (known as a Loan Estimate) and you can compare loan options. Here is a link to learn more about this form: https://www.consumerfinance.gov/owning-a-home/loan-estimate/

Step 4: Obtain Loan Approval

Your work up until this point will have been to approve you as the buyer. But the loan cannot be approved in its entirety until the property has been identified and a Purchase and Sale Agreement has been signed by both the buyer and the seller. This will start a process known as underwriting.  This is a process through which financial institutions measure the eligibility of potential borrowers.

Appraisal

The lender will also check out the home you want to buy with the loan, to ensure the property serves as sufficient collateral. More than anything else, they want to know if it is worth the amount you have agreed to pay in order to protect your interests and theirs. They will send a professional appraiser out to determine the value of the house you are buying based on recently area sales.

Underwriting Guidelines

Most mortgages today are based on guidelines that come from the FHA, Fannie Mae or Freddie Mac. So if a mortgage company wants to sell its loans into the secondary mortgage market, or have them insured by the federal government, they must adhere to the underwriting guidelines issued by those organizations. You can think of them as “baseline” or minimum requirements.

How Long Does the Process Take?

The process can vary, but will typically take between two and three weeks.

Step 5: Close The Loan

The day before closing, Escrow will prepare all the paperwork you have received throughout the home buying process: Loan Estimate, contract, proof of title search and insurance if necessary, flood certification, proof of homeowners insurance and mortgage insurance, home appraisal, inspection reports and Closing Disclosure. The Closing Disclosure will reiterate the loan details and will be provided to you three days before the closing. Here is additional information on that form: https://www.consumerfinance.gov/owning-a-home/closing-disclosure/

At closing, your participation will involve a couple of steps:

  • Sign legal documents.
  • Pay closing costs and escrow items.