Step By Step – Mortgage Guide

In this Guide, you will learn about one of the most important steps in the homebuying process — obtaining a mortgage.
The materials in this Guide will take you from application to closing and they’ll even address the first months of homeownership to show you the kinds of things you need to do to keep your home.
Knowing what to expect will give you the confidence you need to make the best decisions about your home purchase.

1. Overview of the Mortgage Process

Taking the Right Steps to Buy Your New Home
Buying a home is an exciting experience, but it can be one of the most challenging if you don’t understand the mortgage process. Many families feel overwhelmed because of the amount of paperwork they must complete. Knowing what to expect, especially if you’re a first-time homebuyer, will help you make solid decisions about your home purchase. This guide was written to help you navigate through the mortgage process — from the people involved, to the costs and forms you’ll be asked to complete — and how you can take steps to make sure you keep your home long term. Understanding the primary purpose and function of the documents in the mortgage process, as well as the role of the many professionals involved, will make the mortgage process much less intimidating.

Getting Started
As you begin the journey toward homeownership, there are many resources available to you, including community organizations, your local government housing agencies, real estate professionals and loan officers who understand and are willing to work with prospective homebuyers like you. You will face many decisions throughout the process. We strongly encourage you to seek out these resources’ professional services to gather the facts so you can make the best decisions. While it is tempting to look for your perfect home right away, there are some steps to follow before you start shopping for a home. Begin by determining how much you can afford, based on your spending plan and comfort level. One of your first steps should be to talk to a Mortgage Loan Officer that can help you learn the homebuying basics and evaluate your financial readiness.

Next, a Mortgage Loan officer to review your income, credit reports and expenses, which can be used to determine the type and amount of mortgage loan you qualify for. Having a good credit history is also an important beginning step. If you have not yet established a credit history or need information on how to establish or improve your credit history, seek assistance from a Mortgage Loan Officer.

What Does Your Credit Report Include?
Your credit report provides information on money you’ve borrowed from credit institutions, in addition to your payment history, and includes:

• A list of debts and a history of how you’ve paid them. This can include credit cards, auto loans, student loans, department store credit cards, etc.
• Any bills referred to a collection agency. This can include phone and medical bills.
• Public record information. This can include tax liens and bankruptcies.
• Inquiries made about your creditworthiness. An inquiry is made when you apply for credit. Your credit report can also show if you were given credit based upon the inquiry.

Educate Yourself About Protecting Your Finances
As you gather your information from experts, it’s more important than ever to ensure that you are receiving reliable information that will enable you to make the right choices throughout the mortgage process.
Follow these helpful tips so that you can protect yourself against organizations that may not have your best interests in mind:

• Say NO to “easy money.” Beware if someone claims that your “credit problems won’t affect the interest rate.” If an offer is really appealing, get it in writing and then seek a second opinion.
• Find out about prepayment penalties. Know if the mortgage loan offered to you includes a fee if you pay off your loan early. If it is a requirement of the mortgage loan, you may want to ask about other products that do not contain a penalty.
• Ask about additional fees. Make sure you understand all of the fees that are part of your mortgage process. Question any items you didn’t request or know about prior to the time you are asked to sign the mortgage loan documents.
• Get all the facts before deciding to combine credit card or other debts into a mortgage loan.

2. What You Should Know About Your Mortgage Loan Application

Now that you’ve read about the key professionals in the homebuying process, it’s time to start taking a closer look at the forms and assorted paperwork necessary to purchase a home. There are a number of important steps involved in making the dream of homeownership a reality and one of them is completing your mortgage loan application (the official title for this form is the Uniform Residential Loan Application). This mortgage loan application includes several sections that capture information about you, your finances and details of your potential mortgage. It’s lengthy and at first glance seems complicated, so in this section you’ll learn about the reasons for each part of the form and why
you’re being asked to provide the requested information. Your loan officer will help you fill out this form. Be sure to work with your loan officer to complete the application accurately and completely and take your time when answering the questions on the application. If you put false or inaccurate information on your mortgage application, it can seriously harm your chances of being approved and is illegal. All of the personal information on your application is confidential and protected by federal law.

There are 10 sections in the mortgage loan application that are described in detail in this chapter. Your loan officer will assist you with many sections of this document, especially as they relate to the type of mortgage and terms of the mortgage loan.
Section I: Type of Mortgage and Terms of Loan
The information in this section should match the type of mortgage and mortgage loan terms that you discussed with your loan officer. For purchases where you haven’t selected a property yet, you can specify the maximum amount you wish to borrow.
Section II: Property Information and Purpose of Loan
If you’ve already selected a house, in this section you will need to provide information about the property, including the address, the year it was built, whether you want to purchase or refinance — as well as other details about the purpose of the mortgage loan you seek.
Section III: Borrower Information
This is personal information required of you and any co-borrower involved (any additional borrower who accepts responsibility for paying the mortgage, such as your husband or wife), including Social Security number, date of birth, marital status and contact information (street address and telephone numbers). If you have lived at your current address less than two years, be prepared to furnish former addresses for up to seven years.
With this identifying information, your lender will be able to obtain your credit report, which is a key factor in helping your loan officer assess your current financial situation.
Section IV: Employment Information/
Section V: Monthly Income and Combined Housing Expense Information
In these sections, you need to provide a history of your employment (where you have worked and for how long), your monthly income and your monthly expenses (bills you pay every month) — along with recent paycheck stubs and federal W-2 income tax forms for the last two years. With this information, your loan officer can determine your ability to make regular payments on the mortgage and your capacity to afford the costs associated with owning a home.
If you have not worked at your current job for at least two years, or if you have multiple jobs, you will need to provide information on all jobs going back until you have a two-year history. Your loan officer will have you sign a Verification of Employment (VOE) form, which will be sent to your employer to verify your employment and earnings. A VOE form will also be sent to previous employers if you have been on the job less than two years.
Use your gross income for the Monthly Income column in Section V. Your gross income is how much money you make before taxes or deductions. This includes most sources of income, although you aren’t required to disclose alimony, child support or separate maintenance payments if you do not choose to have them considered for paying your mortgage. The information you provide will later be verified by a credit report ordered by your lender. Differences between your figures and those on the credit report will raise questions and may delay the decision on your mortgage loan, so it is important that you are as accurate as possible when filling out this section.
Section VI: Assets and Liabilities
This section indicates your current financial position — how much you own (assets) versus how much you owe (liabilities). The difference between the two is your net worth. If you have bank accounts, savings, retirement funds, investments, cars or trucks — even cash that you keep at home — they can be considered assets that support your application. You will need to provide copies of all of your account statements for at least two months.
For the Liabilities section, you will be asked to itemize all of your current bills, loans and other debts, including current balances and monthly payments. Debts include automobile loans, credit cards, finance company loans, bank and credit union loans and existing mortgages, including home equity loans.
The assets and liabilities information you provide to your loan officer on the loan application will later be verified by a credit report ordered by the lender. If you have not yet established a credit record by obtaining a credit card or an auto loan, for example, your loan officer may look to see if you’ve paid your rent and utilities on time so they can evaluate your payment patterns.

Section VII: Details of the Transaction
This section gives the all-important details of the mortgage loan — presented as estimates — including the purchase price of your home, closing costs and the total cost of your mortgage loan (including principal, interest and fees), among other information. Your loan officer will complete this area of the application. Make sure that it agrees with your understanding of the transaction and look closely at the estimated closing costs.
Section VIII: Declarations
In this section, you will be asked to answer questions about any pending legal problems or other factors (past or present) that may influence your financial situation. For example, have you ever declared bankruptcy? This information, in combination with your credit report, will help your lender assess your ability to pay the mortgage. In addition, you will be asked to affirm if you are a U.S. citizen or a permanent resident alien. If you are not a U.S. citizen but can provide documentation to establish a legal presence in the U.S., you can still obtain a mortgage.

Section IX: Acknowledgment and Agreement
Your signature is your word of honor. In this section, you sign your name, saying that the information you are providing is accurate and true to the best of your knowledge.
Section X: Information for Government Monitoring Purposes
In this section of the application, you will need to provide such information as your ethnic origin and your race. That’s because the U.S. government wants to be sure our housing finance system meets the needs of every racial and ethnic group in the country. This is one way they gather the statistics they need to ensure the system works fairly for everyone.

3. Important Documents to Complete Your Application

You will most likely need the following information to provide to your loan officer in order to complete the mortgage loan application:

• Paycheck stubs for the past 30 days.
• W-2 forms for the past two years.
• Information about long-term debts, like car loans, student loans, etc.
• Recent statements from all of your bank accounts.
• Tax returns for the past two years if you’re self-employed.
• Proof of any supplemental income.

4. Pre-Approval and It’s On to the Next Step

Once the application is complete, your loan officer will review it with you and ask you and any co-borrowers to sign it. Your loan officer will then send it through their organization to obtain approvals. If it’s approved, you will receive a pre-approval letter, which is the lender’s conditional commitment to lend you a specific amount of money for the purchase of your home. With that pre-approval, you will know just how much house you can afford to buy. While this is helpful information, you need to decide for yourself if you can live comfortably with the amount of your suggested mortgage and the associated monthly mortgage payment.

5. Understanding Your Costs Through Estimates, Disclosures and More

Once you have completed the mortgage loan application process, your loan officer will provide you with a variety of documents outlining the costs associated with your loan. The most important are the Loan Estimate and the Closing Disclosure. These forms are required by law and are there for your protection. The Loan Estimate provides you with an estimate of your mortgage loan terms and settlement charges (also called closing charges, or costs to complete your mortgage transaction) if you are approved for a mortgage loan. The Loan Estimate is a three-page form with summary information of your loan terms, monthly payment and money needed at closing on the first page, details of your closing costs on the second page and additional information about your loan on the third page.

You can use your Loan Estimate to compare rates and settlement charges from other lenders. As the legal mortgage terminology used in the Loan Estimate may seem confusing, the following definitions should help you understand some of the most important information on this form.

• Loan Terms — This section defines the basic terms of your mortgage loan, including the initial loan amount, interest rate and initial monthly payment. This section also includes important information indicating if your interest rate can rise and if your loan has a prepayment penalty.
• Escrow Account Information — Most lenders require you to pay in advance for some items that will be due after closing. These prepaid items generally include homeowner’s insurance premiums and property taxes. The first page of the Loan Estimate indicates whether or not an escrow account is required and estimates the amount of your monthly escrow payment.

Closing Cost Details — Your closing costs include Loan Costs and Other Costs. Loan costs are divided into three categories:

• Origination charges are fees charged by your lender for preparing and submitting your completed loan application and underwriting your loan. The Origination Charges can include an application fee, an underwriting fee and an origination charge or points. One point equals one percent (1%) of your mortgage amount.
• Services You Cannot Shop For lists the fees for those settlement services for which the lender will select the person or entity that will provide those services. These services typically include appraisals and credit reports for example.
• Services You Can Shop For lists the fees for those settlement services that you may shop for and choose the service provider. These services may include the company that issues title insurance, conducts a survey, or performs a pest inspection.
• Other Costs include:
  • Taxes and government fees such as recording fees and taxes and transfer taxes;
  • Prepaid such as homeowner’s insurance premiums for the first year of your loan term, prepaid interest and property taxes; and
  • Initial escrow payments at closing, which generally include two (2) months of homeowner’s insurance premiums and property taxes.
• Some common fees you may be charged include the following:
  • Appraisal Fee — the fee paid to the professional appraiser who will assess the value of the home you want to buy. Since the home is the security or guarantee for the amount you are financing with your mortgage loan, your lender needs to know that the value of the property covers the loan amount. Most lenders will not provide you with a mortgage loan amount greater than what the appraiser determines is the property’s fair market value.
  • Credit Report Fee — the cost of getting copies of your credit report to assess your mortgage loan application. Your credit score, included in your credit report, is one of the most important factors in determining the interest rate that will be offered to you.
  • Title services fee and title insurance — the fee paid to a title company to search county records to make sure that the title to the property you wish to buy is clear and free of any complications like pending debts or liens on the property.
  • Government recording charges — the fee required to register the property under your name and record the mortgage or deed of trust.
  • Homeowners insurance — This charge is for the insurance you must buy for the property to protect your property from a loss, such as fire, floods and storm damage. In many cases, homeowners choose to let the lender pay the insurance from an escrow account the lender sets up for you that you fund on a monthly basis.
  • Initial deposit for your escrow account — This represents the money that you are required to pay in advance to establish your escrow account, so that this account can be used by the lender to pay for homeowners insurance, property taxes and other charges, if applicable

Please keep in mind that the Loan Estimate is only an estimate, and the actual charges you must pay at closing may differ. At your closing, you will receive a Closing Disclosure form that lists your actual loan costs. Compare the charges on the Closing Disclosure with the charges on the Loan Estimate to ensure that they have not dramatically changed. If they have changed, be sure to get a clear explanation of why. There are limits on the amount by which certain charges listed on the Loan Estimate can increase. The Loan Estimate also includes certain disclosures that will enable you to see the total cost of your mortgage under the terms of your particular mortgage loan. This disclosure is required by law to inform you of the complete cost of your credit and allows you the opportunity to ask questions and understand how much you will pay for the mortgage loan you will get.

These disclosures reflect the most significant characteristics of your mortgage loan: (1) the annual percentage rate (APR); (2) the payment amount; and (3) the total interest percentage (TIP).

• The APR is not the interest rate for which you applied. This percentage rate takes into account the various loan charges, including loan discounts, origination fees, prepaid interest and other credit costs. The APR is important because it gives the true cost of borrowing since all of the finance charges associated with the mortgage loan are considered.
• The proposed payment amount shows the dollar amount of your payments and their frequency.
• The TIP is the total amount of interest that you will pay over the loan term as a percentage of your loan amount.

6. The Final Document Before Closing: The Closing Disclosure

This document discloses the actual dollar amounts you will pay for the various fees and services associated with the closing of your mortgage loan. Your closing costs can typically range from 3 percent to 7 percent of the mortgage loan amount, so it’s important that you are aware of these costs and ask questions about them.
The Closing Disclosure contains the final terms of your loan, as well as the final loan charges that you will pay at closing. In addition to the disclosures contained in the Loan Estimate, the Closing Disclosure provides information regarding certain features of your loan, the amount financed, the finance charge and the total of payments.

The amount financed is the loan amount available after paying your upfront finance charge. The finance charge is the dollar amount the loan will cost you and the total of payments is the total amount you will have paid after you make all payments of principal, interest, mortgage insurance and loan costs, as scheduled. The Closing Disclosure also lists the date of the closing. In many places, the closing takes place at a title company or an escrow office. The escrow officer is an impartial third party in the transaction, who will be able to answer general questions about the terms of your mortgage loan, but won’t be able to give you legal advice.

7. What You Should Know About Your Closing

The Final Step to Homeownership
You and your family are finally ready to move to your new home. Your mortgage loan was approved, your house passed inspection, your belongings are packed and everyone is looking forward to moving day. All that’s left is to attend your closing.
What is a closing? A closing is a meeting that involves all of the parties signing the final documents and legally transferring the property to you. There are costs and fees in this final step of which you need to be aware.
This section will walk you through the entire process. When you are finished signing the closing documents, you will be given the keys to your new home. The mortgage process is now complete and you are officially a homeowner.

Who Will Be There?
Usually, the closing takes place at a title company or an escrow office. The following individuals should be there or be represented:

• You and any co-borrower (such as your spouse), if they’re involved with the transaction
• Escrow officer
• Closing agent
• The seller’s real estate professional
• Your real estate professional

The thing you’ll probably remember most years later is how many times you had to sign your name. There are lots of documents that need your signature. Here’s an overview of what will happen:

• You will sign a promissory note indicating that you have accepted the mortgage loan from your lender and agree to repay the amount borrowed, plus interest. You also will sign a security instrument which pledges your home as collateral for the loan. In some states this document is a mortgage and in other states it is a deed of trust.
• At closing, your lender will transfer the money to the seller on your behalf. The seller will then sign a document called the deed, transferring ownership of the property to you.
• The title company or settlement agent will prepare all the documents and make sure that they are properly recorded.
• Additionally, there will be a number of affidavits and declarations for you to sign. These legally binding documents spell out the financial obligation you are taking on and your rights as a homeowner.

Make sure you understand what you’re signing. It is important to read the documents carefully. Don’t hesitate to ask questions. Sometimes real estate professionals will go over the documents in detail before the actual closing, so you are comfortable with
the process. If that seems like a good idea to you, by all means ask your real estate professional to spend time with you explaining the paperwork.

The Documents in More Detail

Here’s a little more detail about some of the paperwork you’ll be asked to sign at your closing. Remember, every person who buys a home has to sign this
paperwork, no matter the country of origin, income level or native language.
The Mortgage Note
The mortgage note is a legal document that provides evidence of your indebtedness and your formal promise to repay the mortgage loan, according to the terms you’ve agreed to. These terms include the amount you owe, the interest rate of the mortgage loan, the dates when the payments are to be made, the length of time for repayment and the place where the payments are to be sent. The note also explains the consequences of failing to make your monthly mortgage payments.
The Mortgage or Deed of Trust
The mortgage or deed of trust is the security instrument that you give to the lender that protects the lender’s interest in your property. When you sign the mortgage or the deed of trust (depending on the state where you live), you are giving the lender the right to take the property by foreclosure if you fail to pay your mortgage according to the terms you’ve agreed to. Financing a house is very similar to financing an automobile; in both cases the property is the security for the loan.
The mortgage or deed of trust states most of the information contained in the note. It also establishes your responsibility to keep the house in good repair,
insure it, pay your real property taxes and make your payments on time.
The Deed
A deed is a document that transfers ownership of the property to you. It contains the names of the previous and new owners and a legal description of the property and is signed by the person transferring the property. The deed gives you title to the property, but the title is conveyed to a neutral third party (called a trustee) until you pay the mortgage loan in full.
The closing agent will be responsible for recording this document so that it can be filed as part of your county’s public records. You will receive a copy at
closing and another copy after it has been recorded.

Affidavits and Declarations
Affidavits and declarations are statements declaring something to be true, like the fact that the property will be your principal place of residence or that all the repairs needed on the property were completed prior to closing. In most cases you’ll have to sign one or more affidavits at your closing.

The closing process can be stressful because of all the paperwork you will need to sign. The documents in the mortgage process are the same for everybody, regardless of ethnic origin, language, gender or income. Federal law requires that you sign English language versions of all forms as your final, legally binding contract.

The day you close on your new home will be one of the most rewarding experiences of your life. While homeownership does come with responsibility, you’ll take pride in the fact that you have a new home for you and your family to enjoy now and in the future.