Mortgages

Getting a Mortgage

The mortgage-loan process can be intimidating, especially if you are a first-time home buyer. But it doesn't have to be. We'll give you a basic overview of what to expect when financing the purchase of a home. If you're interested in refinancing your home, refer to the Refinance Loans page.

Pre-Approval

Before you begin looking at homes, you may want to figure out how large a mortgage you can afford, which will enable you to focus your search on properties that are within your price range.

Once you've got an idea about how much house you can afford, you may want to contact a lender to get pre-approved for a loan. The pre-approval process covers many aspects of the approval process - for example, you'll give the lender information on income, assets, and on the area in which you'd like to buy. You'll also give the lender permission to examine your credit history.

If all goes well with the pre-approval process, you'll receive a "pre-approval letter" telling home sellers that you qualify for a certain home mortgage amount. Because it demonstrates to the seller that you are a serious buyer, you can use the pre-approval letter as leverage when you negotiate to buy a house.

Applying for the Loan

The loan-application process typically begins when you and the home seller have signed a purchase and sales agreement, which specifies the amount of your down payment, the price you will pay for the house, the amount of the "good-faith" payment you made with your offer (this will later be applied to closing costs), the type of home mortgage financing you will seek, your proposed closing and occupancy dates, and any other contingencies. You'll need this information when applying for the loan.

Underwriting is the process of evaluating an applicant's information, to determine if the loan should be approved. Through the underwriting process, the lender wants to answer two questions:

• Is the property value sufficient to cover the loan amount?
• Is the borrower willing and able to repay the loan?

To do this, lenders evaluate what are commonly called "The Four C's of Underwriting":

• Collateral - Assets that are pledged as security for a debt, such as real estate pledged as security for a mortgage.
• Capacity - The ability of the borrower to pay the monthly mortgage. Lenders determine this by examining the borrower's income and debt.
• Creditworthiness - The willingness of a borrower to make debt payments on time. Lenders determine this by examining the borrower's credit history.
• Capital - The total assets, including cash and property, that a borrower has available for obtaining a home mortgage and for paying off debt.

During loan processing, the lender gathers and verifies information about the prospective borrower and the property, including:

• Documenting the validity and accuracy of information contained in the loan application
• Reviewing all documents for completeness and accuracy
• Assessing the property's market value (if necessary)

After careful analysis of the collateral and borrower information, the lender determines whether the loan request will be approved. If you're turned down for the loan, you'll probably have to pay the lender's processing costs, which may include (but are not limited to) application, appraisal, and credit-report fees. The lender is required to explain - in writing, within 30 days of its decision - the reasons for denying credit.

You may want to talk with the lender earlier than that, to see if there's anything you can do change the denial into an approval. Do you need to improve your credit rating? You may be required to pay off some of your debt. Do you have limited funds in your savings or checking account? You might need to take steps to increase the amount of money you have for a down payment, or try to qualify for a smaller loan amount. Talk with the lender to develop a plan that will put you in a better position to buy the home of your dreams.

Reserving Your Funds

Part of the mortgage process involves choosing which loan program is best for you. The three most common types of loans are fixed-rate mortgages, adjustable-rate mortgages, and balloon mortgages. Refer to our Mortgage Rates.

Once you know the amount you will need to borrow and the interest rate of the mortgage program you've chosen, your lender will estimate your mortgage payment, which typically consists of four components known as PITI: principal, interest, taxes, and insurance.

Principal is the portion of the payment that reduces the outstanding balance of the loan. Interest is the amount paid by the borrower to the lender in return for use of the lender's money. It's calculated based on the amount of principal left to pay. Taxes and insurance usually are collected by a lender, as a service to the borrower, and kept in an escrow account until it is time to pay local property taxes and homeowners insurance.

Once you have reviewed the details regarding the loan program of your choice, the next step is to reserve your funds. If you think mortgage interest rates are going to rise during the period between your loan approval and closing, you might want to lock-in the current interest rate (you typically pay a fee to guarantee the rate). If you think rates might fall, it might be in your best interest to "float the rate" - that is, contact the lender at a later date to lock-in the rate, or wait until several days before closing for your final rate to be set.

Keep in mind that the interest-rate market may move in a direction other than you expect. If you lock-in a rate, and rates fall, you won't be able to take advantage of the lower rate. Likewise, if you float the rate and rates rise, the loan will be subject to an increased rate, which may affect your ability to qualify for the loan.

Within three business days of reserving your loan for a home purchase, your lender is required by law to send you electronically or via the mail a good-faith estimate of the closing costs you will pay.

Preparing to Close

Once you have your mortgage financing in place, you'll proceed to the closing, also known as the settlement. Closing typically takes place between 30 and 90 days after you ratify the purchase and sales agreement. The final date is chosen after your mortgage application is approved and you have the commitment letter. Make sure the closing occurs before the commitment letter expires and, if applicable, while your interest rate lock-in is valid.

Your lender will most likely select a closing (or settlement) agent to coordinate closing-related activities, such as preparing and recording the closing documents and disbursing funds. Because closings are conducted differently across the country, the types of services provided will depend on the closing agent you choose and where you live - depending on your area, closings can be conducted by title companies, real estate brokers, lending institutions, attorneys, or escrow agents.

If your lender doesn't select a closing agent and you don't know where to look for one, ask your real-estate agent, friends, or neighbors about closing agents they've used. Once you've chosen a closing agent, ask for a statement that lists the date, place, and time of the closing, as well as any items you'll need to bring or supply.

Several other important steps need to be taken in the final weeks before closing. Your lender may order a title search (a review of records to ensure that the seller is the legal owner of the property, and to show liens or other claims outstanding) and purchase lender's title insurance. You may want to purchase an owner's title insurance policy as well, to protect yourself against loss arising from disputes with a third party over ownership of the property.

If you haven't already, you may want to arrange for a home inspection and a termite inspection. A survey of the property sometimes occurs. If the property you want to buy is not served by public utilities, you'll need well and septic certifications (local-government certifications of the private water source and sanitary sewer facility).

Closing Costs

One business day before closing, you have the right to request a copy of the HUD-1 Settlement Statement, a document that provides an itemized listing of the amounts that the buyer and the seller will pay at closing. Also known as the "closing statement" or "settlement sheet," the HUD-1 will at this point contain only the best information the lender has at the time, so its figures may change by the time you close.

Remember that a personal check is generally not accepted at a closing, so you will need to get a certified or cashier's check.

The following list reviews many of the costs that will be itemized on your HUD-1 Settlement Statement:

• Items Payable in Connection with the Loan. These generally include points and other fees payable to your lender. The appraisal and credit report fees are typically labeled POC - "paid outside closing" - because borrowers typically pay these at the time of application. You may also see a charge for flood insurance, which provides protection for the lender if you are in a flood-hazard area. Or you may see a nominal fee to cover the cost of certifying that you are not in a flood zone.
• Items Required by Lender to Be Paid in Advance. Commonly called "prepaids," these may include a mortgage insurance premium, homeowner's insurance, and mortgage interest from the date of closing to the beginning of the period covered by the first monthly mortgage payment.
• Reserves Deposited with Lender. These are items (such as homeowner's insurance, mortgage insurance, property taxes, and annual assessments) that will be held in an escrow account by your lender for payment as they come due.
• Title Charges. This category includes the cost of the lender's title insurance, which is regulated, varies from state to state, and is based on the value of your home and the amount of your mortgage. Other charges, such as the settlement fee, attorney and notary's fees, and title search fees, may also be itemized here.
• Government Recording and Transfer Charges. This category includes (if applicable) recording fees, city/county stamps, and state tax/stamps payable for both deed and mortgage, and transfer taxes.
• Additional Settlement Charges. These may include pest inspection, house location survey, and messenger fees for delivering documents to be recorded in the land records at the courthouse.

Property taxes are typically prorated between the buyer and seller. For example, if the seller has paid taxes for a period of time beyond the closing date, you would reimburse the seller. But if the seller has not yet paid taxes for the current period, the amount owed is deducted from your settlement payment. When this occurs, it is called an "adjustment."

Closing Documents

Among all the documents you'll be required to sign at closing, three are critical:

• Promissory note. This specifies the terms of your agreement with the lender and the terms for repayment, including a late charge if you do not pay in a timely fashion.
• Mortgage, or Deed of Trust. A document in which a borrower pledges his or her property to the lender as security, or collateral, for the repayment of the amount borrowed to purchase the home.
• Deed. The document by which title to (meaning, ownership of) real property is transferred or conveyed from one party to another, such as from a home seller to a home buyer.

If you are buying newly constructed property, you'll also need a land survey, all receipts for tax payments during construction, a Certificate of Occupancy (required by building code in many areas), and certificates from the local health department for plumbing and sewer installations, required in most areas.

If everyone agrees that the papers are in order, you and the seller will each submit a certified check or cashier's check to cover the closing costs and the balance of funds due. The check from the lender covering the mortgage amount will then be submitted to the closing agent. If the lender will be paying your property taxes and homeowner's insurance for you, a new escrow account will be established at this point.

Then, you'll receive the keys to your new home!