The Mortgage Loan Application - Demystified
We get a lot of questions from home buyers about mortgage loan applications, and the process of applying for a loan. Many of these questions have been answered in piecemeal fashion in the past. But we thought it would be helpful to compile all of those responses into an all-inclusive lesson about mortgage loan applications. This article is the result.
Summary: In this lesson, you will learn how to complete a mortgage loan application when buying a home. We will discuss the kinds of documents you need to produce, the different parts of the application, and everything else you need to know in order to succeed.
Let's start with a quick overview of the home loan application process. Once you understand the basic steps, the rest of the article will make a lot more sense.
When you apply for a home loan, it might actually take place in two different stages. If you approach a mortgage lender before you have found a house, the best they can do is pre-approve you for a loan. During this pre-approval process, the lender will review various aspects of your financial background to determine how much they are willing to lend you. This is a step worth taking, because it helps you narrow down your house-hunting search to the properties you can actually afford. It also shows sellers that you are serious about buying their home.
When you have actually found a property you wish to purchase, you would go back to the mortgage lender for a final approval. Some home buyers skip the first part and go straight to the step, but we recommend that you start with pre-approval. Based on the lender's financial review, they will either approve or reject your mortgage loan application.
Gathering Your Loan Documents
Before you submit a mortgage loan application, you will need to gather certain documents for the lender's review. The lender should give you a specific list of items they require. These documents will probably include the following:
- Purchase agreement for the property you wish to buy.
- Tax returns for the last couple of years.
- W-2 statements for the last couple years.
- Pay stubs showing year-to-date information for the last several pay periods.
- Your checking account statements for the last three months.
- Savings account statements for the last 2 to 3 months.
- Any statements relating to other assets, such as a 401(k) plan.
- A complete list of debts you currently owe.
Your lender may request additional items that are not discussed above. But there's a 99% chance you will need at least all of the items on this list. If you can start rounding them up now, you'll have an easier time down the road when you're ready to submit your mortgage loan application.
You should also ask what portion of your tax return paperwork the lender requires. They might only need the summary page. So before you start burning copies of multipage documents, find out exactly what they want.
Parts of a Mortgage Loan Application
Let's talk about the different parts of the loan application itself. I am going to use the Uniform Residential Loan Application as a model for this discussion. This is the form that is required by Fannie Mae and Freddie Mac. So if the mortgage lender wishes to sell their loans into the secondary mortgage market, they must use this standardized document. You may encounter other versions of the mortgage loan application, but most of them require the same type of information.
Part 1 - Type of Mortgage and Term of Loan
The first thing you have to do is indicate type of mortgage loan you wish to obtain. This will be a check-in-the-box sort of thing. You'll have to indicate whether you are using a VA home loan, and FHA loan, a conventional mortgage, or some other type of financing. You also have to indicate the amount of the loan you are requesting, the number of months for the payback period, the interest rate, and whether the rate is fixed or adjustable.
Part 2 - Property Information
The next part of the mortgage loan application will request information about the property itself. You have to provide a street address for the home you are buying, the number of units (if it's not a stand-alone property), a legal description of the property, the year it was built, and a few other items relating to the home.
If you're using a construction loan to build a house, you will be asked for additional information. This will include the year the lot was purchased, the original cost of the lot, the present value of the lot, anticipated cost of construction, and other items of that nature.
Part 3 - Borrower Information
Part three of the mortgage loan application requests more information about you, the borrower. Most of this information is pretty straightforward, so you should be able to do it off the top of your head. It includes your name, Social Security number, phone number, date of birth, marital status, mailing address, etc. It will request the same information for the co-borrower, if there is one.
Part 4 - Employment Information
Now we come to part four of the mortgage loan application, which has to do with your employment status. You will need to provide information about your employer, the number of years you have worked for them, your position or title, your salary, and other items related to your work history. You may have to provide the same information for some of your previous employers as well, dating back a specific number of years.
Part 5 - Monthly Income and Housing Expense
Part five of the mortgage loan application will request information relating to your income and housing expenses. Basically, they want to know how your income stacks up against your housing costs. If your mortgage uses up more than a certain percentage of your monthly income, you could be disapproved for the loan. This is referred to as your debt-to-income ratio.
Part 6 - Assets and Liabilites
In this section of the mortgage loan application, you will be asked to provide detailed information about your various assets and liabilities. Assets include anything with financial value, such as your 401(k) or pension funds. Your liabilities include your other debts -- student loans, credit cards, car loans, etc.
Part 7 - Details of Transaction
What is the purchase price of the home? How much are your closing costs estimated to be? How much, if any, will the seller contribute to your closing costs? Are you paying private mortgage insurance, or PMI? Any discount points? Are you using a second mortgage to finance the purchase, or just one? These are some of the items that will go in this "catch-all" section of the mortgage loan application.
Before You Submit a Loan Application
Up to this point, we have talked about the different parts of a mortgage loan application, as well as the other documents you need to submit. But we haven't addressed the preliminary steps you should take when you apply for a loan. So let's touch on those briefly.
First of all, you need to establish a monthly budget for yourself. Don't leave this up to mortgage lender -- it's not their job or their responsibility. It is your responsibility, as a borrower, to determine your affordability level. Here's an article that shows you how to do it.
It's also a good idea to review your credit report as soon as possible before buying a home. If you have inaccurate information on your reports, it will drag down your credit score. This can hurt your chances of getting approved for a mortgage loan. While you're at it, you should check your FICO credit scores as well. The lender will base their approval decision based largely on your credit situation. So you want to know where you stand before you submit the mortgage loan application.
Lastly, we need to talk about the different types of mortgage loans. Choosing the right type of loan for your particular situation is the key to long-term success. If you're planning to stay in the home for a long time, you are probably better off with a fixed-rate mortgage. If you will only be in the home for a few years, you may be able to use an ARM loan to save money and interest costs. But you can't make this kind of decision until you understand how the different types of mortgages work. You can get started researching this topic on our main mortgage loan page.
Conclusion and Questions
This article explains how to complete a mortgage loan application, and how to prepare for the mortgage process in general. We have talked about the preliminary steps you should take before you apply for a home loan, the documents you will need to provide, and the different parts of the application. If you have additional questions about this topic, you can use the search tool located at the top of this page.