What is the process in applying for a mortgage loan?

A quick overview of the Mortgage Loan Process

Now that your parents have finally kicked you out of the house, or you are sick and tired of paying rent, home ownership seems to be the next logical step. Like many people, you have no idea where to begin when applying for a mortgage loan. Keep in mind that the mortgage process involves multiple steps and a considerable amount of paperwork. Mortgage companies have become stricter to whom they lend, and are not willing to take as many risks as they have in the past. A borrower must be prepared for what the lender will require. The more prepared and professional the borrower is, the better the chance a lender will work with them.

Step 1: Decide how much home you can afford

Review your finances and decide how much home you can afford. If you can only budget $1,500 a month for housing, do not go shopping for a ½ million dollar home. It is smart to review what you can afford, however even if you think you can afford a certain dollar amount, the lender may not agree with your assessment. Most lenders go by the 28 and 36 ratios. The 28 refers to the percent amount of your gross income that can be spent on housing expenses (principal, interest, taxes, and insurance). The 36 refers to the percent of your gross income that can go towards all debts, including the mortgage. It is smart to get an estimate of this before you begin searching for a home because this will save a lot of time and wasted effort by searching for a home you cannot afford. There are many mortgage prequalification calculators available on the Web.

Step 2: Choose a home

Now that you know how much you can afford, begin shopping for a home. Find a reputable Real Estate agent and begin the home finding adventure. A few things to think about before approaching a Real estate agent are: what neighborhoods do I like, how many bedrooms/bathrooms do I need, how big of a house do I need, etc...

Step 3: Review your Finances

Before meeting with or choosing a lender, it is best to have your finances in order. Create a detailed Personal Financial Statement that can be backed up with hard evidence. Lenders will review your assets and liabilities, income and expenses, and your earnings. Review your credit report and credit score with the credit bureau. Lenders want to know the history of your payments, if you pay your bills on time, and if you have any unpaid debts. It is good practice to review your credit report before approaching a lender in order to make sure everything reported is accurate. If you have a bad credit history, the lender may reject your application right away.

Step 4: Choose a lender

When choosing a lender, ask around. Talk to your friends and family to see if there is a lender they would recommend and why. Some people may feel more comfortable using a lender that they have had a personal banking relationship with for some time. You should also decide if you want to use a primary lender or a mortgage broker. A primary lender will lend the funds and service the loan for you, whereas a mortgage broker can shop the rates of many different lenders for you. Choosing between a primary lender and mortgage broker is a matter of personal preference. Some people like to use a primary lender that is close to home, so they can meet with them face to face, while others prefer having a broker shop for the best rates for them. For my first mortgage, I went to my local bank that I had been using for around 15 years; I signed all of the papers and received the loan. However, on my first mortgage payment statement, the loan was from another large/global bank. My bank had sold my loan. I believe if I had gone straight to the source that ended up with my loan, I could have saved money on fees and could have possibly saved a quarter of a point in interest. Live and learn.

Step 5: Meet with the lender

It is best to have all of your financials ready before you meet with your lender. This saves wasted meetings. In order to qualify you for a loan, the lender will typically have you (1) fill out a Uniform Residential Loan Application, they will (2) check your credit report with a credit bureau, and they will (3) review your financials. A few things to have ready in order to make your meeting (whether it is in person or on the phone) run smoothly are:

Step 6: Wait for the lender to qualify you.

Since you have put together a personal financial statement, checked your credit report, and reviewed the 28 and 36 rule, you should have a good idea if you will qualify for the loan or not. By following the above steps, your lender will be amazed at how prepared you are. The preparation and knowledge of the process will be a pleasant surprise for your lender. Having dealt with many lenders, I have heard some horror stories about how people have approached lenders totally unprepared. By following the steps above, you will not be the subject of one of those stories.
If for some reason your application is not accepted, it is required by federal law, that the lender tell you in writing the specific reasons your were turned down. Some common reasons a borrower could be turned down: