Understanding the Home Mortgage Process
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6 Steps to Mortgage Success
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Step 1 
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Step 2 
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Step 3
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What kind of mortgage Do you need; what kind Mortgage do you want?
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Answer the Questions Formulate a Plan
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Lets Get Organized
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Step 4
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Step 5
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Step 6
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What type of Mortgage Loan is right for me?
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Apply for the Loan & Compare
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Close the Loan
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The Mortgage Process is not a secret or mysterious journey. You can be an informed consumer and save you thousands of dollars over the length of your mortgage if you follow these steps. Some steps you can skip such as first time home buyer or VA mortgage loans if you do not fall in those categories. If you do not understand go to our glossary of terms or see a more detailed explanation on what to do can be found in the E-Book-“The Mortgage Process from an Insiders View Point” offered free on the web site
Step 1: What kind of mortgage do you need; what kind of mortgage do you want?
Before you start the refinance and purchase process you need to answer some questions that you pose before you go down the Mortgage process road. If you do not answer them honestly then you might be swayed and lead down a mortgage process path that is not the best financial solution for you and thus not the right Mortgage. This could cost you thousands of dollars over the term of the mortgage.
Answer these questions:
- Do I just want a lower mortgage rate?
- What is my current mortgage rate?
- Do I escrow for real estate taxes and insurance.
- Do I want some cash out at the closing?
- Do I want to pay off some credit cards or other debts?
- Do I have mortgage Insurance on my loan now?
- How long do I intend to live in my home?
- What is my Income per year and what is my spouses Income per year?
- Will our incomes remain steady? Will our jobs remain constant?
- If you are purchasing a home how much money do you have for a down payment; how much money do you want to put down?
- How much house can I really afford to buy?
- Are you a Veteran and do you qualify for a VA loan?
- Are you a First Time Home Buyer?
- What are my credit scores?
- Do I have anything on my credit report that might cause a Lender alarm?
- What are the real estate taxes on the property and what will the home owners insurance cost on the property?
- What is my home really worth?
By honestly answering the questions above you are on your way to determining the type of Mortgage that best fits your financial circumstances. You are taking control of the mortgage process and not allowing it to take control of you.
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Step 2: Answering the questions honestly and formulating the mortgage plan!
We all want a lower mortgage rate but why waste are time trying to obtain one if are credit scores do not warrant it or we only have a few years left on our mortgage and thus it just does not make good financial sense. In other words you by answering the above questions you are starting to narrow down the field of WHAT MORTGAGE IS BEST FOR ME!
- I want a lower mortgage interest rate-First you need to determine your current rate (see B below) and then check the newspapers or go online and see what rates are. Is the rate you are currently paying that much higher or lower than what you are currently paying? Banks Credit Unions and Mortgage Companies do not do mortgage loans for free thus if the difference in rate is only a ¼%-1/2% lower the costs associated with redoing your mortgage loan may not make economic sense. In other words; if the cost of redoing the mortgage loan is $3,500 and you are only saving a ¼% on a $100,000 mortgage, you would need 14 years before you saw any actual savings. Are you going to be in that house in 14 years?
- Your current Mortgage interest rate-Look at you last mortgage statement/bill or pull out your old mortgage loan paperwork to see what your interest rate is (5.5%, 9%), also look for the date you took out the mortgage and the maturity date (how many years you must pay on the mortgage loan) 10 years, 20 years or 30 years.
- Do I escrow for real taxes and insurance-Pull your latest real estate tax bill out as well as your latest insurance bill, determine exactly what the yearly costs are. This will become important since these numbers help determine your debt ratios which are important to the mortgage lender. Your mortgage state/bill will show if there are separate monthly charges for real estate taxes, insurance and mortgage insurance.
- Do I want Cash out at the mortgage closing-Do I need cash for home improvements, college tuition, debts, bills, medical expenses, investment purposes or a 1000 other reasons! Determine the amount of cash out you require if any. Remember the more cash out you take could increase the mortgage interest rate and or the mortgage payment that you will be making monthly.
- Do I want to pay off some credit cards or other debts-look at D above and determine what credit cards or debts I would like to pay off and add them up. Look at the credit cards that have the higher rates and put them first on your list and work down from there. If you have any judgments or liens (state or federal tax liens) place them on the list since the mortgage Lender will require them to be paid off at the time of the mortgage closing. If there are any medical debts, these may or may not be required to be paid off by the mortgage lender.
- Do I have mortgage Insurance on my loan now-Also look at your mortgage statement/bill are you paying monthly mortgage insurance. Mortgage insurance is required by many Lenders for loans that are more than 80% of the mortgage loan compared to the value of the home. If your home is valued at $100,000 and you have a $90,000 loan many mortgage lenders will require mortgage insurance for the amount above $80,000 or $10,000 worth of mortgage insurance coverage. Just like an insurance company this protects the mortgage lender in case of a mortgage loan default. Your mortgage state/bill will show if there are separate monthly charges for mortgage insurance.
- How long do I intend to live in my home-Simple question, tough to answer and one that has great ramifications. The government says that most people move every seven years, so why do most people have a 30 year fixed rate loan. Probably because our parents had this type of loan and their parent has the same type of loan. It is only within the last 10 years or so that the mortgage industry has produced new mortgage loan products for the consumer. These mortgage loans are tailored for specific consumer situations-that is why you are going through this mortgage process-you are determining what mortgage product is best for you, If you are buying a started home for you and your wife or are refinancing after several years and are still thinking about starting a family you probably will want a bigger home when children start to arrive. Or you have just started out on your career path and do not have a large income or a lot of money in the bank then you probably have bought a smaller home. Once you start having children and your incomes rise you will want a bigger home. Changing jobs, moving to be closer to your parent after you have become established; there are many reasons to move thus why have a long term mortgage? You may say that I will be moving in 3-5 years or we intend to stay for 15-30 years, whatever the honest answer will help determine right mortgage loan for you.
- What is my Income per year and what is my spouses Income per year-You and your mortgage Lender will want to know what your income is per year as well as monthly. The easiest way to figure this out is pulling out your last pay stub or stubs if your spouse works as well as last years W-2s. The pay stub should show the year to date as well as what you make weekly, bi-weekly or monthly. The W-2 will show exactly what you made last year. The pay stub will also show any debits such as loan repayments or child support payments that are being deducted from your paycheck. You need to know these amounts since they will help the mortgage lender to determine the amount of the mortgage loan you qualify.
- Will our incomes remain steady? Will our jobs remain constant-Will your income remain steady over the next few years or will it increase substantially; if so you might be able to forego principal payments of your mortgage loan in the early years and catch up in the later years. If you spouse will be quitting work to raise a family even though she is working now will you be able to make the mortgage payment without her extra income.
- If you are purchasing a home how much money do you have for a down payment; how much money do you want to put down-How much money do you have in the bank. Gather your checking account statements, savings statements, money market statements as well as stocks and bond statements and determine how much money you actually have to make a down payment on a home as well as enough left over for closing costs on the loan. How much money will your parents and or friends give you for your down payment?
- How much house can I really afford to buy- Once we know how much we can afford to put down on the home purchase and we know our monthly income and monthly debts, we can go to a mortgage calculator and determine how much house we can afford to buy. Please go to http://www.agreatloan.net/library.html?category=calculators
- Are you a Veteran and do you qualify for a VA loan-If you are a veteran and qualify for a VA loan you may be able to purchase a home with very little down payment and other benefits for your mortgage. Make sure you tell the Lender you are a Veteran and qualify for a VA loan. Questions regarding a VA loans can be answered at www.homeloans.va.gov/veteran.htm.
General Rules for Eligibility
Military Service Requirements for VA Loan Eligibility:
*NOTE: Applications involving other than honorable discharges will usually require further development by VA. This is necessary to determine if the service was under other than dishonorable conditions.
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Wartime - Service during:
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WWII
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09/16/40 to 07/25/47
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Korean
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06/27/50 to 01/31/55
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Vietnam
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08/05/64 to 05/07/75
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You must have at least 90 days on active duty and been discharged under other than dishonorable conditions. If you served less than 90 days, you may be eligible if discharged for a service connected disability.
You must have served at least
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Peacetime – Service during periods:
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07/26/47 to 06/26/50
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02/01/55 to 08/04/64
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05/08/75 to 09/07/80 (enlisted)
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to 10/16/81 (officer)
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181 days of continuous active duty and been discharged under other than dishonorable conditions. If you served less than 181 days, you may be eligible if discharged for a service connected disability.
Service after 09/07/80 (enlisted) or 10/16/81 (officer)
If you were separated from service which began after these dates, you must have:
(a) Completed 24 months of continuous active duty or the full period (at least 181 days) for which you were ordered or called to active duty and been discharged under conditions other than dishonorable, or
(b) Completed at least 181 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1171 (Early out), or have been determined to have a compensable service-connected disability;
(c) Been discharged with less than 181 days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances for the convenience of the Government.
Gulf War - Service during period 08/02/90 to date yet to be determined
If you served on active duty during the Gulf War, you must have:
(a) completed 24 months of continuous active duty or the full period (at least 90 days) for which you were called or ordered to active duty, and been discharged under conditions other than dishonorable; or
(b) completed at least 90 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1173 (Early out), or have been determined to have a compensable service-connected disability, or
(c) been discharged with less than 90 days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances, for the convenience of the Government.
Active Duty Service Personnel
If you are now on regular active duty (not active duty for training), you are eligible after having served 181 days (90 days during the Gulf War) unless discharged or separated from a previous qualifying period of active duty service.
Selected Reserves or National Guard
If you are not otherwise eligible and you have completed a total of 6 years in the Selected Reserves or National Guard (member of an active unit, attended required weekend drills and 2-week active duty for training) and
(a) were discharged with an honorable discharge; or
(b) were placed on the retired list; or
(c) were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable service; or
(d) continue to serve in the Selected Reserves.
Individuals who completed less than 6 years may be eligible if discharged for a service- connected disability.
You may also be determined eligible if you:
(a) are an unremarried spouse of a veteran who died while in service or from a service connected disability, or
(b) are a spouse of a serviceperson missing in action or a prisoner or war.
[NOTE: Also, a surviving spouse who remarries on or after attaining age 57, and on or after December 16, 2003, may be eligible for the home loan benefit. However, a surviving spouse who remarried before December 16, 2003, and on or after attaining age 57, must apply no later than December 15, 2004, to establish home loan eligibility. VA must deny applications from surviving spouses who remarried before December 16, 2003 that are received after December 15, 2004.]
Eligibility may also be established for:
(a) certain United States citizens who served in the armed forces of a government allied with the United States in WWII.
(b) individuals with service as members in certain organizations, such as Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with WW II service, and others.
- Are you a First Time Home Buyer-If so there is another world of benefits opening up for a first time mortgage loan. Listed below are many web sites the can guide you to your First Mortgage loan:
www.homebuyingguide.com
www.hud.gov/buying/comq.cfm
www.hud.gov/buying/index.cfm
- What are my credit scores-By knowing your scores you can know in advance what type of mortgage loan rate you qualify for or at a minimum the range of mortgage interest rates you might qualify. To find out your scores and a copy of your credit report go to:
www.Free-Credit-Score.com
www.experian.com
www.equifax.com
www.transunion.com
The credit is an indication of how likely you are to default on your mortgage loan. The higher the score the less likely you are to default.
- Do I have anything on my credit report that might cause a Lender alarm-By reviewing your credit report in advance you can see for yourself and blemishes that might cause a Lender concern. Those blemishes may be late payments on credit card debt or auto payments, or it might be a charge off for an old medical bill. Whatever the blemish, make sure you look at it and determine if it is your and if not notify the credit bureau right away. Make sure you contact directly all of the 3 credit report agencies. A more detailed explanation on what to do can be found in the E-Book-“The Mortgage Process from an Insiders View Point” offered free on the web site. The more late pays or blemished either the mortgage interest rate will be higher or the loan to value will be lower or BOTH. The key to low mortgage rates is great credit.
- What are the real estate taxes on the property and what will the home owners insurance cost on the property-Look for your real tax bill from your county assessor and your latest home owners insurance bill. Write down the yearly costs of the taxes and insurance.
- What is my home really worth-Another important question that will save you a lot of time and disappointment if you determine in advance what your home is worth. The mortgage lender will require an appraisal to be done to determine the value of your home. They will generally pick an appraiser that you are not familiar with and thus they will independently arrive at the value of your home. You need to know in advance what your home is worth since this will tell you how much of a mortgage loan you can possibly have as well as how much equity (your current loan balance minus the value of the home) you have in your home and thus how much is available to you to borrow. The simplest way to determine what you home is worth is to look up and or see what similar homes are selling for in your neighborhood. If the same model home you live in down the street sells for $100,000 one month ago your home is probably going too valued at $100,000. If your home was the same value but you added a 500sq.ft. addition; your home will appraise for more. Generally, a new roof, windows, heating system, carpeting, flooring, lighting will not increase the value of your home since we all expect a roof and lighting in your home.
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Step 3: You have Answered the questions-LETS GET ORGANIZED
- Income documents-Copies of last two paychecks. [ ]
- Income documents-Copies of last two years W-2’s. [ ]
- Income Documents-Copies of last two years Federal Income Tax returns. [ ]
- Mortgage Documents-Copy of previous closing statement if refinancing. [ ]
- Mortgage Documents-Copy of last month’s mortgage statement. [ ]
- Mortgage Document-If on Land Contract; Copy of Land Contract [ ]
- Mortgage Documents- If paying on Land Contract copies of last 12 month checks to Land Contract holder. [ ]
- Miscellaneous Documents- Copy of last months bank statement. [ ]
- Miscellaneous Documents- Copy of last month’s 401-K statement. [ ]
- Miscellaneous Documents- Copy of last months Investment statements. [ ]
- Miscellaneous Documents-Copy of Homeowners Insurance front page. [ ]
- Miscellaneous Documents-Copy of real estate tax bill. [ ]
- Miscellaneous Documents-Copy of Divorce Decree. [ ]
- Miscellaneous Documents- Copy of Child Support Agreement. [ ]
- Miscellaneous Documents- Copy of Drivers License. [ ]
- Miscellaneous Documents-Copy of Bankruptcy papers if you filed in the last 5 years and or information is still being shown on your credit report. [ ]
- Miscellaneous Documents-Copy of the last appraisal on your home if available. [ ]
Miscellaneous Documents- Letter detailing the reason for any dings/challenges on your credit report. You were out of work for 3 months because of illness. There were two late payments on a credit card and they are being disputed because the charges were not yours in the first place.
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Step 4: Deciding what type of loan is right for me:
As you can see from the below table regardless of the type of credit you have you can qualify for almost any loan. That does not mean that everyone can or will accept the loan they qualify for from the mortgage lender. The rate may be 10% but the Lender is willing to only lending 50% loan to value, you already have an 80% loan on your home, thus you will not accept the mortgage lenders terms. What the table does show you is that you have choices. Arms are adjustable rate loans that remain fixed for a certain number of years and then start adjusting. If you are only going to stay in your home for three years then a 3-year Arm would be perfect for you. Why; the mortgage interest rate will remain fixed for 3 years but will generally be lower than 15 and 30 year fixed rates. If you happen to stay another year the loan is not due but the interest rates generally adjust upward. The table gives you some ideas of what to ask about or exactly what type of loan you are looking for.
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Type of Loan
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Good Credi t
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Bad Credit
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Time in Home Less than 5 yrs
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Time in Home Less than 10 yrs
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Time in Home Less than 20 yrs
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Interest Only
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x
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x
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1 Year Arm
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x
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x
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x
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3 Year Arm
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x
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x
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x
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5 Year Arm
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x
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x
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15 Year Fixed
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x
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x
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X
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20 Year Fixed
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x
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x
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x
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30 Year Fixed
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x
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x
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x
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Home Equity
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x
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x
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X
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x
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Debt Consolidation
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x
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x
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x
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X
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x
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FHA
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x
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x
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- Interest Only - This mortgage loan is just what it says it is-interest only for a number of years. Your monthly payment is only interest no principal. In addition to be interest only it allows the borrower to make additional principal payments (pay down the loan balance) at any time. This type of loan is for self employed borrowers that own their own business and can make principal payments when times are good. Or Borrowers that have had a reduction in income or are just starting out and want a breather before starting to make principal payment.
- 1 Year Arm- Mortgage Interest rate remains fixed for 1 year and become adjustable after that one year. The adjustments depend on many factors (Index, margin, caps). This loan is for the borrower that wants a very low rate either because they will not be in the home for a very long time or wants the lowest rate possible and then they will refinance at a later date. Be Careful-this loan is not for everybody.
- 3 Year Arm - Mortgage Interest rate remains fixed for 1 year and become adjustable after that three year.
- 5 Year Arm - Mortgage Interest rate remains fixed for 1 year and become adjustable after that five year.
- 15 Year Fixed - Mortgage rate remains fixed for 15 years and the borrower makes equal mortgage payments over that 15 year period and then the loan is paid for in full.
- 20 Year Fixed - mortgage rate remains fixed for 20 years and the borrower makes equal mortgage payments over that 20 year period and then the loan is paid for in full.
- 30 Year Fixed - mortgage rate remains fixed for 30 years and the borrower makes equal mortgage payments over that 30 year period and then the loan is paid for in full.
- Home Equity Loan (HELOC) - Also known as a 2nd Mortgage loan is generally taken out when you already have a 1st mortgage on your home and have a great first mortgage rate. Generally it is less expensive take out a 2nd mortgage or Home Equity Loan since the loan amounts are smaller. When you only need a small amount of cash our or have a few debts you want to consolidate, a Home Equity Loan or 2nd Mortgage may save you dollars over a new first mortgage. Caution-many Lenders will try to have you refinance your 1st mortgage before they offer you a new Home Equity Loan or 2nd Mortgage-Why-they make more money on 1st mortgages.
- Debt Consolidation Loan - this just means that you are consolidating or combining several small debts into one and taking out either a new 1st mortgage or a 2nd mortgage.
- FHA Mortgage Loans - FHA's mortgage insurance programs help low and moderate income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the mortgage company against loan default on mortgages for properties that meet certain minimum requirements--including manufactured homes, single-family and multifamily properties, and some health-related facilities.
Section 203(b) is the centerpiece of FHA's single family insurance programs. It is the successor of the program that helped save homeowners from default in the 1930s, that helped open the suburbs for returning veterans in the 1940s and 1950s, and that helped shape the modern mortgage finance system. Today, FHA One to Four Family Mortgage Insurance is still an important tool through which the Federal Government expands home ownership opportunities for first time homebuyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms, as well as for those who live in under served areas where mortgages may be harder to get. In 1997, FHA insured more than 790,000 homes, valued at almost $60 billion, under this program. FHA currently insures a total of about 7 million loans valued at nearly $400 billion. These obligations are protected by FHA's Mutual Mortgage Insurance Fund, which is sustained entirely by borrower premiums.
Section 203(b) has several important features:
Down payment requirements can be low. In contrast to conventional mortgage products, which frequently require down payments of 10 percent or more of the purchase price of the home, single family mortgages insured by FHA under Section 203(b) make it possible to reduce down payments to as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage, in some cases.
Many closing costs can be financed. With most conventional loans, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to finance many of these charges, thus reducing the up front cost of buying a home. FHA mortgage insurance is not free: borrowers pay an up front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.
Some fees are limited. FHA rules impose limits on some of the fees that mortgage companies may charge in making a loan. For example, the loan origination fee charged by the mortgage company for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.
HUD sets limits on the amount that may be insured. To make sure that its programs serve low and moderate income people, FHA sets limits on the dollar value of the mortgage loan.
There are many variations on each of the above loans. Sometimes a lender will offer to an 80/20 mortgage loan or 80/10 mortgage loan. This just means an 80% 1st Mortgage and a 20% or 10% 2nd Mortgage combined. Ask questions from the mortgage lender after all you have already most of the answers.
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Step 5: APPLY FOR THE MORTGAGE LOAN & COMPARE MORTGAGE LOANS
Lenders come in many different shapes and forms. From your local Bank and Savings & Loan, Credit Unions, National Mortgage Lenders (Countrywide, Washington Mutual), Internet Companies (Lendingtree, E-Loan) to Mortgage Bankers and Mortgage Brokers. As a Consumer you have a wide choice, each of the above can give you a great mortgage loan-IF YOU HAVE DONE YOUR JOB AND HAVE DETERMINED IN ADVANCE WHAT YOU NEED AND WHAT TYPE OF MORTGAGE LOAN YOU QUALIFY FOR!
The loan officer will start off by asking you many questions or start taking an application. You have at your fingertips all of the answers-this will be a surprise and thus will put the loan officer on the defensive since he is now dealing with an informed consumer. Tell him what type of loan you are looking for-I want a 15 year fixed rate and I want $10,000 cash out after all expenses are included in the loan. You have taken charge; you have directed him to one product and thus made his life easy. He should come back with a rate quote or payment based upon the information you gave the loan officer. You should not have been charged one penny at this point in time. Once he quotes rate you need to ask him what he charges and what are all of the fees associated with the loan. You do not want this verbally but on a GOOD FAITH ESTIMATE (GFE) and TRUTH AND LENDING STATEMENT (TIL). He is required by law to send you these documents within 3 business days of taking an application from you; if he does not or is reluctant to give you the GFE and TIL move on to another Lender. The only way you can see or compare if you are receiving a great mortgage loan is by having the GFE and TIL to compare to another. These documents level the playing field. It gives you the consumer the ability to analyze which Lenders deal is best for you or at the very least what are all of the costs associated with the loan.
Once you have narrowed it down to the type of loan and the Lender and the Lender has supplied the GFE and TIL, it’s time to commit to the loan and obtain loan approval. Ask the Lender to approve the loan subject to the appraisal of the property. In other words you want all contingencies except the appraisal removed before you pay for and the Lender orders the appraisal. Once the approval is obtained and a loan commitment letter is given to you; then pay for an order the appraisal. Based upon your previous work you already know what the home is worth, you already told the loan officer what the home was worth and the Lenders underwriter has taken this value along with your income, real estate taxes, insurance, debts, existing mortgage payments, credit scores and credit reports and calculated exactly what you qualify for and the interest rate and payment. You have already done the work they are just confirming the numbers.
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Step 6: Close the Loan
Once the appraisal is ordered and reviewed by the Lender the loan should close within a few days. The whole process if you have done your job by answering all of the questions in Step 1 & 2 and having all of the documents outlined in Step 3 should take 2-3 business weeks or 14-21 days. The process could take as few as a week or the time to order and receive the appraisal or over a month if you have an inept Lender. Your in charge the Lender/loan officer should be more than willing to communicate with you every step of the way including being available either at the closing table or on the phone during the closing. If the loan officer is not taking your calls ask for his boss/supervisor or owner of the company. If they do not respond take your business elsewhere, there are people out there that want your business and will provide you great service. Never, Never, Never stay with someone that thinks they are doing you a favor after all you have done most of the work! The mortgage process is not some secret mysterious process, you already should know if you qualify for a loan since you answered the above questions. Best of Luck on your mortgage loan search.
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