An important step to becoming a homeowner is completing your mortgage loan application. This is a lengthy application that documents your personal and employment information, assets and liabilities, mortgage terms, and much more.
Once you have completed and signed the loan application, your lender will:
- Pull your credit report and score from all three major agencies to verify your credit history.
- Evaluate the four C’s to determine if you are creditworthy.
- Capacity – Current and future ability to make payments
- Capital/Cash Reserves – Money, savings, and investments you have that can be sold quickly for cash
- Collateral – The property that you will purchase
- Credit – Your history of paying bills and other debts on time
At this point, the lender can provide a pre-approval letter that outlines how much you qualify to borrow and the specific terms of the loan. Now, you can begin looking for your new home and eventually sign a Purchase Agreement.
Once you have signed a Purchase Agreement for your home, your lender will:
- Get an appraisal to determine the market value of the property and home, because it will be used as collateral for your loan. You have a legal right to get a copy of this and will want a copy for your records.
- Issue a Commitment Letter detailing the terms of your loan approval.
The Commitment Letter serves as the final approval of your mortgage loan and states the terms of the approval. Once you receive and accept this, you are assured the financing needed to complete the purchase of your home and can now focus on completing the details required for closing.
Within three business days after you have completed the mortgage loan application process, your loan officer will provide you with a variety of documents outlining the costs associated with your loan. The most important of these include the Good Faith Estimate and the Truth-in-Lending Disclosure Statement.
Good Faith Estimate
After you are approved for the loan, the Good Faith Estimate (GFE) provides you with an estimate of your mortgage loan terms and settlement charges, which includes:
- A summary of your loan defining the initial loan amount, loan term, interest rate and initial monthly payment.
- Your escrow account information, such as your property tax and homeowner’s insurance that your lender may require you to include in your monthly payments.
- Your estimated settlement charges, such as application fee, origination fees, discount points, title charges, etc.
It is important that you read the GFE very carefully and review all fees with your loan officer. At this time, you can evaluate your mortgage application and even explore a few other possibilities before accepting it. You have 10 business days to accept the terms disclosed in your GFE.
You will also receive the Truth-in-Lending disclosure statement, one of the most important forms in the entire mortgage process, three days after completing your loan application. This document allows you to see the total cost of your mortgage under the terms of your mortgage loan, including:
- Your annual percentage rate, which combines your interest rate and closing costs into a single percentage.
- Your finance charges, which are the total of the closing costs and the interest that you will pay over the life of your loan stated in a dollar amount.
- Your monthly payment schedule showing the amount you will have to pay each month and any possible changes to your payment amount.
You will also receive other forms and disclosures after being approved, but these are the most important documents concerning your related costs.
Closing or “settlement” is when you sign the final mortgage documents and the property will be legally transferred to you. It typically involves you and any co-borrowers, a closing agent, and your real estate agent. When preparing for the loan closing, you should contact your closing agent to determine how much money you will need to bring to closing and any other steps for completing the purchase of your home. You will sign many documents at closing and it is important that you read the documents carefully and ask as many questions as necessary.
The closing documents include:
- The Mortgage Note. A legal document that provides evidence of your debt and your formal promise to repay the mortgage loan.
- The Mortgage or Deed of Trust. The security instrument that you give to the lender that protects the lender’s interest in your property. When you sign the deed of trust, you are giving the lender the right to take the property back by foreclosure if you fail to pay the mortgage according to the set terms.
- The Final Truth-in-Lending Disclosure. This document reflects any changes to the terms of your mortgage loan since your application date.
- Affidavits and Declarations. Statements declaring something to be true, such as the property will be your principal place of residence.
- The HUD-1 Statement. Discloses the final details of your mortgage loan including:
- The actual settlement charges you will be paying
- A comparison of the costs disclosed on your GFE to the costs being charged at closing
- Your final loan terms
- Avoid feeling rushed by reading all the documents that will be sent to you prior to closing. Oftentimes, real estate agents will review your documents in detail with you before the closing date to ensure you are comfortable. Don’t hesitate to ask your agent for this.
- Don’t be afraid to ask questions about the legal terminology in closing documents. It is important that you understand everything you are signing; most homebuyers ask a lot of questions and it is expected.
- The documents in the mortgage process are the same for everyone, regardless of race or ethnic origin.
- Consider having an attorney look at the documents or attend the closing with you.
- Closing on a home involves a number of important steps. Make sure to pay the same level of attention to these steps as you did when you were house hunting.
Information originally appeared on www.freddiemac.com