When you apply for a mortgage, you provide your lender with a lot of personal and financial information. If your finances are in good shape, your lender will give you a conditional approval, which includes a list of the conditions that must be satisfied before you can close on the loan. Conditions vary among lenders and loan types but usually revolve around your income, your assets and the property being financed.
Lenders and mortgage investment firms such as Freddie Mac and Fannie Mae have strict rules in place that are designed to stop people from buying homes they can't afford. A figure called the "debt-to-income ratio" is used to describe the percentage of your income that you plan to spend on both your mortgage and your other debts. You provide this financial information to your lender informally when you submit your application. However, as a closing condition for a mortgage you normally have to back up this information with evidence such as pay stubs and copies of your tax returns. If you can't provide proof of income, your lender may cancel the loan.
Mortgages include closing costs such as appraisal fees and origination fees. You have to prove that you have enough money to cover these costs, and closing conditions on your loan may include providing your lender with copies of your bank statements. If a relative plans to gift you money to cover these costs, your lender will need to see a gift letter from your relative and a copy of that individual's bank statements. If the seller agrees to pay some of your costs, you need to include the seller concession in the signed purchase contract.
You and the seller may agree on a value for the home, but you can't get a mortgage until a licensed appraiser has inspected the property. Loan agreements are conditional on the appraisal coming in high enough to cover the loan amount. If the appraisal comes in lower than expected, you'll either need to renegotiate the purchase price or find a different home to buy. Lenders don't like to finance homes that are in a state of disrepair or contain safety hazards such as faulty wiring or rotten beams. Loan approvals are normally conditional on the home being in decent shape before you sign the mortgage.
Homeowners insurance isn't required by law but lenders usually require you to buy insurance as a condition of the mortgage agreement. If your house sits in a federally designated flood zone, you are required by law to buy flood insurance, and this will be included in the loan conditions. Other conditions include paying for a title search to ensure that no one else has a legal claim on the home. If you plan on making a down payment of less than 20 percent, your lender may require you to buy private mortgage insurance as a condition of the loan. PMI covers your lender's losses in the event of a loan default. Once the conditions have all been satisfied, you can proceed with the loan closing.
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