Even before you make an offer on a new home, you should start the process of applying for a mortgage. And be prepared to provide your lender with piles of paperwork—from before the offer is made to the time when you are sitting at the closing table. The good news is that your lender will walk you through the process and guide you in preparing all the documents you need.
The first step to getting a mortgage loan is to get a pre-approval. Don't confuse this with a pre-qualification, which is just a casual determination of how much of a loan can afford. A pre-approval is more formalized, and a seller will want to see a pre-approval letter when you submit an offer. The pre-approval will set a maximum dollar amount that the bank is willing to lend to you.
Your Credit Score and Application
During the pre-approval process, the bank will run a credit check. They will ask for your Social Security number and look up your FICO score, which looks at your income, debt and payment history. A high score will qualify you for lower interest rates. The lender will also ask you to document your income with recent pay stubs, personal and business income tax returns and recent W-2 forms. If you have assets, like savings or brokerage accounts, you will provide recent statements. The lender wants to see proof of your ability to make the down payment.
At different points during the home-buying process, the bank requires documents related to the property. You'll provide them a copy of your accepted offer and later a copy of the executed purchase and sale agreement.
The lender wants to ensure that make sure they're not lending you more money than the property is worth. Some lenders conduct a “desk appraisal” by comparing your property to comparable recent sales in the neighborhood. In most cases, the lender sends an appraiser out to physically appraise the home. The appraisal fee is part of the closing costs.
The Good Faith Estimate and Disclosure Statement
When your application is approved, you receive a good faith estimate. The estimate summarizes all of the settlement charges plus your monthly payments. Information related to your property taxes and homeowner insurance will be included if those charges are to be paid out of an escrow account held by the lender. You also receive a truth-in-lending disclosure statement. It shows you the total cost of your mortgage over the life of the loan and breaks down your interest rate and all the components of the monthly payment.
About 24 hours before your closing date, you will receive the HUD-1 Settlement Statement. It should mirror the charges listed in your good faith estimate. At the closing, you can sign property documents for the transfer of title and acquisition of your home. Rest your fingers the night before because you will also finalize your mortgage and sign a seemingly endless number of loan documents.
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.