Mortgage 101

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Mortgage 101: Understanding the Home Loan Process

Whether you use an FHA, USDA, VA, Jumbo or Conventional mortgage to purchase your home, the process for obtaining the financing is very similar. Listed below are the basic steps that accompany almost every home loan.

Application

An application is a form that either will be completed by you or by a lender with your assistance. It asks for basic information such as name, age, social security number, address, place of employment, and lists out your debts as well as assets. There are sections for employment and address to establish at least a two year history for each of these items.

Credit report

A lender will get your permission to check your credit rating. The lender will then use their preferred credit agency to request a credit report. In the vast majority of cases the report will be a combination of information from the big three credit bureaus; Equifax, Transunion and Experian. The scores from these three bureaus will differ. However, they will normally be within the same range as each other. Most lenders will arrange the scores from highest to lowest and use the middle score to determine what loan program or programs that you will qualify for.

Proof of income

The lender will ask that you provide evidence to support your claim of income on the application. For people who are not self-employed this will usually mean pay-stubs covering the last 60 days of employment as well as W-2 forms covering the last two calendar years. For people who are self-employed, a copy of the last two calendar years business tax returns and personal tax returns will be requested.

Proof of assets

The lender will ask that you provide evidence to support your claim of assets on the application. If you have saved money in any type of account, such as a money market fund, savings account, CD, stocks, bonds, or retirement account then you will need to provide a recent statement from the account.

If you own another piece of property, such as a home, land or building, then you will be asked for a copy of the deed.

Underwriting

Once the lender has all of the above information, the items will be filed and presented to an underwriter. The underwriter will verify that the borrower meets the requirements for the loan. It is their job to compare the borrower’s income, assets, credit history and rent history against the rules for the specific type of mortgage and make sure that the borrower can repay the loan while having enough income to pay other debt and living expenses.

Appraisal

An independent appraiser will be hired by the lender to visit the home and determine its value. The appraiser will walk through the home and measure each room as well as the exterior of the home in order to determine the square footage. The home will be compared to similar houses nearby that have recently sold. Comparing similar homes that sold within the past 6 months to one year gives the appraiser a good idea of what the market will bear for the home you are considering.

Home inspection

A home inspection may not be required by the lender, but it is usually a good idea. An independent inspector will investigate the home and keep a keen eye out for any problems. Typically, the inspector looks at all parts of a home such as the plumbing, electrical, heating & air conditioning, foundation, roof and insulation. The inspector will prepare a report of his or her findings and give a recommendation toward any necessary repairs.

Title policy

A local title agency will visit the county courthouse and inspect the title to the home. The title agent is tasked with the responsibility of making sure the home can be sold based on the terms of the offer. The agent is specifically looking for any existing liens, loans or judgments against the property. All of these items must be paid off either with the proceeds of the new loan or prior to the new loan closing.

Closing

Once all of the above steps are completed, the lender will send a closing file to the title agency. The seller, buyer, real estate agent and any necessary attorneys will all meet at one time for the closing. The seller will sign a few documents that assert they have agreed to sell the home for a particular price and also transfer the deed to the new owners.

The buyers will sign several documents related to their promise to repay the mortgage, maintain homeowner’s insurance, pay the property taxes and apply with the lender’s rules for the loan.