1. Death of a loved one.
2. Serious Illness or injury.
3. Separation or divorce.
4. Getting Married.
5. Losing a job.
6. Starting a job.
7. Speaking in public.
8. BUYING A HOME.
9. Winning the lottery.
10. Starting a family.

Introduction

Buying a home may be the most exciting, confusing and stressful financial transaction you ever undertake, even if you have done it several times. Countless loan documents, unfamiliar terminology and uncertainty serve to temper the joy of buying a new home. As soon as the sales contract is signed, obtaining the financing for the purchase becomes paramount for all but a very few buyers. If you understand the steps required to qualify for a mortgage loan, however, much of the stress can be avoided. The following explanation of the loan approval process is intended to help you through the complexities of obtaining a mortgage loan.

The Loan Application Interview

The first step to obtaining a mortgage loan is meeting with a loan counselor, whose job is to begin the collection of information the lender needs to approve the loan. Your loan counselor will explain the types of mortgage loans available to you, the interest rates and 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 form. 

When discussing the terms of the loan, it is important to understand how and when the rate and fees on the loan are going to be set. Your loan counselor will explain to you the terms of your rate “lock” or guarantee. 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.

Completing The Loan Application Form

The loan application form asks for information on the property you are buying, terms of the purchase contract and the employment and financial history of all loan applicants, including your spouse and/or other co-borrowers. The lender will verify the information on your loan application, so it is important to make sure that it is complete and accurate.

You can complete the loan application process much more easily and accurately if you prepare for it ahead of time. A great deal of detail will be asked about your personal finances, including bank account numbers and balances, current loan amounts and payments, and credit card account numbers. You will want to be thorough and precise in your answers, so it will benefit you to assemble this kind of information before the meeting with the loan counselor. The following is a summary of the documents that may be required by the lender, and should be brought with you when you apply for a loan.

• The purchase contract for the house (if you don't have the contract, check with your real estate agent or the seller).
• Your bank account numbers, the address of your bank branch and your most recent bank statements.
• Proof of employment and salary, pay stubs, W-2 forms, or other.
• If you are self-employed, balance sheets, tax returns for two to three previous years, and other information about your business.
• Information about debts, including loan and credit card account numbers and the names and addresses of your creditors.
• Evidence of your mortgage or rental payments, such as cancelled checks.
• Certificate of Eligibility from the Veterans Administration if you want a VA-guaranteed loan. (Your lender can help you obtain this.)

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. The lender may request a written explanation of the circumstances regarding the problem to be included with the loan application. 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.

At the time the application is taken, you will probably be asked to pay for the credit report and appraisal fees. The credit report fee is $20, and the appraisal fee is typically $400, but may vary depending on the home value, and loan requested.

Based on the information collected from the application, the loan counselor may be able to pre-qualify you for the loan requested. While prequalification is the first step, the actual loan approval can only be done by the lender’s underwriters after all documents and information have been received and verified.

Within three business days after completing 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 over the life of the loan. 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. Since the APR includes origination fees and other charges as well as interest on the mortgage loan, the APR is usually higher than the interest rate on the loan, and the two should not be confused. Most lenders and borrowers agree that using the APR to compare loan products is confusing, and many times misleading, as many lenders compute the APR differently. For accurate fee and rate comparison, instead refer to the good faith estimate provided by your lender.

Processing the loan application

After the loan application has been completed, it will be turned over to the processing department and then to the underwriter. Loan processors send out the Verifications of Employment and Deposit and order the credit report, property appraisal and other documents. Based on the application and documentation provided by the processor, the underwriter will issue the loan approval.

During the processing, it is important to be accessible if the lender needs additional information or documents. 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.

After the lender has approved the loan, you will be informed verbally and sometimes you will receive a commitment letter, which sets out the terms of the loan and the length of time for which those terms are offered. The commitment may contain conditions that you will still have to satisfy, so it is important to understand the terms of loan approval. Your loan counselor and processor will review these items with you to ensure that they can be taken care of and cleared in a timely manner.

Keep in mind that everybody involved wants to make the 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.

Closing the loan

Once your application for a mortgage loan has been approved and you have received a commitment letter from the lender, the final step before you can call the house your own is the closing, or settlement, of the purchase transaction and mortgage loan. Even though you have signed the purchase agreement and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and the loan is closed. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it runs smoothly.

There are standard documents and exhibits that are commonly required for a loan closing. Some of these will be your responsibility and others will be the responsibility of the seller. The following documents are typically required for closing.

• Title Insurance Policy Every lender will require title insurance. The company issuing the title insurance policy will have researched legal records to make sure that you are receiving clear title, or ownership, to the property. Their title search has established that the seller of the property is the legal owner, and that there are no claims, or liens, against the property. The title company offers both a lender's policy and an owner's policy. You will have to pay for a lender's policy and it is advisable for you to have an owner's policy as well. For a small additional premium, it will protect you up to the full value of the property if fraud, a lien or faulty title is discovered after closing.
• Homeowner's Insurance The lender will require you to have homeowners insurance on the property at least in the amount of the replacement cost of the property. You should make sure the policy covers the value of the property and contents in the event they are destroyed by fire or storm. You must pay for the policy and have it at closing. You are free to select the insurance carrier, but the lender will require the company to meet rating standards and be rated by a recognized insurance rating agency.
• Termite Inspection and Certification In many areas of the country, the property must be inspected for termites and the inspection is required in the purchase contract. In some parts of the country, this may be called a "wood infestation" report. The report is required on all FHA and VA loans as well as many conventional loans.
• Survey or Plot Plan Your lender may require a survey of the property, showing the property boundaries, the location of the improvements, any easements for utilities or street right-of-way and any encroachments on the boundaries by fences or buildings. Encroachments can be minor, such as a fence, or may be serious and have to be corrected before closing. In some areas, an addendum to the title policy eliminates the need for a survey.
• Water and Sewer Certification If the property is not served by public water and sewer facilities, you will need local government certification of the private water source and sanitary sewer facility. Properties with well and septic water sources are usually governed by county codes and standards.
• Flood Insurance If the lender or the appraiser determines that the property is located within a defined flood plain, you will want, and the lender will require, a flood insurance policy. The policy must remain in force for the life of the loan.
• Certificate of Occupancy or Building Code Compliance Letter If your home is new construction, you will have to have a Certificate of Occupancy, usually from the city or county, before you can close the loan and move in. The builder will obtain the certificate from the appropriate authority. Many local governments require an inspection when a home is sold to see if the property conforms to local building codes. Code violations may require repairs or replacement of structural or mechanical elements. The responsibility for ordering the inspection and paying for any required repairs should be spelled out in the purchase contract.
• Other Documentation Additional documentation required for closing will be set out in the commitment letter from the lender and will depend upon terms of the sale, peculiarities of the property and local ordinances and custom.

*Within 24 hours prior to the actual closing, you and your real estate agent should make a final inspection of the property to make sure any required repairs have been completed, all property described in the sale contract, such as kitchen appliances, carpeting and draperies are present and that no recent fire or storm damage has occurred. In some cases, the lender will make a similar inspection before closing.

The actual loan closing procedure, including who conducts the closing and who is present, depends upon local law and custom and lender practices. In the state of Arizona, most lenders use title or escrow companies to conduct the closing. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face.

The closing agent will have received instructions from the lender on how the loan is to be documented and the funds disbursed, and will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.

You typically need to come to the closing with a certified check for the closing costs, including the balance of the down payment. You can get the exact figure a day or two prior to the closing from your lender or the closing agent.

For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you an opportunity to check them before signing. A brief description of the major documents may help you understand their purpose and significance.

• Settlement Statement - HUD-1 Form This form is required by Federal law and is prepared by the closing agent. It provides the details of the sale transaction including the sale price, amount of financing, loan fees and charges, proration of real estate taxes, amounts due to and from buyer and seller and funds due to third parties such as the selling real estate agent. It must be signed by both buyer and seller and becomes a part of the lender's permanent loan file.

*Some of your charges on the HUD-1 may have already been paid, such as credit report and appraisal fees. They will be noted as P.O.C. (paid outside of closing). You will usually be charged interest on the loan from the date of settlement until the first day of the next month and your first payment will be due on the first day of the following month. Make sure you know exactly when your first and subsequent payments are due and what the penalties are for being late.

• Truth-in-Lending Statement This form is also required by Federal law. You were given an initial TIL shortly after you completed the loan application. If no changes have taken place since that time, the lender need not provide one at closing. If, however there are significant charges, you must receive a corrected TIL no later than settlement.
• The Mortgage Note The mortgage note is legal evidence of your indebtedness and your formal promise to repay the debt. It sets out the amount and terms of the loan and also recites the penalties and steps the lender can take if you fail your payments on time.
• The Mortgage or Deed of Trust This is the "security instrument" which gives the lender a claim against your house if you fail to live up to the terms of the mortgage note. It recites the legal rights and obligations of both you and the lender and gives the lender the right to take the property by foreclosure if you default on the loan. The mortgage or deed of trust will be recorded, providing public notice of the lender's claim (lien) on the property.
• Miscellaneous Documents There will be a number of documents or affidavits that you will be asked to sign at closing. Some are lender requirements (e.g. a statement that you intend to occupy the properties your primary residence), or are required by state or Federal law.

When everything has been signed and the closing agent is satisfied that all of the instructions for closing have been complied with in full, you become the owner and are given the keys to the property.