Mortgage Application

For many homebuyers, selecting and applying for their mortgage is mysterious and at least a little bit scary. But it doesn't have to be if you know what to expect and what your mortgage lender is expecting from you.

The first step is the most important. If you start the process with a quality lender and a good loan officer, you are off to a good start. If you have the right product at the best rate, you are off to a great start. Discuss all your options with someone who is qualified to evaluate your financial situation and match your needs with the best available type of mortgage.

It may seem they need to know everything about you, but actually all your mortgage lender needs to know about you is your employment, finances, and information about the home you're buying. However, you will need to provide quite a few details about these topics, and your application process will go much more smoothly if you're prepared.

Speeding up the Mortgage Process

Be sure to respond promptly to your lender's requests for information while processing is taking place.

Be prepared to provide the following typical items:

• The final purchase contract for the house (if applicable).
• Pay stubs for each applicant, showing earnings for the last 30 days and year-to-date earnings. (These must be computer-generated or typed originals that identify the employer and the employee's name.)
• Last year's W2 and 1099 for each applicant. If you're self-employed, the lender may require your personal and business tax returns for the previous two years and your company's year-to-date Profit and Loss statement.
• Account numbers for all bank accounts, along with account statements for the past two months.
• Information about debts, including loan and credit card account numbers and the names of your creditors.
• Evidence of your mortgage or rental payments, such as canceled checks.
• An irrevocable gift letter if you are receiving a monetary gift from a relative.

What Happens After I Apply?

Your lender will begin the work of verifying all the information you've provided. This process can take anywhere form one to six weeks, depending on the type of mortgage your choose, whether you're buying a home outside your local community, and other factors.

Within three business days after your application, the lender must give you an estimate of your closing costs. (The closing is the actual settlement of your loan.) You'll also get a statement that shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.

For many home buyers, this waiting period can be nerve-wracking. So stay in touch with your mortgage lender, be prepared to answer any questions that might come up -- and remember that mortgage lenders are in the business of making loans, not denying them.

Some homebuyers find the closing process to be one of the most intimidating aspects of buying a home because it's so unfamiliar. Ask your mortgage lender what to expect at your closing

Real Estate Settlement Procedures Act

This law protects consumers from abuses during the residential real estate purchase and loan process and enables them to be better informed shoppers by requiring disclosure of costs of settlement services.

The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) administers several regulatory programs to ensure equity and efficiency in the sale of housing. One of these programs, under the Real Estate Settlement Procedures Act (RESPA), applies to almost all mortgage loans and lenders, not just FHA-insured mortgages. RESPA’s purposes are (1) to help consumers get fair settlement services by requiring that key service costs be disclosed in advance, (2) to protect consumers by eliminating kickbacks and referral fees that would unnecessarily increase the costs of settlement services, and (3) to further protect consumers by prohibiting certain practices that increase the cost of settlement services.

RESPA protects consumers by mandating a series of disclosures that prevent unethical practices by mortgage lenders and that provide consumers with the information to choose the real estate settlement services most suited to their needs. The disclosures must take place at various times throughout the settlement process:

• Disclosures at the time of loan application. When a potential homebuyer applies for a mortgage loan, the lender must give the buyer (1) a Special Information Booklet, which contains consumer information on various real estate settlement services; (2) a Good Faith Estimate of settlement costs, which lists the charges the buyer is likely to pay at settlement and states whether the lender requires the buyer to use a particular settlement service; and (3) a Mortgage Servicing Disclosure Statement, which tells the buyer whether the lender intends to keep the loan or to transfer it to another lender for servicing, and also gives information about how the buyer can resolve complaints. RESPA does not specify penalties for lenders that fail to provide these three items, but bank regulators can impose penalties on lenders.
• Disclosures before settlement (closing) occurs. (1) An Affiliated Business Arrangement Disclosure is required whenever a settlement service refers a buyer to a firm with which the service has any kind of business connection, such as common ownership. The service usually cannot require the buyer to use a connected firm. (2) A preliminary copy of a HUD-1 Settlement Statement is required if the borrower requests it 24 hours before closing. This form gives estimates of all settlement charges that will need to be paid, both by buyer and seller.
• Disclosures at settlement. (1) The HUD-1 Settlement Statement is required to show the actual charges at settlement. (2) An Initial Escrow Statement is required at closing or within 45 days of closing. This itemizes the estimated taxes, insurance premiums, and other charges that will need to be paid from the escrow account during the first year of the loan.
• Disclosures after settlement. (1) An Annual Escrow Loan Statement must be delivered by the servicer to the borrower. This statement summarizes all escrow account deposits and payments during the past year. It also notifies the borrower of any shortages or surpluses in the account and tells the borrower how these can be paid or refunded. (2) A Servicing Transfer Statement is required if the servicer transfers the servicing rights for a loan to another servicer.

Along with these disclosures, RESPA protects consumers by prohibiting several other practices: (1) Kickbacks, fee-splitting, and unearned fees: Anyone is prohibited from giving or accepting a fee, kickback, or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan, which covers almost every loan made for residential property. RESPA also prohibits fee-splitting and receiving unearned fees for services not actually performed. Violations of these RESPA provisions can be punished with criminal and civil penalties. (2) Seller-required title insurance: A seller is prohibited from requiring a homebuyer to use a particular title insurance company. A buyer can sue a seller who violates this provision. (3) Limits on escrow accounts: A limit is set on the amount that a lender may require a borrower to put into an escrow account to pay taxes, hazard insurance, and other property charges. RESPA does not require lenders to impose an escrow account on borrowers, but some government loan programs or lenders may require an escrow account. During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. And each year, the lender must notify the borrower of any escrow account shortage and return any excess of $50 or more.

Escrow Accounts

Mortgage escrow accounts are special accounts set up by the lender in which money is held to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items. Escrow accounts ensure that these items are paid in a timely fashion. They are a guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.

Guarantee that bills are paid on time. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.

Unexpected increases are taken care of. It is the responsibility of the lender to allow for possible increases in tax or insurance premiums.

Lenders typically cover shortages when tax or insurance payments increase. It is very common for lenders to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.

Mortgages have lower rates and down payments because of escrows. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.

Local governments save money. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.

How Do I Chose A Lender?

When most people think about choosing a mortgage lender, they think about finding the lowest rate. Period.

Of course, financial considerations are important to every home buyer, and you certainly should consider the different rates lenders in your area offer on comparable loans. But you also want a lender you can trust, and someone you can work with effectively. So don't let rates be your only criterion. Here's the process we recommend:

1. Build a list of lenders. Talk to people you know who have bought or refinanced a home recently. Check the newspaper's real estate or business section. Or just look in the yellow pages under "Mortgages."

2. Talk to a loan officer. Call or visit the lenders on your list. Get a feel for what it will be like to work with them, and how they approach your needs. If you're still uncertain, ask for references -- recent home buyers like yourself -- and talk to them.

3. Compare rates for similar loans. Among the things you'll want to discuss with prospective lenders are the rates they offer on mortgages. But when comparing rates between lenders, be sure the rates are for comparable loans -- and remember to include fees and other costs so you're really comparing apples to apples.