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Would Refinancing Be Worth It?

Refinancing can be worth while, but it does not make good financial sense for everyone. A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. this figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.

There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. (Depending on your loan amount and the particular circumstances, however, you might choose to refinance a loan that is only 1.5 percentage points higher then the current rate. You may even find you could recoup the refinancing costs in a shorter time.)

Refinancing can be a good idea for homeowners who:

• Want to get out of a high interest rate loan to take advantage of lower rates. This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.
• Have an adjustable rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.
• Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM they currently have.
• Want to build up equity more quickly by converting to a loan with a shorter term.
• Want to draw on the equity built up in their house to get cash for a major purchase or for their children’s education.

If you decide that a refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing.

Should You Refinance Your ARM?

In deciding whether to refinance an ARM you should consider these questions:

• Is the next interest rate adjustment on your existing loan likely to increase your monthly payments substantially? Will the new interest rate be two or three percentage points higher than the prevailing rates being offered for either fixed-rate loans or other ARMs?
• If the current mortgage sets a cap on your monthly payments, are those payments large enough to pay off your loan by the end of the original term? Will refinancing a new ARM or a fixed-rate enable you to pay your loan in full by the end of the term?

What Are The Costs of Refinancing?

The fees described below are the charges that you most likely to encounter in a refinancing.

• Application Fees
  This charge imposed by your lender covers the initial costs of processing you loan request and checking your credit report.
• Title Search and Title Insurance
  This charge will cover the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy, usually issued by a title insurance company, that insures the policy holder in a specific amount for any loss caused by discrepancies in the title to the property. Be sure to ask the company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy.
• Lender’s Attorney’s Review Fees
  The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller. In most situations, the person conducting the settlement is providing a service to the lender. You may want to retain your own attorney to represent you at all stages of the transaction, including settlement.
• Loan Origination Fees and Discount Points
  The origination fee is charged for the lender’s work in evaluating and preparing your mortgage loan. Discount points are prepaid finance charges imposed by the lender at closing to increase the lender’s yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on a $75,000 loan would be $750. In some cases, the points you pay can be financed by adding them to the loan amount. The total number of points a lender charges will depend on market conditions and the interest rate to be charged.
• Appraisal Fee
  This fee pays for an appraisal which is a supportable and defensible estimate or opinion of the value of the property.
• Prepayment Penalty
  A prepayment penalty on your present mortgage could be the greatest determent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies be state, type of lender, and type of loan. Prepayment penalties are forbidden on various loan including loan from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which your prepay your loan.
• Miscellaneous
  Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.

In conclusion, a homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist. One way of saving on some of these costs is to check first with the lender who holds your current mortgage. The lender may be willing to waive some of them, especially if the work relating to the mortgage closing is still current. This could include the fees for the title search, surveys, inspections, and so on.

The information contained in this brochure is intended to help you ask the right questions when considering refinancing your loan. It is not a replacement for professional advice. Talk with mortgage lenders, real estate agents, attorneys, and other advisors about lending practices, mortgage instruments, and your own interests before you commit to any specific loan.

Refinancing Savings On A $100,000 Loan

How To Buy the Home You Want

Mortgage insurance (MI) allows you to choose from a wider price range of homes. How? Lenders are generally willing to accept a lower down payment than the standard 20% if the lender obtains mortgage insurance on your loan through a mortgage insurance company.

You can not only get the home you deserve, but you can conserve your savings and increase your income tax deductions, just by putting less money down.

Buy More Home

You can afford more home and maximize your investment if your lender obtains MI for your loan.

Financing a home with a low down payment loan may be the best way to afford a home in high-priced markets.

Conserve Your Savings

The lower the down payment, the more you retain for home furnishings, other investments, future emergencies, or even college tuition

Even if you have less than $20,000 saved, you can still afford to buy a $100,000 home with a lower down payment option if your lender obtains MI on your qualified loan from a mortgage insurance company.

Increase Your Tax Write-off

A larger loan amount will have higher interest payments and could result in higher tax deductions.

Mortgage interest is one of the few remaining consumer debt items that you can deduct.

• All About Rate Lock-Ins
• What Is A Rate Lock-in?
• Will Your Lock-In Be In Writing?
• Will You Be Charged For A Lock-In?
• Setting The Mortgage Term
• How Long Are Lock-Ins Valid?
• When The Lock-In Period Expires
• Speeding Up The Loan Approval
• Ask About Lock-Ins
• Complaints About Lock-Ins
• State Agencies
• Federal Agencies

In most cases, the terms you are quoted when you shop among lenders only represent the terms available to borrowers settling their loan agreement at the time of the quote. The quoted terms may not be the terms available to you at settlement weeks or even months later; therefore, you could not rely on the terms quoted to you when shopping for a loan useless a lender is willing to offer a lock-in.

A lock-in, also called a rate-lock or rate commitemnt, is a lender’s promise to hold a certain interest rate and points for you, usually for a specified period of time, while your loan application is processed. (Points are additional charges imposed by the lender that are usually pre-paid by the consumer at settlement but can sometimes be financed by adding them to the mortgage amount. One point equals 1 percent of the loan amount.) Depending upon the lender, you may be able to lock in the interest rate and n umber of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.

A lock-in that is given when you apply for a loan may be useful because it’s likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of your mortgage may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This protection could affect whether you can afford the mortgage. However, a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a lower rate that becomes available during this period. It is important to recognize that a lock-in is not the same as a loan commitemnt, although some loan commitemnts may contain a lock-in. A loan commitemnt is the lender’s promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender’s commitemnt only after your loan application has been approved. This commitemnt usually will state the loan terms that have been approved (including loan amount), how long the commitemnt is valid, and the lender’s conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender.

Some lenders have pre-printed forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in on the telephone or at the time of application. Oral agreements can be very difficult to prove in the event of a dispute. Some lenders’ lock-in forms may contain crucial information that is difficult to understand or that is in fine print. For example, some lock-in agreements may become void through some unrelated action such as a change in the maximum rate for Veterans Administration-guaranteed loans. Thus, it is wise to obtain a blank copy of a lender’s lock-in form to read carefully before you apply for a loan. If possible, show the lock-in form to a lawyer or real estate professional.

It is wise to obtain written, rather than verbal, lock-in agreements to make sure that you fully understand how your lender’s lock-ins and loan commitemnts work and to have a tangible record of your arrangements with the lender. This record may be useful in the event of a dispute.

Lenders may charge you a fee for locking in the rate of interest and number of points for your mortgage. Some lenders may charge you a fee up-front, and may not refund it if you withdraw your application, if your credit is denied, or if you do not close the loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction of a percentage point added to the rate you lock-in. The amount of the fee and how it is charged will vary among lenders and may depend on the length of the lock-in period.

Lenders may offer options in establishing the interest rate and points that you will be charged, such as:

• Locked-in interest rate/locked-in points
  Under this option, the lender lets you lock in both the interest rate and points quoted to you. This option may be considered to be a true lock-in because your mortgage terms should not increase above the interest rate and points that you’ve agreed upon even if market conditions change.
• Locked-in interest rate/floating points
  Under this option, the lender lets you lock in the interest rate, while permitting or requiring the points to rise and fall (float) with changes in market conditions. If market interest rates drop during the lock- in period, the points may also fall. If they rise, the points may increase. Even if you float your points, your lender may allow you to lock in the points at some time before settlement at whatever level is then current. (For instance, say you’ve locked in a 10.5 percent interest rate, but not the 3 points that went with that rate. A month later, the market interest rate remains the same, but the points the lender charges for that rate have dropped to 2.5. With your lender’s agreement, you could then lock in the lower 2.5 points.) If you float your points and market interest rates increase by the time of settlement, the lender may charge a greater number of points for a loan at the rate you’ve locked in. In this case, the benefit you might have has by locking in your rate may be lost because you’ll have to pay more in up-front costs.
• Floating interest rate/floating points
  Under this option, the lender lets you lock in the interest rate and the points at some time after application but before settlement. If you think that rates will remain level or even go down, you may want to wait on locking in a particular rate and points. If rates go up, you should expect to be charged the higher rate. Because practices vary, you may want to ask your lender whether there are other options available to you.

Usually the lender will promise to hold a certain interest rate and number of points for a given number of days, and to get these terms you must settle on the loan within that time period. Lock-ins of 30-60 days are common. But some lenders may offer a lock-in for only a short period of time (for example, seven days after your loan is approved) while some others might offer longer lock-ins (up to 120 days). Lenders that charge a lock-in fee may charge a higher fee for the longer lock-in period. Usually, the longer the period, the greater the fee.

If you don’t settle within the lock-in period, you might lose the interest rate and the number of points you had locked-in. This could happen if there are delays in processing whether they are caused by you, others involved in the settlement process, or the lender. For example, your loan approval could be delayed if the lender has to wait for any documents from you or from others such as employers, appraisers, termite inspectors, builders, and individuals selling the home. On occasion, lenders are themselves the cause of processing delays, particularly when loan demand is heavy. This sometimes happens when interest rates fall suddenly. If your lock-in expires, most lenders will offer the loan based on the higher of the prevailing interest rate and points, or your locked in rate. If market conditions have caused interest rates to rise, most lenders will charge you more for your loan. One reason why some lenders may be unable to offer the lock-in rate after the period expires is that they can no longer sell the loan to investors at the lock-in rate. (When lenders lock in loan terms for borrowers, they often have an agreement with investors to buy these loans based on the lock-in terms. That agreement may expire around the same time that the lock-in expires and the lender may be unable to afford to offer the same terms if market rates have increased.) Lenders who intend to keep the loans they make may have more flexibility in those cases where settlement is not reached before the lock-in expires.

While the lender has the greatest role in how fast your loan application is processed, there are certain things you can do to speed up its approval. Try to find out what documentation the lender will require from you.

Much of the information required by your lender can be brought with you when you apply for a loan. This may help to get your application moving more quickly through the process. When you first meet with your lender, be sure to bring the following documents.

• 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 latest bank statement, plus pay stubs , W-2 forms, or other proof of employment and salary, to help the lender check your finances.
• 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 may be able to help you obtain this.

Be sure to respond promptly to your lender’s request for information while your loan is being processed. It is also a good idea to call the lender and real estate agent from time to time. By calling occasionally, you can check on the status of your application, and offer to help contact others such as employers who may need to provide documents and other information for your loan. It is also helpful to keep notes on your contacts with the lender so that you will have a record of your conversations.

When you’re ready to settle on your loan, you’ll want to get the loan terms that you’ve locked in. To increase that likelihood, it is important to learn as much as you can about what the lender is promising you before you apply for a loan. Ask for the following information when shopping for a loan:

Lock-Ins and Fees

• Does the lender offer a lock-in of the interest rate and points?
• When will the lender let you lock in the interest rate and points? When you apply? When the loan is approved?
• Will the lock-in be in writing? If the lock-in is not in writing, you will have no record of the lender’s agreement with you in case of a dispute.
• How long will the lock-in last (30, 60, 90, 120 or more days)?
• Does the lender charge a fee to lock-in your interest rate? Does the fee increase for longer lock-in periods? If so, how much?
• If you have locked in a rate, and the lender’s rate drops, can you lock-in at the lower rate? Does the lender charge you an additional fee to lock in the lower rate?
• Can you float your interest rate and points for now, and lock them in later?

Loan Processing Time

• How long does the lender expect to take to process your loan?
• What has been the lender’s average time for processing loans recently?
• Has the lender’s loan volume increased? Heavy volume might increase the lender’s average processing time.

Expiration of Lock-ins

• What rate will be charged if the lock-in expires before settlement-the rate in effect when the lock-in expires?
• If you don’t settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?
• If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration will the lender charge an additional fee for the second lock-in?

Knowing what to look for puts you in a better position to decide whether, when, and how long to lock-in mortgage terms and, by helping to keep the loan process moving, you can lessen the chance that your lock-in will run out before settlement. But what i f your lock-in does lapse? If you believe that the lapse was due to delays caused by the lender or someone else involved in the loan process, you should try first to reach a mutually satisfactory agreement with the lender, if that effort fails, consider writing to the appropriate state or federal regulatory agency.

Some lender actions, such as offering lock-in terms which are impossible to fulfill, failing to process you loan diligently, or causing your lock-in to expire are improper and may even be illegal. In addition, because you may have contractual rights under your lock-in or loan commitemnt, you may want to consult with an attorney. Be aware, though, that complaints may not be resolved as quickly as may be necessary for a home purchase. Depending upon their authority under applicable state or federal law, regulatory agencies may either attempt to help you resolve your complaint directly or record your complaint and recommend other action.

State consumer protection officers, banking authorities, and offices of the attorney general can be contacted regarding complaints against many lenders doing business in the state. (Some states have enacted legislation to specifically address complaints about mortgage lock-ins.)

In addition, some lenders are directly supervised by federal regulatory agencies, as shown in the list that follows:

Mortgage Companies

• Division of Credit Practices
  Bureau of Consumer Protection
  Federal Trade Commission
  601 Pennsylvania Avenue, N.W.
  Washington, D.C. 20580
  (202) 326-3224

Federally Insured Savings and Loan Institutions an Federally Chartered Savings Banks

• Office of Community Investment
  Federal Home Loan Bank Board
  1700 G Street, N.W.
  Washington, D.C. 20552
  (202) 377-6000

State Member Banks of the Federal Reserve System

• Division of Consumer and Community Affairs
  Board of Governors of the Federal Reserve System
  20th and Constitution Avenue, N.W.
  Washington, D.C. 20551
  (202) 452-3946

National Banks

• Consumer Activities Division
  Office of the Comptroller of the Currency
  490 L’Enfant Plaza, S.W.
  Washington, D.C. 20219
  (202) 447-1600

Federally Insured Non-Member State-Chartered Banks and Savings Banks

• Office of Consumer Programs
  Federal Deposit Insurance Corporation
  550 Seventeenth Street, N.W.
  Washington, D.C. 20429
  (800) 424-5488
  (202) 898-3536

Federal Credit Unions

• National Credit Union Administration
  1776 G Street, N.W.
  Washington, D.C. 20456
  (202) 357-1065

The Federal Reserve Board and the Federal Home Loan Bank Board have prepared this information on mortgage lock-ins in response to a request from the House Committee on Banking, Finance and Urban Affairs and in consultation with many other agencies and trade and consumer groups. It is designed to help consumers understand an important aspect of home financing.

We believe a fully informed consumer is in the best position to make a sound financial choice. This page will provide useful basic information about obtaining the terms of credit you really want. It cannot provide all the answers you will need, but we believe it is a good starting point.

The information presented on this page was prepared in consultation with the following organizations:

• American Bankers Association
• American Institute of Real Estate Appraisers
• Comptroller of the Currency
• Consumer Federation of America
• Credit Union National Association, Inc.
• Federal Deposit Insurance Corporation
• Federal Home Loan Mortgage Corporation
• Federal National Mortgage Corporation
• Federal National Mortgage Association
• Federal Reserve Board’s Consumer Advisory Council
• Federal Trade Commission
• Independent Bankers Association of America
• Mortgage Bankers Association of America
• Mortgage Insurance Companies of America
• National Association of Federal Credit Unions
• National Association of Home Builders
• National Association of Realtors
• National Council of Savings Institutions
• National Credit Union Administration
• Office of Special Adviser to the President for Consumer Affairs
• Society of Real Estate Appraisers
• The Consumer Bankers Association
• U.S. Department of Housing and Urban Development
• U.S. League of Savings Institutions
• Veterans Administration

Buying a home may be the most exciting, confusing and stressful financial transaction you ever undertake. Even if you have done it several times you can still find the process complicated and intimidating, particularly when it comes to getting a mortgage loan. 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 application process is intended to help you through the complexities of obtaining a mortgage loan.

The Loan Application Interview

Once you have selected a lender, the next step will probably be a meeting with a loan officer or other lender representative, whose job is to begin the collection of information the lender needs to approve the loan. They will explain the types of mortgage e 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.

By this time you should have a good idea of the general interest rates and fees being charged in the area. The total cost of a mortgage loan consists of the interest rate on the loan, origination fees, discount points, and miscellaneous other charges. 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, while 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 8.5 percent interest rate with 2 points, a nine percent rate may be offered at no points. If you are a first-time home buyer, the larger monthly payments on the 9 percent 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 all of your options to you.

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 quote 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 exactly the terms of the lock-in agreement.

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 or not to make the loan, so it is very 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 be to your benefit to assemble this kind of information before the meeting with the loan officer. The following is a summary of the major kinds of information required on the loan application, the documents that may be needed and the questions that 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:

* A complete copy of the sales contract, including any addendum’s, 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.

Personal Information

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 less than 2 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 is 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 or layoffs, or for any other reason.

The loan officer will 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 form which 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.

Personal Assets

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 the account balances reported by the institution and the balance you give for the loan application have to be reconciled, so be sure you have your 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.

Personal Indebtedness

You will be asked to itemize all of 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 a nd 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 ordered by the lender. Like 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 take time to get your data 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.

Additional Information

You will be asked to sign a section of the loan application form 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 on; 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 form 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 voluntary on your part and has no effect on your loan application. The lender, however, is required by federal law to request the information.

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.

At the time the application is taken, you will probably be asked to pay for the credit report and appraisal fees. depending upon the locality and the type of the loan, these fees will generally run up to $500.

Based on the information collected in taking the application, the loan officer may be able to pre-qualify you for the loan requested, but cannot approve the loan. That is done by the lender’s underwriters after all documents and information have been recieved and verified.

After The Loan Application – What Next?

After the loan application has been completed, it will be turned over to the lender’s loan processing department and then to the underwriter, where the decision to approve or reject the loan will be made. Loan processors send out the 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 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. 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.

After the lender has approved the loan, you will usually receive a commitment letter which sets out the terms of the loan and the length of time for which those terms are offered. If the loan does not close within the specified commitment period, the terms are subject to change. You usually must accept the commitment by returning a signed copy to the lender within five to ten days and may have to pay part or all of the origination fees at this time. The commitment may contain conditions that you will still have 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 a commitment letter. This is not unusual, but make sure you understand the terms of the approval.

Once the commitment letter or approval 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 home buyers, the period of time between the submission of the loan application and receipt of the commitment letter 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 that both you and the lender can do to reduce the stress.

Keep in mind that the lender 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.

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. Remember, however, that it may take several weeks to process the application and frequent inquiries from you prior to that time will not speed things up.

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.

Obtaining a 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.