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Mortgage Application Basics

Two Key Factors in Qualifying for a Home Loan

In attempting to approve home buyers for the type and amount of mortgage they want, mortgage companies basically look at two key factors: the borrower's ability and willingness to repay the loan. Ability to repay the mortgage is verified by your current employment and total income. Generally speaking, mortgage companies prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years.

The borrower's willingness to repay is determined by examining how the property will be used. For instance, will you be living there or just renting it out? Willingness is also closely related to how you have fulfilled previous financial commitments, thus the emphasis on the credit report or rent and utility bills.

It is important to remember that there are no rules carved in stone. Each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for the weak one. Everyone involved in real estate is in the business of selling homes, in one way or another. Therefore, if the loan makes sense, mortgage companies and insurers will do their best to see that you qualify.

By its very nature, mortgage insurance is an aid to affordability, because it allows families to purchase homes with less cash on hand. The industry plays a central role in helping low- and moderate-income families become homeowners.

More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with as little as 5 percent down. For more information on how you can take advantage of the benefits of a low down payment home loan with mortgage insurance, contact your local mortgage professional or real estate agent.

Real Estate Settlement Procedures Act

This law protects consumers from abuses during the residential real estate purchase and loan process and enables them to be better informed shoppers by requiring disclosure of costs of settlement services.

The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) administers several regulatory programs to ensure equity and efficiency in the sale of housing. One of these programs, under the Real Estate Settlement Procedures Act (RESPA), applies to almost all mortgage loans and mortgage companies, not just FHA-insured mortgages. RESPA’s purposes are (1) to help consumers get fair settlement services by requiring that key service costs be disclosed in advance, (2) to protect consumers by eliminating kickbacks and referral fees that would unnecessarily increase the costs of settlement services, and (3) to further protect consumers by prohibiting certain practices that increase the cost of settlement services.

RESPA protects consumers by mandating a series of disclosures that prevent unethical practices by mortgage companies and that provide consumers with the information to choose the real estate settlement services most suited to their needs. The disclosures must take place at various times throughout the settlement process:

• Disclosures at the time of loan application. When a potential homebuyer applies for a mortgage loan, the buyer must receive (1) a Special Information Booklet, which contains consumer information on various real estate settlement services; (2) a Good Faith Estimate of settlement costs, which lists the charges the buyer is likely to pay at settlement and states whether the buyer is required to use a particular settlement service; and (3) a Mortgage Servicing Disclosure Statement, which tells the buyer whether the loan will be kept or transferred for servicing, and also gives information about how the buyer can resolve complaints. RESPA does not specify penalties when these three items are not provided, but bank regulators can impose penalties.
• Disclosures before settlement (closing) occurs. (1) An Affiliated Business Arrangement Disclosure is required whenever a settlement service refers a buyer to a firm with which the service has any kind of business connection, such as common ownership. The service usually cannot require the buyer to use a connected firm. (2) A preliminary copy of a HUD-1 Settlement Statement is required if the borrower requests it 24 hours before closing. This form gives estimates of all settlement charges that will need to be paid, both by buyer and seller.
• Disclosures at settlement. (1) The HUD-1 Settlement Statement is required to show the actual charges at settlement. (2) An Initial Escrow Statement is required at closing or within 45 days of closing. This itemizes the estimated taxes, insurance premiums, and other charges that will need to be paid from the escrow account during the first year of the loan.
• Disclosures after settlement. (1) An Annual Escrow Loan Statement must be delivered by the servicer to the borrower. This statement summarizes all escrow account deposits and payments during the past year. It also notifies the borrower of any shortages or surpluses in the account and tells the borrower how these can be paid or refunded. (2) A Servicing Transfer Statement is required if the servicer transfers the servicing rights for a loan to another servicer.

Along with these disclosures, RESPA protects consumers by prohibiting several other practices: (1) Kickbacks, fee-splitting, and unearned fees: Anyone is prohibited from giving or accepting a fee, kickback, or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan, which covers almost every loan made for residential property. RESPA also prohibits fee-splitting and receiving unearned fees for services not actually performed. Violations of these RESPA provisions can be punished with criminal and civil penalties. (2) Seller-required title insurance: A seller is prohibited from requiring a homebuyer to use a particular title insurance company. A buyer can sue a seller who violates this provision. (3) Limits on escrow accounts: A limit is set on the amount that a borrower is required to put into an escrow account to pay taxes, hazard insurance, and other property charges. RESPA does not require an escrow account on borrowers, but some government loan programs or mortgage companies may require an escrow account. During the course of the loan, RESPA prohibits charging excessive amounts for the escrow account. And each year, the borrower must be notified of any escrow account shortage and return any excess of $50 or more.

Your Initial Meeting With a Mortgage Professional

The loan approval process generally begins with an initial interview where the prospective home buyer and the mortgage professional meet to discuss the potential loan. You will need to bring information to verify your income and long-term debts.

Often people prefer to meet with the mortgage company before house hunting to determine in advance what price range they can realistically afford and the mortgage amount for which they can qualify. This step is called pre-qualification and can save you much time and trouble by making certain you are looking in the correct price range.

For your first meeting with the mortgage company, you should bring:

• A purchase contract for the house (if you have one)
• Your bank account numbers and the address of your bank branch, along with checking and savings account statements for the previous 2-3 months
• Pay stubs, W2 withholding forms, tax returns for two years, or other proof of employment and income verification
• Divorce settlement papers, if applicable
• Credit card bills for the past few billing periods, or canceled checks for rent or utility bill payments, to show payment history and amount of revolving debt
• Information on other consumer debt such as car loans, furniture loans, student loans and retail credit cards
• Balance sheets and tax returns, if you are self-employed
• Any gift letters, if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. This letter simply states that the money is in fact a gift and will not have to be repaid.

Having these items on hand when you visit the mortgage company will help speed up the application process. Usually an application fee and the appraisal fee will have to be paid when you submit the mortgage application. This is only done after you have successfully negotiated on a home and have had your offer accepted by the seller. Generally, there is no fee for pre-qualification.

After the initial meeting with the mortgage company, you should have a general idea if you qualify for the size and type of loan you want. The mortgage company should let you know if you qualify for the loan within days. If you are denied a home loan, the mortgage company must explain the reasons. If this happens, the mortgage company will usually discuss any options with you.

After The Mortgage Application

Your mortgage company will begin the work of verifying all the information you've provided. This process can take anywhere from one to six weeks, depending on the type of mortgage you choose, whether you're buying a home outside your local community, or a host of other factors.

Within three business days after your application, the mortgage company must give you an estimate of your closing costs. (The closing is the actual settlement of your loan.) You'll also get a statement that shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.

For many home buyers, this waiting period can be nerve-wracking. So stay in touch with your mortgage company, be prepared to answer any questions that might come up -- and remember that mortgage companies are in the business of making loans, not denying them.

Some home buyers find the closing process to be one of the most intimidating aspects of buying a home because it's so unfamiliar. Ask your mortgage company what to expect at your closing

Speed Up The Mortgage Process

Be sure to respond promptly to requests for information while processing is taking place.

Be prepared to provide the following typical items:

• The final purchase contract for the house (if applicable).
• Pay stubs for each applicant, showing earnings for the last 30 days and year-to-date earnings. (These must be computer-generated or typed originals that identify the employer and the employee's name.)
• Last year's W2 and 1099 for each applicant. If you're self-employed, the mortgage company may require your personal and business tax returns for the previous two years and your company's year-to-date Profit and Loss statement.
• Account numbers for all bank accounts, along with account statements for the past two months.
• Information about debts, including loan and credit card account numbers and the names of your creditors.
• Evidence of your mortgage or rental payments, such as canceled checks.
• An irrevocable gift letter if you are receiving a monetary gift from a relative.

Escrow Account Basics

Mortgage escrow accounts are special accounts set up in which money is held to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items. Escrow accounts ensure that these items are paid in a timely fashion. They are a guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.

Guarantee that bills are paid on time.
Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.

Unexpected increases are taken care of.
It is the responsibility of the mortgage company to allow for possible increases in tax or insurance premiums.

Mortgage companies typically cover shortages when tax or insurance payments increase.
It is very common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.

Mortgages have lower rates and downpayments because of escrows.
Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.

Local governments save money.
Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.