Mortgage Basics

Application Checklist

Preparing your documentation in advance can help ensure your loan application gets off on the right foot and will help speed up the process. Typically, you’ll need to provide copies of these items:

• Photo ID
• Pay stubs
• W-2s
• Bank statements
• Documentation for any other assets you have
• A gift letter if a family member or friend is giving you money to help with your home purchase

Lenders will also pull your credit report, so taking the time to review it in advance is a good idea. You’ll want to be prepared to explain any blemishes on your report, for example. To get started, visit annualcreditreport.com to request your credit report from the three major reporting companies—Equifax, Experian, and TransUnion. You’re entitled to a free report from these companies every 12 months.

Appraisal

Appraisals are key to mortgage loans because they give lenders an estimate of a property’s fair market value. Only a state-licensed professional is qualified to appraise a property. They inspect the physical condition of the property and take into account its location and comparable properties in the area and other factors.

Closing Costs

When it’s time to close on your home, you’ll be asked to pay final closing costs, which include taxes and fees to state and local agencies, third-party costs (such as attorney fees), and finance and lender fees. The amount will vary depending on your loan.

Credit History

Lenders use a credit report to get a complete picture of your finances and ensure you are a responsible borrower. They’ll look at your credit report for indications of your bill-paying history, any late payments or collections that may be on your report, the number of accounts (and type of accounts) you have, and the age of your accounts.

What If My Credit Score Is Low?

A good credit score can certainly help you get favorable mortgage terms. However, if your score is low, here are three steps you can take to begin improving it:

• Pay your bills on time.
• Are you close to the credit limits on your credit cards? Pay these down.
• Don’t apply for new credit, especially while trying to get a home loan. Your score may drop if you have too many credit inquiries.

Keep in mind that it can take time to improve a credit score. But if you focus your efforts correctly, you’ll see a change moving forward.

What Happens If I’m Denied Or I Don’t Get The Terms I Want?

A creditor is required to inform you why your application was rejected within 60 days. For example, some reasons might include your income being too low, or you haven’t been employed long enough.

Foreclosures

If you’re unable to make your mortgage payments a lender can seize and sell your property according to the terms of your contract.

How Can I Avoid Foreclosure?

If you’re struggling to make your mortgage payment, the first plan of action is to call your lender to open a dialogue. You want to make sure they understand your situation and that all of your options are discussed. Many lenders have solutions that can help, such as putting you on a repayment plan or issuing a forbearance.

Loan Programs

FHA Home Loan

An FHA loan is one that’s guaranteed by the government and is typically a good option for first-time home buyers or those with a spotty credit history.

Benefits

• Smaller down payment
• Lower interest rates
• Easier on credit-challenged borrowers
• 100% of the down payment can be in the form of a gift

VA Home Loan

Active service members, veterans, and their surviving spouses can purchase a home with a VA loan, which is offered by the U.S. Department of Veterans Affairs. To qualify, the VA will verify military status.

Benefits

• No down payment
• No minimum credit score
• Private Mortgage Insurance (PMI) is not required
• Pay off loan at any time with no penalty

Refinancing Your Loan

When mortgage rates drop 1% to 2% lower than your current loan rate, it’s an excellent time to consider refinancing. The most significant benefit is that your monthly mortgage payment is likely to drop, saving you money in your budget.

Private Mortgage Insurance

Lenders use Private Mortgage Insurance (PMI) to protect themselves if you can't pay your mortgage and end up defaulting. You'll typically be required to purchase PMI if your down payment is less than 20%.

Up-Front Expenses

When purchasing a new home, there are some additional up-front expenses to be aware of, such as the costs for:

• Inspections
• Appraisal fee
• Moving expenses
• Transfer of utilities
• Title insurance
• Escrow funds