Obtaining a mortgage can be a confusing and very stressful process, particularly for first-time homebuyers. Lenders seem to hold the power of whether your dream will come to fruition, determining how much you can borrow and what your interest rate will be. However, by shedding knowledge on the process, we hope to ease your mind and put the decision-making power back in your hands.
The Loan Estimate
When applying for a mortgage, the first step is to request a Loan Estimate, a form that went into effect in October 2015. It is three pages, and the lender must provide it to you within three business days of receiving your application. The form contains important information, such as the estimated interest rate, monthly payment, and closing costs. In the wake of the housing crisis, the document is designed to be writtenote in clear English to be clear.
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Six key pieces of information are required to receive a Loan Estimate: name, income, social security number (to complete a credit check), the address of the home you plan to purchase, an estimate of the home’s value, and the amount you intend to borrow.
Official documents are not required to obtain a Loan Estimate, although the Consumer Financial Protection Bureau (CFPB) recommends you do so to get the most accurate estimate possible. You should also request a loan estimate from several lenders. This will give you different options to compare to choose the best loan.
Assuming you are happy with the loan terms from one of the lenders, you need to inform one of them that you are ready to go forward with a loan application. This is typically done within ten business days. Otherwise, the lender can alter the Loan Estimate or start the process again. You may be asked to provide additional documentation to verify the information you have submitted. The lender will decide on whether to approve or deny your loan application.
Typically, lenders will ask for several documents. These can be broken down into income and assets/liabilities. It will behoove you to have these on hand before your loan application. On the income side, the list includes two years worth of W-2s and income statements/1099 forms for self-employment income, recent pay stubs, and at least your last federal income tax return. To verify your debts, lenders will ask for a list of all loans, such as credit cards, student loans, car loans, and personal loans. To prove your assets, statements from your bank, mutual fund, brokerage, and retirement accounts (e.g., 401k and IRA) should be made available upon request.
There are two important ratios lenders use to determine how much to approve for a loan, at least on a preliminary basis. One is the ratio of monthly housing costs to monthly income and the second is the debt to income.
In the first ratio, lenders will typically limit housing costs to 28% of your monthly income. For debt to income, your monthly debt serving costs should not exceed 35% of your income.
Check your credit
While it is wise to check your credit regularly for blemishes, this is particularly pertinent if you are applying for a mortgage. You should check your credit report with all three credit agencies, giving yourself ample time to correct any discrepancies.
The mortgage process does not have to be a daunting process. Armed with some basic information, and being well prepared with your paperwork, you will likely find the process much smoother than you expect.