The Complete Step-by-Step Mortgage Loan Guide For First Time Buyer

Posted by David
February 20, 2008

What does a lender consider to approve your loan?

Imagine if someone asked you for a $100,000 loan. What would you want to know before handing over the money? Can the person afford to pay you back? Is the person responsible with money? How will the money be used? These are the same types of questions loan underwriters ask when a prospective buyer applies for a loan.

Underwriters approve or deny a mortgage loan application based on an evaluation of:

1. Your property appraisal. Your appraisal is done by an independent appraiser, and provides an estimate of the market value of the home you want to buy, based on similar homes sold in the neighborhood. An appraiser also inspects the property to evaluate its general condition and see if any repairs are needed to bring the property to its full value. Lenders generally lend you up to a certain percentage of the property value. The loan amount will be based on the lesser of the sales price or the appraisal amount.

2. Your income and assets. Your current earnings,What’s This? along with available funds (like bank accounts, investments or gift funds) help determine your ability to repay a loan.

3.Your down payment. The down payment is the up-front cash you’ll pay toward the purchase of your home, reducing the amount of the loan amount that needs to be financed. Generally, the larger the down payment, the lower your monthly payment. With a conventional loan, you can put down as little as 3%, although if your down payment is less than 20% your monthly payments will increase because you must also purchase private mortgage insurance.

4. Your credit history. Lenders base part of their decision on how you’ve handled credit payments in the past. A report from the credit bureau shows the types of credit you’ve had, whether you’ve repaid promptly and how well you’ve managed the responsibilities of credit.

I strongly recommend that you request a copy of your credit report before you apply for a mortgage. That way, if you detect potential credit concerns on your report, such as incorrect information, you’ll have enough time for the credit reporting agency to correct it.

What do you need to apply for a loan?

For pre-qualification, all you need to provide is your income, debt and how much you have for a down payment. Then I can tell you how much you can afford to make your house-hunting more productive.

Once you’ve found your new home, I’ll need more detailed information to approve your loan. So I’ve put together a handy walk-through of everything you’ll need to help you save time, avoid delays and get to the closing table faster. Of course, these items alone do not ensure your loan approval-that’s where experience and knowledge is crucial. An experienced loan officer is able to gather additional documentation to put your application in a better light.

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1. Copy of purchase sales contract
Ok, so this one isn’t actually required up front. I believe it’s better to get approved for your loan before you even find your perfect house. Why? That way, there are no surprises-you’ll know exactly how much you can afford or how much more you need to save before you go through the time and expense of putting a contract on a home. Of course, once you’re ready to buy your new home, a signed copy of your sales contract or offer to purchase, and all addenda, will be required. This is usually provided by your real estate agent.

2. Property information listing sheet
This sheet lists all the attributes of your prospective new home, such as the number of rooms, square footage, appliances, acreage, etc. This listing sheet-or multiple listing sheet (MLS)-is usually given to your lender by your real estate agent.

3. W2 forms
Your lender will need to verify your income and employment history in order to qualify you for a loan. You and any co-borrowers will need to give your loan officer copies of your W2’s from the previous two years.

4. Pay stubs
Your loan officer will need copies of your pay stubs (and those of any co-borrowers) from the most recent month to verify your current salary and employment status.

5. Employment history
You’ll need to provide your loan officer with the name and address of your employer(s) for the last two years, including your dates of employment and income.

And if you’ve had a recent gap in employment of one month or longer, you’ll also need to explain why in writing. Don’t worry-gaps in your employment are common. Your lender just needs to ensure that you’re willing to work and there’s a low likelihood of unemployment recurring.

6. Social security number(s)
Both you and your co-borrower(s) need to provide your social security numbers. Your loan officer will need these numbers to fully research your financial history for loan approval.

7. Bank statements for checking and savings accounts
You’ll need to supply copies of the past three months’ statements, including names, addresses, account numbers and balances of depository institutions (i.e. banks and credit unions).Your loan officer will need to have ALL pages of each statement, even if they’re blank, to ensure that you have the necessary funds on hand and your accounts are in good standing.

8. Credit information
For each open credit card account, you’ll need to provide the creditor name, address, account number, payment amount and current balance. If you’ve had any credit problems, you’ll also need to include a letter of explanation. Even one late payment will need to be explained.

9. Tax returns
You’ll need to supply the previous two years’ personal federal income tax returns and all schedules if you’re:

10. Stocks, bonds and investment accounts
If these are being used for your house purchase, you must supply the name and address of your broker and copies of the previous three months’ statements or stock certificates. A list of serial numbers and issue dates may be acceptable for verifying bonds. ALL pages of all statements are needed, even if blank.

11. IRA/Retirement plan
If you have an IRA, 401(k) or other retirement plan, you’ll need to provide the approximate value of your vested interest and copy of your most recent statement.

12. Life insurance policies
If you have no other cash reserves (like stocks or bonds),your lender may ask for the name of your insurance company(ies), policy number, face amount and approximate cash value of each policy.

13. Automobiles owned
Your loan officer needs to know the make and year of each automobile owned and its approximate current market value. If your automobile is less than five years old and you own it free and clear, you’ll need to provide a copy of your title.

14. Construction loan
If you’re having a new home built, your loan officer needs a copy of your signed construction contract, including the cost breakdown and builder plans.

15. Gift letters
If part of your down payment or closing costs is from a gift, a signed letter is needed from the donor to verify that your are not required to repay the funds. This is a form letter that will be provided by your loan officer. There are many rules governing the use of gift funds, so ALWAYS talk to your lender prior to receiving gift funds.

16. Other income
If you’re using other income to qualify, like interest or dividend income, you will need to provide documentation to your lender for any funds received in the past 12 months.

17. If you are renting…
You need to provide your landlord’s name, address and phone number or previous 12-month rental payment history. Canceled checks and rent receipts are acceptable.

18. If you are self-employed…
Your lender needs your Profit and Loss Statement and Balance Sheet for the prior quarter year-to-date. This must be signed by you or your accountant, depending on the size of your company.

19. If you are divorced or separated…
Provide a copy of your separation agreement and divorce decree, along with any amendments. If payments are received and are needed to qualify, your lender needs a 12-month payment history of alimony/child support payments. You must provide check stubs or copies of both the front and back of the checks. If checks cannot be provided, support payments must be documented by deposits into your bank account.

20. If you are a student…
If you don’t have two years of employment history because you were attending school (high school, college, trade school, etc.), then your school transcripts or diploma will be needed.

21. If you are the owner of rental properties…
You need to provide signed Federal tax returns, along with a schedule of all real estate owned and the account number and address of the mortgage company that holds the properties.

In addition, if the real estate owned is:

22. If you’re applying for affordable housing loan programs…
A number of special loans are available to help low- to moderate-income buyers. You’ll need to speak with your loan officer to see if you can qualify for any of these programs, which include the Community Home Buyer’s Program, Mortgage Revenue Bond Authorities and the Guaranteed Rural Housing Loan.

Loans underwritten using liberalized guidelines under affordable housing programs may require you to present a counseling or inspection certificate.

How does the mortgage loan process work

Income verifications. Credit checks. Insurance applications. Many home buyers wonder where the loan process begins…and ends. To help make the process easier to understand, here are the basic steps involved in purchasing a home and the approximate time frame for each step. The whole process takes about 45 days.

A note about pre-approval
As you search for your new home, choose a loan officer, like Rock Vaughan, and request preapproval. Once you find a suitable home, negotiate an offer to purchase or a sales contract with your real estate agent. If the seller accepts, you move on to the application process.
day 1 - day 2

Complete a loan application with your lender. You must supply:

Within three days of application, you’ll receive a Truth-in-Lending disclosure which itemizes the approximate costs of applying for a loan.

day 3 -day 10

The lender orders a property appraisal and credit report, mails out Verifications of Employment (VOE) and Deposit (VOD).

VOE: Employers are asked to verify for each borrower the last two years of employment history and gross income, and state the probability of continued employment.

VOD: Financial institutions are asked to verify the existence of each borrower’s funds. If gift funds were received, the lender must be able to verify the transfer of money from the giver to receiver beyond doubt. Your lender will give you the gift letter form for you and the gift donor to complete. A copy of the gift letter must be in the loan file.

day 5 - day 25

The loan processor reviews the credit report and verifies your debt and payment histories as Voes and VODs are returned. If there are any late payments, collections, judgements or inquiries shown on the credit report, your written explanation is required.

The loan processor also reviews the home appraisal and checks to see if there are any property issues that may require additional comment by the appraiser. Any repairs required by the appraiser must be reported.

day 15 - day 25

The underwriter reviews the loan package and decides whether to approve or deny the loan. If more information is required to make a decision, the loan is put into suspense and information is requested from you. It’s very important that you respond immediately to requests for additional information, or you risk delays and possible expiration of locked interest rates.

If you have less than 20% down on a conventional loan, the lender will submit an application for private mortgage insurance on your behalf.

day 17 - day 27

Once the loan is approved, the title insurance is ordered by the settlement agent/title attorney and the closing is scheduled.

day 25 - day45

At closing, you obtain your loan proceeds and present a cashiers check to cover the balance of the down payment and closing costs (see below). The loan closes, and you’re ready to move into your new home.

Closing costs include the following:

Appraisal fee-shows the lender a reasonable estimate of value for loan purposes. FHA and VA loans set maximum charges; conventional loan appraisers can set their own charges, usually about $300 in the Washington, DC metro area.

Attorney/settlement fee-this is a charge for all the paperwork and research required by the mortgage company.

Credit report-reports your credit history so your lender can verify your credit worthiness. Reports range from $55 to $70.

Points-equal to 1% of the loan. Points are comprised of the origination point and discount point(s).
Origination point-a fee collected by the lender for obtaining your loan. On all loans, this cannot exceed 1% of the base loan amount.

Discount point(s)-a one-time charge paid to reduce the interest rate on your loan. The lower you want your interest rate, the higher the discount points will be. However, depending on market conditions, a loan may or may not have discount points. They are set by the lender-the higher the interest rate, the fewer points.

Sales commission-usually paid by the seller, this is the charge from the real estate company or builder’s representative who sold the property to the home buyer. For the real estate company, the charge is generally a percentage of the sales price; builders may receive a straight fee per house.

Survey-the survey, done by an engineer, shows the lot measurements and all recorded or unrecorded easements or restrictions against the lot. This ensures that the house and lot being sold are the same as the current deed.

Title insurance-protects you and your lender from title liens placed upon your new home. Any claims that would cause problems with the lender’s first lien on the property and that was not detectable through the title search would be protected with this insurance.

Recording changes-cost to record mortgage loan papers and the deed at the county courthouse.

Termite inspection-checks for wood damage or infestation of any kind from wood destroying insects.

What types of loans are available?

When you’re buying a new home, finding the right mortgage to fit your needs is just as important as finding the right home. To get the most home for your money, I recommend finding the right type of mortgage first, because it can mean so much when choosing the best house for your needs.
1. Conventional Conforming
Income ratio: 28%

Debt ratio: 36%
Minimum down payment: 5%, except on special programs
Maximum loan amount: $227,150

Conventional Jumbo
Income ratio: 33%
Debt ratio: 38%
Minimum down payment: 5%
Maximum loan amount: $650,000

A conventional loan is one that is not insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA).

A conventional conforming loan means it conforms to the accepted standards set by Fannie Mae and Freddie Mac.

A conventional jumbo loan is also known as a non-conforming loan because it does not conform to government, Fannie Mae or Freddie Mac standards or exceeds their maximum loan limits. Instead, each lender sets their own jumbo loan standards-most use Fannie Mae and Freddie Mac guidelines and then diverge from there. Jumbo loans typically have a higher interest rate because the banks set the guidelines, not government agencies. However, they allow you to have a greater amount of debt and let you use more of you monthly income toward your home.

Conventional loans can have any of the following rate structures:

The standard fixed-rate mortgage is the most popular, offering a fixed interest rate and payment for the life of the loan. The 15- and 30-year loans are the most typical.

30-year fixed-rate
You pay down all the principal in 360 equal monthly payments.

15-year fixed-rate
You pay down all the principal in 180 equal monthly payments. Because of the reduced loan term, you’re monthly payments are higher, but you’ll build up equity much faster and cut your interest payments.

Other options:
Fixed-rate balloon
Similar to a 30-year, you make equal monthly payments based on a 360-month payment (amortization) schedule. But instead of taking 30 years to pay down the mortgage, the entire outstanding principal balance is due at a specific time prior to the end of the loan period (typically after 5,7 or 10 years). Hence the name “balloon”-your payment inflates at the end of the loan. This loan allows you to secure slightly lower interest rates, but you must be sure that you have the funds to make the balloon payment. That’s why most borrowers anticipate refinancing or selling the property prior to the end of the balloon period.

Adjustable-rate Mortgages, or ARMs, offer an interest rate that is adjustable throughout the entire life of the loan, and down payments change accordingly. A good ARM has limits, or caps, that prevent the payments from increasing beyond a predetermined maximum (to protect you), or decreasing beyond a predetermined minimum (to protect the lender).

By sharing a portion of the interest rate risk with your lender, you’ll get an initial interest rate that’s substantially lower than fixed-rate. It also means that you might qualify for a larger loan because lenders may make their decision based on your current income and the first and/or second year’s payments. However, because your payments are tied to the fluctuation of interest rates, there’s the potential for changing payment amounts.

The interest rate of an ARM is determined by an index of current interest rates, and adjusted at specific, predetermined periods, usually every 1, 3, 5 or 7 years. These adjustments have caps placed on the increase of payments and interest rates. The most common caps specify a 1% or 2% maximum interest rate increase per adjustment and a 4% to 6% per year maximum rate increase over the life of the loan.

1-Year ARM
With this loan, your interest rate adjustment period occurs on the one-year anniversary of your loan.

3/1 ARM
This is a hybrid version of a 1-year ARM. The interest rate stays the same for the first three years, and then the loan turns into a 1-year arm. This gives you the advantage of a stable payment and rate for an extended time period, followed by the lower rates and indexes of a 1-year ARM.

7/1 ARM
This works just like a 3/1 ARM, except the interest rate remains the same for the first seven years before turns into a 1-year ARM.

You can temporarily or permanently lower the interest rate (and hence monthly payment) by paying additional points at loan closing.

For example, with a 2/1 buydown, your interest rate is reduced by 2% the first year and 1% the second, which lowers your monthly payment during that time. A buydown loan helps to qualify borrowers by paying more toward the loan up front.

2. FHA

Income ratio: 29%
Debt ratio: 41%
Minimum down payment: 2.25% to 4.5%
Maximum loan amount (in the Wash. DC metro area): $170,350

For many families, the main obstacle standing in the way of home ownership is the down payment. So FHA loans require very low down payments and allow for more generous income and debt ratios.These ratios are based on your gross monthly income, and if applicable, social security income, alimony, public assistance payments or child support/maintenance payments.

Because this loan is meant to help first-time owners and low- to middle-class buyers, the maximum loan amount is capped at $170,350 (in the DC/Baltimore area). For the same reasons, FHA loans are not available for investor loans-buying a property as an investment instead of as a primary dwelling.

With an FHA loan, the seller can contribute up to 6% of the sales price by paying points, prepaid items or closing costs for the buyer.

And if you’ve ever been bankrupt, there’s no need to despair. FHA loans have rather forgiving bankruptcy policies.

FHA loans can have any of the following rate structures:

The standard fixed-rate mortgage is the most popular, offering a fixed interest rate and payment for the life of the loan. The 15- and 30-year loans are the most typical.

30-year fixed-rate
You pay down all the principal in 360 equal monthly payments.

15-year fixed-rate
You pay down all the principal in 180 equal monthly payments. Because of the reduced loan term, you’re monthly payments are higher, but you’ll build up equity much faster and cut your interest payments.

Other options:
Fixed-rate balloon
Similar to a 30-year, you make equal monthly payments based on a 360-month payment (amortization) schedule. But instead of taking 30 years to pay down the mortgage, the entire outstanding principal balance is due at a specific time prior to the end of the loan period (typically after 5,7 or 10 years). Hence the name “balloon”-your payment inflates at the end of the loan. This loan allows you to secure slightly lower interest rates, but you must be sure that you have the funds to make the balloon payment. That’s why most borrowers anticipate refinancing or selling the property prior to the end of the balloon period.

Adjustable-rate Mortgages, or ARMs, offer an interest rate that is adjustable throughout the entire life of the loan, and down payments change accordingly. A good ARM has limits, or caps, that prevent the payments from increasing beyond a predetermined maximum (to protect you), or decreasing beyond a predetermined minimum (to protect the lender).

By sharing a portion of the interest rate risk with your lender, you’ll get an initial interest rate that’s substantially lower than fixed-rate. It also means that you might qualify for a larger loan because lenders may make their decision based on your current income and the first and/or second year’s payments. However, because your payments are tied to the fluctuation of interest rates, there’s the potential for changing payment amounts.

The interest rate of an ARM is determined by an index of current interest rates, and adjusted at specific, predetermined periods, usually every 1, 3, 5 or 7 years. These adjustments have caps placed on the increase of payments and interest rates. The most common caps specify a 1% or 2% maximum interest rate increase per adjustment and a 4% to 6% per year maximum rate increase over the life of the loan.

1-Year ARM
With this loan, your interest rate adjustment period occurs on the one-year anniversary of your loan.

3/1 ARM
This is a hybrid version of a 1-year ARM. The interest rate stays the same for the first three years, and then the loan turns into a 1-year arm. This gives you the advantage of a stable payment and rate for an extended time period, followed by the lower rates and indexes of a 1-year ARM.

7/1 ARM
This works just like a 3/1 ARM, except the interest rate remains the same for the first seven years before turns into a 1-year ARM.

You can temporarily or permanently lower the interest rate (and hence monthly payment) by paying additional points at loan closing.

For example, with a 2/1 buydown, your interest rate is reduced by 2% the first year and 1% the second, which lowers your monthly payment during that time. A buydown loan helps to qualify borrowers by paying more toward the loan up front.

3. VA

Debt ratio: 41%
Minimum down payment: none
Maximum loan amount (in the Wash. DC metro area): $203,000
Available for: active and retired members of the U.S. armed forces

VA loans were created to help military veterans purchase homes. In most cases, there is no down payment required, and the interest rate is generally less than those for conventional loans. The debt ratio is based on your gross monthly income, and if applicable, social security income, alimony, public assistance payments or child support/maintenance payments. And with a VA loan, the seller can pay all the closing costs, normal points, plus an additional 4% of sales prices which can be used towards prepaid items and even some of the buyer’s debt.

Because these VA loan factors are so generous, the maximum mortgage amount is capped at $203,000, and the home must be a primary residence (not an investment property).

And if you’ve ever been bankrupt, VA loans have rather forgiving bankruptcy policies.

To qualify, you must provide your lender with a Certificate of Eligibility.

Remarried surviving spouses may no longer eligible if the remarriage is terminated by death or divorce, but can restore eligibility if the remarriage is void or has been annulled by a court.

VA loans can have the following rate structure:

The standard fixed-rate mortgage is the most popular, offering a fixed interest rate and payment for the life of the loan. The 15- and 30-year loans are the most typical.

30-year fixed-rate
You pay down all the principal in 360 equal monthly payments.

15-year fixed-rate
You pay down all the principal in 180 equal monthly payments. Because of the reduced loan term, you’re monthly payments are higher, but you’ll build up equity much faster and cut your interest payments.

Other options:
Fixed-rate balloon
Similar to a 30-year, you make equal monthly payments based on a 360-month payment (amortization) schedule. But instead of taking 30 years to pay down the mortgage, the entire outstanding principal balance is due at a specific time prior to the end of the loan period (typically after 5,7 or 10 years). Hence the name “balloon”-your payment inflates at the end of the loan. This loan allows you to secure slightly lower interest rates, but you must be sure that you have the funds to make the balloon payment. That’s why most borrowers anticipate refinancing or selling the property prior to the end of the balloon period.

Home Mortgage Loans

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