Definitive Guide to
Mortgages

Chapter 4 — Walkthrough of the Mortgage Application Process

Prerequisites

First, you should know your FICO credit score. You can get this via https://annualcreditreport.com for free every year - it’s federally mandated. Otherwise you can sign up for a service like creditsesame.com which is also free and allows you to monitor your credit.

FICO Logo

Next, you should also have a baseline estimate of the maximum amount you should borrow based on your current financial situation.

Finally, you should already have an idea of what kind of mortgage (15 year conventional fixed? 7/1 Jumbo ARM? 30 year fixed FHA?) you’re looking for based on your current situation / preference along with a best guess of what will happen in your future. If you’re not sure yet, take a look at our detailed breakdown of the different types of mortgages first and come on back whenever you’re ready.

Key People

Lending Team

These personnel are all part of the mortgage company that you choose to work with.

Mortgage Banker
Mortgage Banker

Interacts with you on behalf of the lending institution; answers questions, consults with you to figure out the best loan option, receives the loan application, locks the rate, and collects all required information from you for qualification.

Mortgage Banker
Loan Processor

Prepares and submits the loan documents to the underwriting department for review and final loan approval.

Mortgage Banker
Underwriter

Reviews the loan documents (which consists of information detailing your income, assets, and the property’s appraisal value) to ensure compliance with guidelines for the loan program that was applied to; basically makes sure that the risk for the lender is acceptable for the return.

Loan Closer
Loan Closer

Authorizes the loan funds to be released to the title/escrow company and reviews the final signed documents after all parties (buyer and seller) have signed at the closing table.

Property Team

Team real estate agent
Real Estate Agent

Shows you properties, educates you on neighborhoods and prices, and walks you through the process of homebuying.

Team home inspector
Home Inspector

Thoroughly inspects the home you’re interested in purchasing after getting an offer accepted but prior to the close so that you can perform due diligence on the property to make sure that there aren’t hidden repairs or damage that could impact you.

Team appraiser
Appraiser

Estimates the value of the property you plan on purchasing or refinancing so that the lender is satisfied you are not overpaying and ensures that the lender has enough collateral for the loan.

Team surveyor
Surveyor

Prepares a map showing the precise legal boundaries of a property, including the location of easements, rights of way, encroachments, improvements / additions, and other features.

Team insurance agent
Insurance Agent

Provides home insurance coverage for the dwelling in the event of physical damage to a property from fire, wind, vandalism, or other hazards. Home insurance is not a legal requirement but lenders universally insist on it for the duration of the mortgage to protect the value of their underlying asset, the house.

Team title company
Title Company

Ensures that the title to your home is legitimate (validating that you are in fact purchasing the property from someone who has the legal right to sell the property) and then issues title insurance for the property to protect you and the lender against legal claims or disputes over the title. They also serve as the escrow account for the closing transaction.

How To Shop For A Mortgage

So how should you shop for mortgages to make sure you get the best mortgage rate?

We recommend an aggregator like Lending Tree since it allows you to get instant loan quotes from a ton of different providers all at once instead of having to fill out forms at each individual lender's website so you can compare side by side.

Shopping for a mortgage is actually very straightforward. Whether you do it online or through a broker, generally, you’ll mention the loan product(s) you’re interested in, and they’ll ask for your credit score, outstanding debt, and annual income. Based on that information, they can give you a back of the envelope estimate on rates for the loan types you’re interested in.

You should strive to compare mortgage rates by getting multiple quotes so you can get an idea of what the market rate is and also the type of service you can expect from the loan officer in question. Three to eight is a good number to shoot for - any less than three you won’t have a solid grasp of the local market rates, whereas any more than eight is pretty much always a waste of time for both parties.

Get quote

We’ve found that calling is almost universally faster than email, but do make sure to ask for a written quote so that you don’t have write everything down when you’re comparing.

Also pay attention to how quickly you receive follow up communications, as it’s usually a sign of how responsive they’ll be later on in the process - it’ll be super important when you’re trying to close on time.

When trying to figure out who is giving you the best mortgage rate, in addition to the interest rate, don’t forget to ask about the points and fees for the mortgage, along with how frequently interest is accrued and whether there are prepayment penalties.

Pre-qualified vs Pre-approved

A pre-qualification letter is a document from a lender that states that you qualify for a mortgage. The bar is super low for this because it’s usually based on the pro forma (verbally unverified) information that you provided to the lender when obtaining your quote.

You should get this document when you call for quotes to show your realtor so that they know you’re serious about buying a home.

The pre-approval letter on the other hand carries much more weight because it’s only issued after the lender has received all your documents to verify your ability to actually get a mortgage.

This letter is often required by sellers when you submit an offer so that they know you’re a serious buyer and capable of closing the deal.

Rate Lock

Overview

Once you’ve gotten a mortgage quote you’re happy with, it’s time to lock in your rate. The closing process takes awhile (usually at least a month), and since mortgage rates fluctuate day to day depending on various factors, a mortgage rate lock allows you to ensure that you’ll get your quoted rate regardless of how the market moves.

What is a rate lock?

A rate lock, also called a lock-in or rate commitment, is a lender’s promise to issue a mortgage to you at a certain interest rate and number of points for a specific amount of time while your loan application is being processed. This protects you against rate increases, which could affect your ability to afford the mortgage, but it also prevents you from taking advantage of decreases in the interest rate, unless your lender

How long does a rate lock last?

The duration of a rate lock depends on the agreement you arrive at with your lender; usually it lasts for 30 or 60 days, but a lock can be issued for longer periods of time if the underlying deal being funded is more complex and requires more time to close. You should ask your lender for a written estimate of how long they need to process the loan, and also take into account any other factors that could delay the deal.

Will you be charged for a rate lock?

Longer rate locks usually cost more.

Document gathering

The list of documents you need to provide to your lender will vary based on their underwriting techniques, but you’ll pretty much always need to provide some variety of the following:

  • Copy of Driver’s License or other official government photo identification
  • Past two years’ worth of personal tax returns (including all pages and schedules)
  • Past two years’ worth of W2 (salary) and/or 1099 (freelance) tax documents
  • Past month’s worth of paystubs if employee OR past two years’ worth of business tax filings
  • Past two months’ worth of ALL bank statements, including checkings and savings accounts
  • Most recent statement from asset accounts such as retirement and brokerage accounts
  • Permission and information to pull credit report

The lender needs this documentation to assess your ability to repay the loan so that they can decide whether to issue you a loan, and if so, what interest rate to charge you to compensate for the risk that they take.

The sooner you gather these documents, the better, because closing a deal takes time due to all the coordination between members of your team.

Choosing a home

Once you find a home within your budget that you're happy with, submitted an offer to the seller, gotten that offer accepted, and you’re satisfied with the results of the home inspection, you’re ready to move forward with financing, aka actually getting a mortgage loan!

Appraisal

The appraisal is a third party evaluation by a trained professional, conducted on behalf of the lender to determine whether the price you’re paying for the property is within fair market value. It usually costs around $300 and is added to the closing costs.

If the house you’re buying doesn’t appraise, it basically means the appraiser thinks your offering price is too high compared to the market. (You can never underappraise since the lender will happily accept the lesser risk of you having more equity in the property.) This is a real possibility in hot real estate markets where houses are flying off the shelves.

The lender won’t loan you more than the appraised value of the home, so if this happens, you have a few options:

  1. If there’s enough time left before the agreed upon closing date, you can consider trying another lender. However, this decision is still dependent on luck since the new lender’s apprasial may come back at the same (or even lower!) price, leaving you stuck still.
  2. You can choose to pay the difference from the appraisal value to your offer out of pocket.
  3. You can renegotiate with the seller to see if they’ll take a lower price on the property.
  4. Assuming you did not waive the financing contingency in your contract, you can walk away from the purchase and get your earnest money back and try again with a different property.

Closing Costs

Closing costs are extraneous costs beyond the down payment associated with getting a mortgage - some of them are occasionally wrapped into the mortgage, but most of the time they’re paid separately at or before closing (hence the name). Usually they’re paid to third parties for services rendered to help process the mortgage.

They add up to quite a bit, and many people have had a very unexpectedly high bill surprise them on closing day. Be prepared and determine what your closing costs are so you can have that money ready and go through a smooth close!

A lot of people just take closing costs for granted and don’t question them - you should be an informed consumer and ask your mortgage banker to walk you through each line item prior to closing in order to understand what you’re paying for, how the cost is calculated, and whether it’s necessary.

Here’s a list of common closing costs along with a guesstimated price range:

Appraisal (up to $450)

This is paid to the appraisal company to confirm the fair market value of the home.

Credit Report (up to $30)

a credit report pull to retrieve your credit score and from all three major credit bureaus: Equifax, Experian, and Transunion. Your consumer pulled report and the scores requested from the internet from any place other than myfico.com are not sufficient since they’re not official nor always accurate.

Closing Fee / Escrow Fee (approximately 0.2% of purchase price + $250)

paid to the title company, escrow company and/or attorney for conducting the closing which transfers the title from one owner to another and gives you keys to the house. Some states require the presence of a real estate attorney at the closing as well.

Title Company Title Search / Exam Fee (varies greatly)

paid to the title company for going through an in-depth search of the property's records to make sure that nobody else has a claim to the property.

Survey Fee (up to $400)

paid to a survey company to verify all property lines, to make sure there all structures (including fences, sheds, pool, guest house, etc., for both the purchasing property and all neighboring units) are within property limits; not always required in some states.

Flood Determination or Life of Loan Coverage (up to $20)

paid to a third party to confirm whether the property is located within a flood zone, in which case you will need to buy flood insurance separately on an annual basis.

Prepaid Interest (varies depending on loan amount, interest rate and time of month you close on your loan)

paid at closing to lender to handle the prorated interest accrued until the first of the next month.

Homeowners’ Association Transfer Fees (~$250)

paid by seller to HOA to transfer responsibilities to new owner. Includes documents which show that the dues are paid current, how much the dues are, as well as copies of the association’s financial statements, minutes, and notices. The buyer should review these documents to determine if the Association has enough reserves in place to avert future special assessments, check to see if there are special assessments, legal action, or any other items that might be of concern. Also includes association by-laws, rules, and regulations.

Property Tax (dependant on municipality, usually 0-4% of home value)

both buyer and seller pay their own prorated portions to the municipal / city government which sets the rate to support local infrastructure.

Courier Fee (up to $30)

paid to title company to covers the cost of transporting documents to complete the loan transaction as quickly as possible.

Lender's Policy Title Insurance (Calculated from the purchase price based on a rate table; varies by company)

insurance to assure the lender that you own the home and the lender's mortgage is a valid lien. Similar to the title search, but sometimes a separate line item.

Owner's Policy Title Insurance (Calculated from the purchase price based on a rate table; varies by company)

insurance policy protecting you in the event someone challenges your ownership of the home.

Homeowners' Insurance ($300 and up)

paid to insurance company to cover possible damages to your home from some natural disasters and other hazards. Your first year's insurance is often paid at closing.

Escrow Deposit for Property Taxes & Mortgage Insurance (varies widely)

Often you are asked to put down two months of property tax and mortgage insurance payments at closing.

Transfer Taxes (varies widely by state & municipality)

regional tax paid when the title passes from seller to buyer.

Recording Fees (varies widely depending on municipality)

fee charged by your regional government, usually city or county, to update public land records with your new transaction.

Processing Fee (up to $1,000)

paid to lender to reimburse the cost of processing the information on your loan application.

Underwriting Fee (up to $795)

paid to lender to cover the cost of researching how much to approve to you for the loan.

Loan Discount Points (~0-2% of loan amount)

prepaid interest paid to lender as a lump sum on closing that lowers your monthly payment for the life of your loan, already specified in the loan terms. One point is one percent of your loan amount.

Wood Destroying Pest Inspection and Allocation of Costs (~$120)

paid to third party inspector to look for evidence of termites, dry rot, or other wood damage; not always required but definitely strongly recommended for frame houses.

What NOT To Do

Dont bank

Don’t open or close bank accounts, or transfer a lot of funds from one account to another, especially the money for your down payment since the lender will need to know source of funds.

Dont credit

Don’t apply for new credit since changes in credit score may impact your ability to qualify for a mortgage or get a lower rate. New credit accounts reduce your average credit history length which in turn can reduce your credit score.

Dont car

Don’t make large purchases on credit because changing debt ratios may impact your ability to qualify for a mortgage.

Dont briefcase

Don’t keep any change in your job, title, or pay structure a secret from your lender since your paycheck is the main indicator of your ability to repay the loan.

Dont box

Don’t schedule movers, utilities, etc. until after the close happens, since there’s no 100% guarantee that you will close until you actually do.

Dont insurance

Don’t wait to shop for homeowners’ insurance because it’s a requirement for a loan, so you’ll need to have quotes in hand before you can qualify.

Dont calendar

Don’t schedule your closing date too tightly; try to leave plenty of room (at least one month) to give

Dont travel

Don’t have plans to travel near the closing date since you’ll need to be present in person to close. It’s possible to give the power of attorney to a third party to sign in your stead, but that’s generally a headache requiring additional paperwork and review.


Disclaimer: The materials provided are for informational purposes only and is presented without warranty. It is not financial or legal advice and use of the information is at your own risk. To the maximum extent allowed by law, FranceGothic disclaims any and all liability in the event any information, commentary, analysis, opinion, advice and/or recommendations prove to be inaccurate, incomplete, or unreliable. You should consult with a professional and do your own due diligence before making any financial decisions.