Help on completing a mortgage loan application

Most people can buy the everyday items without borrowing in the Unites States. Buying lunch, for instance, would involve cash. How about when buying a home? Buying a home does not actually involve any cash. The transaction is with checks or wire transfers because of the amount of money involved. Buying a lunch could just be under $10 while the price of the home is thousands or millions of dollars. In the latter, who is that kind of money in cash and skills to count?

Many people have dreams to buy a home but don’t have the money. So they ask a bank for a loan. If the bank gives them a loan, then, the buyer can get the home. Otherwise, the buyer does not have a chance to buy the home immediately unless of course he wins a lottery.

When banks lend money for people to buy a home, it is called a mortgage. Because the bank wants to protect itself if the people default on their loan, the bank uses the property as collateral. This means when you borrow a loan on a property and you fail to make the mortgage payment, the bank will take the property (collateral) away. Then, the bank can sell that property to recover what it gave the borrower as a loan. But no one purposely wants to gets into a situation where the bank takes away the property because it often means a loss for the bank and the borrower.

Before applying for a mortgage

A good place to start is by looking at your budget. Take a look at what you pay in rent, for instance. If you are paying $1000 in rent, can you afford a mortgage payment that exceeds that amount? If the answer is yes, why how much? Can you pay $1200 in mortgage payments monthly? Keep in mind to save some money for repairs and maintenance. We recommend that a home buyer keep the mortgage payment lower than what is comfortably affordable. The difference could be put into savings account for future use.

Before you think about getting a mortgage, know you need a good credit history. Otherwise, you may not get the loan or your loan will be expensive. When banks get your personal information, they will check your credit to determine your eligibility for the loan. If you know your credit history is bad, it probably is not a good idea to keep high hopes for a mortgage. If you know you have good credit history, you can expect to get a good deal on your loan. It is hard to tell if you are getting a good deal or not unless you apply with more than one bank.

Beside the credit history, you will need your tax information (W-2 forms) for the past a few years. As part of the loan application process, the bank will ask you for this information. If you don’t have this information you can request a copy of this from IRS.

Here some items that your lender is likely to ask you to provide when you apply for a mortgage loan application (applies to borrower and co-borrower):

  • Social security number
  • Have address(es) for the last few years
  • W2 tax records for the few years
  • Employment info – employer name, address and phone number
  • Proof of income – provide all income information that should be considered for repaying the loan
    • Copies of recent pay stub, salary, bonuses, commissions
    • Interest income, dividends, and any other source of income
  • Liquid assets – cash
    • Bank account statements – copies of most recent bank statement for checking, savings or certificate of deposit (CD) accounts.
    • Value of stocks, bonds, other assets
  • Other assets
    • Real estate owned – need to provide property address, market values, outstanding liens, current mortgage payment, and any rental income.
  • Liabilities – provide information on outstanding balances for your liabilities.
  • Cost of credit report and appraisal (if applicable)
  • Purchase contract for the home your plan to buy, if applicable

Terms to know when applying for a mortgage

Here are terms and definitions that often come up when applying for a mortgage.

Adjustable Rate Mortgage (ARM)
ARM is a home loan with interest rate adjusting periodically.
Amortization
This represents the reduction in principal of a mortgage in response to occurring mortgage payments.
Assets
Something that person owns of monetary value. Examples of assets include money bank accounts, stocks, real estate, and so on.
Closing
This refers to the format meeting in which a home loan is finalized.
Closing costs
Closing costs refers to the total expenses due at the time when the home loan is finalized (or closed). The expenses may include:
  • Appraisal fee
  • Origination fee
  • Points
  • Underwriting fee
  • Processing fee
  • Tax service fee
  • Title search and insurance fee
  • Recording fee
  • Tax adjustments
  • Agent commissions
  • Private mortgage insurance
The closing costs are typically between 3% to 6% of the home’s purchase price. A good faith estimate (see below) details all the expenses relating finalizing the home loan.
Conditional credit approval
This means the bank has preapproved the mortgage application with subject to a satisfactory appraisal of the property, title review, and no substantial changes to the borrower’s financial information. The pre-approval is significant because it helps the buyer to shop for a home knowing he/she has access to funds necessary to make the purchase possible.
Debt-to-income ratio
This represents the difference in income and credit debt of the home loan borrower. It is computed simply by subtracting monthly credit card and loan repayments from monthly income. A high debt-to-income ratio limits the borrower’s home financing options.
Deed of trust
A legal document that pledges the borrower’s property to the lender – in case the borrower defaults.
Equity
This is the difference between the appraisal value of a home and the unpaid balance of the home loan. For example, if a borrower, has paid $20,000 of the mortgage and the home value has risen from $80,000 (original home loan) to $100,000, the equity is $100,000 – ($80,000 – $20,000) = $40,000.
Escrow amount
This is a account set up by the mortgage servicer (bank) to pay expenses related to home ownership. The expenses include homeowner’s insurance and property taxes. Eeach month part of the mortage payment is deposited in to theis account when the expenses are due, the bank makes the payment.
Fixed-rate mortage
This type of a home loan has fixed interest rate mostly payment for the term of the loan (i.e., 15 or 30 years).
Good faith estimate
This document provides an intemized estimate of all costs needed to finialize (or close) the home loan.
Interest
This is the cost of borrowing on a home loan.
Interest rate
This represents a percentage rate of interest charged to a home loan. When interest rate is lower, the monthly mortage payments are lower. Conversely, high interest results in higher mortage payments.
Libailties
This referst to the fininical obligation and debts of the borrower. A borrower’s liabilities may include credit card debt, student loans, auto loans, or personal loans.
Loan to value (LTV)
This is the ratio or percentage of the home loan to sale price of the home. For example, if a home purchase price is $100,000, and the down payment is 20% or $20,000, LTV is 80% because $80,000 is the amount of the loan.
Principal
The amount that is borrowed to purchase a home.
Rate lock
It refers to making sure that a home loan closes with a particular interest rate.
Posted on 5/28/2008
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by Raj Singh