Buying an Indiana home for sale may be the most exciting financial transaction you ever undertake. Yet it can also be the most confusing and stressful. No matter how many times you may have done it before, as laws change the process becomes more complicated and intimidating every time, particularly when it comes to getting a mortgage loan. Countless loan documents and unfamiliar terminology, along with home buying’s stress and uncertainty, can temper the joy of buying your new home. As soon as the sales contract is signed, securing financing for your new home is the primary concern for all but a very few buyers. However, if you understand the steps required to qualify for a mortgage loan, much of that stress can be avoided. The following explanation of the loan application process is intended to help you through the challenges of obtaining a mortgage loan for your home purchase. The good news is that your Carpenter agent can always help you manage the process!
The Loan Application Interview
Once you have selected a lender, the next step will be to meet with a loan officer or other lender representative. Their job is to collect the information the lender needs to approve your home loan. They’ll explain the types of mortgage loans available to you, interest rates, fees for each type and the qualification requirements. During the meeting, the loan officer will fill out, or assist you in filling out, the loan application.
The “cost” of your home loan
By this time you should have a good idea of your interest rate and the fees being charged. The total cost of a home mortgage loan consists of the interest rate on the loan, origination fees, discount points and miscellaneous other charges. You’ll hear the term “points” used when discussing your loan’s costs. One point is equal to one percent of the amount of the loan and is usually collected at the loan closing, or settlement. The interest rate affects the amount of the monthly payment; points affect the amount of cash you must have at closing.
Most lenders will offer a range of interest rate/point combinations to meet the borrower needs. In general, the higher the interest rate, the lower the points. For example, if the current market provides for an 5% interest rate with 2 points, a 5.5% rate may be offered at no points. If you are a first-time home buyer, the larger monthly payments on the 5.5% loan may be easier to handle than the 2 points that will require additional cash at settlement. If you are a corporate transferee, however, your company’s relocation policy may pay all or part of origination costs and the lower rate will have more appeal. The loan officer is prepared to explain options to you.
“Lock” it or “Float” it?
When discussing the terms of the loan, make sure you understand how and when the rate and fees on the loan are going to be set. Most lenders will quote a rate and fee at the time the application is taken and then will guarantee, or “lock” the rate for a specified length of time. A rate lock protects you from rising interest rates while the loan is being processed, but it also typically commits you to close the loan at the rate and the fee even if rates decline prior to closing. Lock periods may run from 10 to 60 days, with longer periods available in some cases at an additional fee. The lock period must be long enough to get you through the estimated closing date. A 30-day lock affords you no protection if closing is at least 60 days away.
You may have the option to let the rate “float,” getting the final rate and fees set nearer the settlement date. If you believe rates are declining and are willing to run the risk that interest rates could rise during the processing of your loan, you may select this alternative. Before you take a floating rate, make sure that the rise in interest rates will not create a problem for you because you have insufficient income to cover the higher mortgage payments. In either case, make sure you understand the terms of the lock-in agreement.
Completing The Loan Application Form
The loan application asks for information on the property, terms of the purchase contract, employment and financial history of all loan applicants, including your spouse and/or other co-borrowers. The lender will verify or not, to approve the loan, so it is very important to submit a complete and accurate application.
You can complete the loan application process easier if you prepare for it ahead of time. A great amount of detail will be asked about your personal finances, including bank account numbers and balances, current loan amounts, payments, and credit card account numbers. You will want to be thorough and precise in your answers. It will be to your benefit to assemble this kind of information before the meeting with the loan officer. The following is a summary of information required on the loan application, documents you may need to provide and the questions you should be prepared to answer.
Details of Purchase Contract and the Property
Because the property is security for the loan, the lender will have an appraisal made of the property, and you need to have the following information available. Your Carpenter real estate agent can help you compile and track these documents.
- A complete copy of the sales contract, including addendums, signed by all parties, showing the full names of the sellers and buyers as they will appear on the new deed, the amount of earnest money deposit and who is responsible for closing costs, origination fees, etc.
- If the house is to be built, or is still under construction, a set of plans and specifications.
- The complete mailing address of the property, its age and its full legal description.
- Name, address and telephone number of the real estate agent and/or the seller of the property who will assist the appraiser in obtaining access to the property. All of this information should be in the purchase contract. If not, consult the Realtor or the seller.
The loan officer will want the social security numbers of you and your spouse (or other co-borrowers), age, number of years of schooling, your marital status, number and ages of dependents and your current address and telephone number. If you have lived at your current address fewer than two years, be prepared to furnish former addresses for up to seven years. You will also be asked to detail your current housing expenses, including rent or mortgage payments, real estate taxes and insurance (your mortgage payment may include tax and insurance funds). You will need the name and address of your landlord(s) or mortgage lender(s) for the past two years.
Employment History and Sources of Income
Your ability to make the regular payments on the mortgage and to afford the costs associated with owning a home are primary considerations in the lender’s loan approval process and should be your primary concern. Required information includes:
- At least two years employment history with employer’s name and address, your job title or position, length of time on the job, salary, bonuses, commissions and average overtime pay.
- Recent paycheck stubs and Federal W-2 forms for two years (some lenders may require full Federal tax returns).
- Records of dividends and interest received from investments.
- If you are self-employed, full tax returns and financial statements for 2 years, plus a profit and loss statement for the current year to date.
- A written explanation if there are gaps in your employment record, because of circumstances such as illness, layoffs, or for any other reason.
The loan officer may have you sign a Verification of Employment (VOE) form. This will be sent to your employer to verify your employment and earnings. One will be sent to previous employers if you have been on the job less than two years. Many lenders now use a general authorization that allows them to verify employment and other financial information on the application.
If you are relying on income from other sources, such as rental property, social security or disability payments, child support, etc., you must provide adequate proof of the source. Appropriate documents could include canceled checks, copies of leases, certification of benefits, divorce decrees and similar evidence.
A detailed listing of your personal assets is required on the loan application form. You will need to
have the following information available to complete the form:
- All bank accounts, both checking and savings, and money market accounts, with the name and address of the institution, name(s) on the accounts, account numbers and current account balances.
- Recent bank statements for at least two months.
- Current market value of stocks, bonds, CDs and other investments.
- Vested interest in all retirement funds.
- Face amount and cash value of life insurance policies in force.
- Make, model, year and value of automobiles owned.
- Address and market value of all real estate owned along with the amount of rents collected, the mortgage on the property and the monthly mortgage payments (a profit and loss statement will be required for investment properties).
- Value of other personal property such as furniture.
As with the Verification of Employment, the loan officer will have you sign Verifications of Deposit (VOD) for each of the institutions (or a general authorization) where you have savings or checking accounts. Differences between account balances reported by the institution and balances you provided on the loan application have to be reconciled. Be sure you have correct current balances.
The lender will look for the source of funds with which you will make the down payment and pay closing costs and fees. Gifts from a relative, church, municipality or non-profit organization may sometimes be used, but must be verified in writing. If you are providing less than 5 percent of the sales price, the donor must be a relative and must provide a letter stating the donor’s relationship to you, the amount of the gift and the fact that no repayment is expected.
You will be asked to itemize all your current bills, loans and other debts, including current balances and monthly payments. Debts include automobile loans, credit cards such as Visa, Mastercard and other retail store accounts, finance company, bank and credit union loans and existing mortgages, including home equity loans. You should be able to give the account or loan number, the monthly payment, the number of payments remaining and the outstanding balance.
The information you provide on the loan application will later be verified by a credit report requested by the lender. As with employment and deposit information, differences between your figures and those on the credit report will raise questions and may delay the approval of your loan. It is to your advantage to have data correct, right prior to filling out the loan application. If you have had credit problems, you should inform the lender. Lenders recognize that unemployment, illness, marital problems or other financial difficulties can temporarily impair your credit rating.
Provide a written explanation of the circumstances regarding the problem to be included with the loan application. The lender must consider such a written explanation as part of the underwriting analysis. If the problem has been corrected and your payments have been made on time for a year or more, your credit will probably be judged as satisfactory. Chronic late payments, judgments or loan defaults, however, severely damage your credit standing and may prevent you from obtaining the financing you need to complete the purchase.
If you have been through bankruptcy or foreclosure proceedings within the past seven years, be prepared to give full details and copies of applicable documents regarding them. You will also be asked to explain the details if you are obligated to pay alimony, child support or separate maintenance. Such obligations are treated like debt payments by most lenders and will be part of the underwriting analysis.
You will be asked to sign a section of the loan application which contains your certification that the information you have provided is correct to the best of your knowledge; your promise to advise the lender of any material changes in the information and your consent to (1) verification of the application data, (2) submission of account history to credit reporting agencies, and (3) transfer of the loan or loan servicing to successors to the original lender.
The last part of the application requests information on the race and gender of the applicants. The Federal Government uses this data to monitor lenders’ compliance with fair housing and equal credit opportunity laws. Providing this information is strictly on your part and has no effect on your loan application. The lender, however, is required by federal law to request the information. Under Federal Regulations, this lender is required to note race and sex on the basis of physical observation or surname.
Because of the particular circumstances surrounding a loan application, the lender may require additional information or documentation regarding you or the property after the application has been submitted for approval. Loan officers make every effort to collect all data at the outset, but cannot foresee every eventuality. Requests for additional information are not necessarily bad omens and your primary concern should be in responding promptly with the information.
Based on the application, the loan officer may be able to pre-qualify you, but cannot approve the loan. That is done by the lender’s underwriters after all documents and information have been received and verified.
After The Loan Application – What Next?
After the loan application has been completed, it will be forwarded to the lender’s loan processing department and then to an underwriter, where the decision to approve or reject the loan will be made. Loan processors send out Verifications of Employment and Deposit and order the credit report, property appraisal and other documents. The time it takes to receive these documents affects the length of time required for approval of the loan. If you are transferring from out of the local community, it may take longer to receive the credit and employment information. Processing times vary from one lender to another, but the loan officer should be able to give an idea of the processing time for your application.
Within three business days after receiving the application, the lender must provide you with a Good Faith Estimate of the anticipated closing costs. It will show costs associated with the loan settlement, such as origination fees, mortgage insurance, title insurance, escrow reserves and hazard insurance.
Within the same three days you will also receive a Truth-in-Lending Disclosure statement. This statement shows, among other things, the estimated monthly payment. The total cost of all finance charges on your loan is also shown, stated as an Annual Percentage Rate (APR). The APR represents the dollar amount of finance charges you pay either up front or over the life of the loan, converted to an annual interest rate. After the lender has approved the loan, you will usually receive an approval letter. If the loan does not close within the specified commitment period, the terms are subject to change. The approval may contain conditions you need to satisfy, so you should read it carefully. In cases where closing is scheduled soon after approval, the lender may give you verbal approval instead of an approval letter. This is not unusual, but make sure you understand the terms of the approval.
Once the approval letter has been received, you are assured the financing you need to complete the purchase of your home and you need to turn your attention to completing the details required for settlement.
Reducing The Anxiety of Waiting
For many homebuyers, the period of time between submission of the loan application and approval is one of uncertainty and concern. Requests for additional information, unexpected delays and lack of communication all serve to increase the tension. There are a number of things both you and the lender can do to reduce the stress.
Keep in mind the lender wants to make your home loan. Loan underwriters are looking for ways to approve loans, not reject them. If you have come to the interview with the loan officer fully prepared and have provided good documentation, you have done a great deal to assure prompt processing of your application and approval of your loan.
You and the lender need to make sure that lines of communication are kept open. Your contact person may be the loan officer, but often it might be someone in the lender’s loan processing department who can tell you the status of your application.
You should be accessible if the lender needs additional information or documents during processing. If you are from out of town, use your real estate agent as a contact, if necessary. Quick response to lender requests helps keep the process on schedule. In order to protect both you and the lender, mortgage loans require much more paperwork and legal documentation than an automobile or other installment loan, and lenders do not ask for more than is absolutely necessary.
Getting a home mortgage loan need not be an ordeal that dampens the thrill of acquiring a new home. If you understand the lending process and are prepared to do your part, it simply becomes a key step in owning a home.
Be Prepared For Home Ownership
The expenses of owning a home go beyond the monthly mortgage and utility payments, and can create financial difficulties, particularly for first-time home buyers who have minimal cash reserves..
Mechanical failures in the plumbing, electrical and heating systems seem to occur at the worst possible times, but have to be repaired. If you have purchased an older home, complete replacement of water heaters, furnaces or kitchen appliances may be needed. You should have drawn up a budget before beginning your search for a home, making allowances for such expenditures. If you did not, it is time that you begin to accumulate adequate reserves to deal with such emergencies.
In a newer property, your immediate expenses may be confined to landscaping, interior decoration and furnishings. Under normal conditions, mechanical items and appliances will be under warranty for six months to a year and will not require major expenditures, but may need minor repairs. In an older property, replacement of major items can be very expensive. You should have determined the age of the furnace, hot water heater, air conditioning system, kitchen appliances and the roof. Your home inspector’s report probably noted the ages of these major items. If they are older than half their expected useful life, you will need to plan for the costs of replacement.
Set up a budget and plan for both regular maintenance and major repairs. Establish an emergency fund for repairs and appliance replacement. Know what sources of financing are open to you when a major item such as the roof or heating system has to be replaced. These are things that can cost thousands of dollars and you may have to finance them through a home equity loan, a second mortgage or an installment loan. Determine which kind of loan you are likely to qualify for, the pros and cons of the alternatives and have a plan for dealing with a major expense.
Your budget should also include a reserve for making your mortgage payments in the event of illness or loss of future income.
Planning For The Unexpected
While over-obligating yourself or unexpected repair bills may jeopardize your ability to keep up your house payments, the primary causes of foreclosure and bankruptcy are unanticipated personal crisis. More homeowners lose their homes because of illness, loss of employment or marital problems than all other reasons combined. None of us factor these things into our plans for the future, but you should know about some of your alternatives if you find yourself in such a position. It is much easier to look at alternatives and plan an effective course of action before you are in trouble and in a state of anxiety and stress.
Sometimes you can see the trouble coming before financial problems begin. An advance notice of a layoff means the family income will be severely cut back or eliminated in the near future. A major medical operation or property repair bill may be more than you can afford to repay, even with a short term loan. You have to address the situation as soon as possible or risk losing your home. There can be a number of local sources that can help you get over the hump. Churches and civic groups may have assistance programs or may know what is available. Non-profit organizations, particularly housing assistance groups or counseling agencies, may manage special assistance programs. State and local housing agencies are also places to help.
If Your Mortgage Becomes Delinquent
The day of the month on which your mortgage payment is due, usually the first day of the month, is set out in the mortgage note. Your payment is considered late if the lender receives it after the due date, and the lender usually will charge a late payment fee when the money is not received within 15 days of the due date (the timing and amount of late charges may vary from lender to lender).
Payments made, including any late charges assessed, before the next payment due date will be accepted by the lender, but if you owe two or more mortgage payments, your home is in serious jeopardy. Unless specific arrangements are made with your lender, you must remit all payments and late charges before the money will be accepted and the loan considered current.
When three or more mortgage loan payments are due and unpaid, the loan may be given to the lender’s attorney and foreclosure proceedings initiated. The entire balance of the loan may be due and payable immediately. In addition to the loan payments due, you are liable for legal fees incurred by the lender. At this point, you are in serious danger of losing your home.
What To Do When You Default On Your Mortgage
No lender wants to foreclose on a mortgage. Foreclosure costs them more money than they can make from the foreclosure sale. Therefore, lenders do not foreclose in order to make money, but only reluctantly as a way of limiting losses on a defaulted loan. This is why, if you get behind on your mortgage payments, your lender will work with you to devise a practical plan to cure the default and bring the loan current. In order to do so, however, you must stay in communication with your lender and be honest in evaluating your financial situation. The willingness of the lender to work with you to get past your current problems will depend heavily on your past payment record. If it shows consistently timely payments and no serious defaults, you will find the lender much more receptive than if you have a record of unexplained chronic late payments.
If you are falling behind in your payments, or know that you are likely to in the immediate future, there are steps you should take before talking with the lender about alternative payment arrangements.
First, you need to prepare a monthly list of your income and expenses, using realistic figures based on your current financial situation. You will also need to put together a complete financial disclosure package, showing your assets and liabilities, including all debts and monthly payments and when they are due. Pay stubs, unemployment check stubs or other proof of current income should be in the package, along with two years’ tax returns. Get an estimate of the value of your property. You can usually get a local real estate broker to give you an idea of the current market value, free of charge. Finally, prepare a written explanation of your situation for the lender and offer any plan or suggestion you may have on how you can bring the loan current.
Mortgage Loan Workout Plans
A loan workout plan is an agreement between you and your lender that sets out the steps to be taken to cure the delinquency and prevent loss of your home. It may be written or oral and will have specific deadlines which you must meet in order to avoid foreclosure. Therefore, it must be based on very realistic estimates of your ability to meet the plan schedule.
The nature of the workout plan will depend upon the seriousness of the default. Whether your financial problems are short-term or your payment ability has been impaired for the foreseeable future, your prospects for obtaining funds to cure the default and the current value of your property. If the default is caused by a very temporary condition and is likely to be cured within 30 to 60 days, the lender may consider granting you temporary indulgence. Some examples of cases where this approach would be considered are where the house has been sold but the sale has not settled or where an insurance settlement is pending. It is usually possible to determine a date certain for curing the default. The lender will want documented evidence, such as the sale contract, before granting indulgence.
If you have suffered a temporary loss of income but can demonstrate that it has returned to previous levels, you may structure a repayment plan to bring the loan current. This type of workout arrangement requires your normal mortgage payments be made as scheduled, plus an additional amount that will cure the delinquency in no more than 12 to 24 months. In some cases the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of workout agreement.
In some circumstances, it may be impossible for you to make any payments at all for some period of time. If you have had a good record with the lender, a “forbearance plan” will allow you to suspend payments or make reduced payments for a specified length of time. The forbearance plan will be in writing, have a definite term and spell out the method of ending the delinquency. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if you default on the agreement.
Any workout agreement is a last-ditch effort by you and your lender to avoid foreclosure and keep you in your home. It is not a substitute for good budgeting and financial planning on your part and will probably not be available if your payment record has not been consistently good up to the present time. Lenders will work closely with good borrowers who are having a period of real emergency and hardship, but are not inclined to cooperate with those who demonstrate little financial discipline.
Have more questions or need tips and hints about getting a mortgage or about Carpenter Realtors after reviewing this? Ask us!