Applying for a Mortgage Loan 101: The Basics

Applying for a home mortgage loan is the starting line for one of the most exciting events in life—buying a home. But you must first choose the right mortgage consultant, because when you work with the right one, you’re properly prepared and you know what to expect, the process can be a snap. Just remember: home-ownership is a worthwhile goal, and like any worthwhile goal, it will take work to accomplish.

First things first
Before you do anything else (including look at houses), sit down and work out a budget. Figure out exactly how much you can afford to spend on your monthly house payment. Come up with a number that you can comfortably live with. Next, you’ll want to interview at least three licensed mortgage consultants.

The best way to find candidates is to ask friends, family and coworkers for referrals. You’ll find that satisfied customers can’t help but talk about their good experiences. You’ll also find that price isn’t the only component of a positive lending transaction. Criteria for licensed mortgage consultants should include a mortgage license, expertise, flexibility, excellent communication skills, one you feel an easy rapport with and sterling references.

During the interview process for each candidate, here are two items to request:
1. A standard-format good faith estimate (lenders are required to provide this to clients no more than three days after applying for a mortgage). This will give you a breakdown of their fees (how much your mortgage loan will cost you).
2. At least three references from closings of the prior month.

Here’s a list of questions (plus the preferable answers) to ask each of the candidates:
1. How long have you been in business? (More than two years.)
2. Do you have your mortgage license?
3. Will you stand by your good faith estimate? (Yes!)
4. Are there any upfront fees to work with you, such as application fees? Credit report fees? Appraisal fees?
5. How long will it take to complete the loan process? (It should take 2-6 weeks, depending on your situation. The average is 3 weeks. If the candidate says it’ll only take a couple of days—or more than two months—this should raise a red flag.)
6. How many loan products do you have access to? (The more the better, of course.)
7. What will my TOTAL house payment be—including principal, interest, taxes, home insurance and mortgage insurance?

Do your homework
Your mortgage consultant will pull a copy of your credit report from all three major bureaus. A good mortgage consultant will go over each of your reports with you with a fine-tooth comb and help you to correct any errors you find. A good mortgage consultant will also advise you of which (if any) of your debts you should pay off or accounts you should close.

Be sure to disclose any and all credit trouble you’ve had. Laboring under the delusion that you can hide aspects of your history from your mortgage consultant is a fatal mistake—you will be found out, and it will hinder your ability to get the best rate or even be approved at all.

A word of caution: if you decide to let several mortgage consultants pull your credit in order to choose among them (i.e., who can get you the best rate based on your information?), be sure to do this sort of shopping within five days. The more your credit is pulled, the lower your credit score dips.

Finally, the free online credit reports aren’t accurate and therefore are a waste of your time. These free Internet reports only come from one bureau, and you need all three to have a complete credit report. In qualifying for a mortgage, the middle FICO score of the three is used.

Pre-qualification vs. pre-approval
What’s the difference between getting pre-approved and being pre-qualified? Good question, and an important distinction, because knowing the difference can save you a lot of heartache. Prequalification means you’ve had a meeting with your mortgage consultant and given some preliminary information. Your mortgage consultant has run some hypothetical numbers and come up with how much you’ll probably be able to borrow once you’ve submitted actual paperwork.

Pre-approval, on the other hand, is the actual amount of money you have been approved to borrow, based upon income, employment history, outstanding debts, credit history, etc. It is, in essence, your lender guaranteeing that you’ll be able to borrow a certain amount of money. While prequalification is a good thing, pre-approval is preferred—everything has been disclosed and verified, so you’re eliminating any unforeseen problems.

You’re ready
Now you can go find the house of your dreams. After you’ve done that, you’ll need to provide some documentation to your mortgage consultant. Below is a list of the things you’ll probably need, so get them together in advance.

Income Items:
• W2 forms from the last two years
• Most recent pay stubs for past 30 days
• Bank statements from the past two months.
• Statements from other asset accounts from the past two months.

Note: Internet credit and bank statements are not always acceptable, especially when the printed version does not contain your name, account number and the name of the institution.

More items may be required from those who are self employed, such as the last two years’ tax returns. Also, supporting documentation requirements are based on your personal situation and the loan program chosen. Your mortgage consultant will provide you with a customized list of items.

Details, details
Next, you need to be aware that you’ll have to disclose where you got the money for your earnest money and down payment. If you borrow the money, that debt will be considered in the approval process (it could even increase your interest rate or prevent you from being approved at all.) If relatives are providing the money, you need proof that the down payment is a gift—in other words, that you won’t have to pay it back.

As you now see, the mortgage loan process doesn’t have to be difficult. You just need to know what to expect, be prepared and, most importantly, work with the right licensed mortgage consultant.

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