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1. Research & Mortgage Qualifications | 2. Shopping for a House | 3. Contract & Mortgage Application
4. The Title & Settlement Process | 5. Closing & Move In
The Advantages of Pre-Approval
Pre-approval helps you understand the type of mortgage you will qualify for and the price range you can afford.
It can:
- Help you know how much you can borrow.
- Confirm your ability to qualify for a mortgage based on your credit, financial, and employment information.
- Strengthen your position to make an offer on a house. Sellers are usually more willing to accept offers from pre-approved buyers.
To get pre-approved, you'll need to work with a mortgage lender. The lender will review your credit, financial, and employment information after you fill out an application. Click here to view a Loan Application form. Based on your individual circumstances, you may be asked to provide proof of income, such as a pay stub. A fee might be involved to cover application costs.
If you qualify, you'll receive a letter that says you are approved for a certain amount of money and for a certain amount of time. Click here to view aMortgage Application Checklist.
A pre-qualification is a free test run of the loan application process that usually takes a few hours. The mortgage lender uses your credit, financial, and employment information to come up with an estimate of the mortgage amount you can afford. A pre-approval, on the other hand, may require a complete application, along with an application fee. Usually, a pre-approval is your bank's guarantee of the amount they will lend you toward a home.
Most mortgage lenders and brokers have your best interests in mind; however, there are "predatory lenders" - lenders that act unscrupulously and may try to take advantage of you.
Although predatory lending is not defined by federal law and individual states define it differently, this type of lending usually involves loans with terms you can't meet, no matter how good the deal sounds, and practices that strip away the equity in your home.
Predatory lenders target people who may have fewer credit choices or who are perceived as higher credit risks. Predatory lenders usually reach out to elderly and low-income homebuyers, minorities and women, people with less than perfect credit, and people who know very little about home loans and mortgages.
These lenders usually tell you that you can get loans with very low monthly payments, refinance your existing mortgage, or take out a loan or second mortgage to help pay for expenses like medical costs and home-improvement work.
Predatory lenders usually offer loans with high interest rates, broker fees, unnecessary costs like pre-paid life insurance, and unaffordable repayment terms.
Be suspicious of anyone who offers you "bargain loans," whether they mail or E-mail you an offer, call you on the phone, or come to your door. Avoid promises of "No Credit? Bad Credit? No Problem!" and beware of offers that are only "good for a very short time."
Avoid lenders who encourage you to borrow more than you need or more than the value of the home. Beware of terms that change at the last minute or offer next-day approval based on prepayments or up-front fees.
For more helpful tips to protect you from loan fraud click here.
When you apply for a mortgage loan, the lender will often look at "the three Cs" in order to review your application. They want to ensure that you're a good risk and that you can be trusted to pay back the loan.
- Capacity.
Capacity is your current and future ability to make payments. Lenders will look at your income, employment history, savings, and monthly debt payments.
- Collateral.
The principal collateral for a loan is typically the proposed mortgaged property. In addition, if you have savings, land, property, or other valuable assets, they can be used to secure loans.
- Credit.
Lenders look at your credit and on-time payment history to see your record of paying bills and debts.
Lenders will ask for financial statements to see if you meet all of their criteria. Sometimes, your strength in one area can cancel out your slight weakness in another. For example, if you own a home (strong collateral), but your credit history contains several late payments (weaker credit), your slight credit weakness may not hurt your application. To view an actual Loan Application click here.
Based on the type of mortgage you're interested in, lenders will obtain, or you will be asked to provide, some or all of the following financial documentation:
- Credit report.
- Pay stubs for the past 30 days.
- W-2 forms for the past 2 years.
- Information about long-term debt, like car loans, student loans, etc.
- Recent statements from your checking, savings, mutual fund, or other accounts.
- Tax returns for the past 2 years if you're self-employed.
- Proof of any supplemental income.
- Records of any past derogatory credit accounts that have since been paid off.
- Records of child support or alimony.
When you apply for a mortgage, several things happen:
- Your lender will get an appraisal.
The appraisal will determine the market value of your new home, which will be used as collateral for your loan. You'll be charged a fee for this service, which may be included in your closing costs.
- Your lender will look at your credit report.
Your lender will look at your credit report to verify your credit history. You'll be charged a fee for this document, as well. If you're pre-approved, this step may already have been completed.
- Your lender will verify your personal information.
Your bank account and employment information will be verified. Your lender may ask you for your 2 most recent monthly bank statements or pay stubs. If you can't provide them, a Verification of Employment (VOE) and Verification of Deposit (VOD) will be mailed on your behalf to verify the last 2 years of employment and banking information.
Your lender is required by law to provide you with the following documents:
- Truth-in-Lending disclosure.
This disclosure includes a summary of the total cost of credit, such as the Annual Percentage Rate (APR) and other specifics of the loan.
- "A Home Buyer's Guide to Settlement Costs."
This guide is a government publication that describes the closing or "settlement" process, associated costs, and your rights.
- Adjustable-Rate Mortgage (ARM) disclosure.
This disclosure includes information about terms and costs associated with an ARM, past performance of the index to which the interest rate will be tied, and the "Consumer Handbook on Adjustable-Rate Mortgages."
- Annual Percentage Rate (APR) information.
This is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fee and any other charge you're required to pay in order to obtain your mortgage loan.
To view a standard MORTGAGE form click here .
To view a standard NOTE form click here .
To view an ADJUSTABLE RATE NOTE form click here .
To view a GROWING EQUITY NOTE form click here.
After you apply for a mortgage, your lender will work with you to determine a settlement date. You may also want to lock in an interest rate at this time.
The next step is the qualification process. Your lender will review your application and decide whether or not to approve it. Be sure to answer any questions quickly and honestly. Follow up with your lender to get the status of your application.
If you're turned down for a mortgage, ask why. By law, you should receive a written disclosure statement from the lender indicating the reason(s) your loan was turned down. Common reasons include too much debt or credit that needs improvement.
If you get turned down, talk with your lender and develop a plan. You may try to qualify for a smaller mortgage or reapply after you've paid off some of your debt.
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