Applying for a home loan can be an intimidating process. It's one of the things that can cause first-timers to drag their feet the feet on buying a home. Even homeowners who've been through it before may put off refinancing simply because they fear an extended and cumbersome process.
But it doesn't have to be that way. A home loan application can be a fairly simple and straightforward process. You don't necessarily have to supply a lot of documents – your lender can often pull those up for you. And you don't even have to spend a lot of time meeting with your lender or hanging around a bank – many lenders now allow you to apply for a home loan online.
What do you need to apply for a home loan?
The list of things you need to provide with a home loan application is pretty straightforward.
- Proof of income
- A list of financial assets
- A list of monthly debt payments
- Credit scores
- A sales contract or title for the property
In the case of a joint loan application, information for all applicants must be provided.
As with so many things, the devil is in the details. If your finances are uncomplicated, assembling the above should be fairly easy. However, the more complex your finances are, the more challenging it's going to be to document everything the satisfaction of your lender.
It's like filing a tax return. The more extensive your financial activities, the more forms you need to fill out. People with simple finances may be able to get by with a 1040-EZ.
For some of these, you won't have to supply the actual documents – you can simply authorize your lender to obtain them directly. For example, your lender will pull your credit scores and reports from the credit reporting agencies. They'll also likely want to obtain your tax returns straight from the IRS, which you can allow.
Here's a closer look at the types of things you may need to provide from each category when you apply for a home loan. Exact requirements vary depending on the lender and your own financial circumstances.
Proof of income
W-2 forms, 1099 forms, payroll stubs, federal tax returns, alimony payments received, business profit-and-loss statements, rental property income, spousal income (if applying jointly). Lenders generally want to see that the last two years of annual forms and/or the two most recent pay stubs.
List of financial assets
Bank account statements (checking and savings), investment account statements, CDs, mutual funds, real estate titles, documentation of any other valuable assets or investments. Bank accounts or other liquid assets should show ability to cover the down payment you intend to make. Your financial statements will also provide proof you have funds available to cover the down payment you propose to make.
List of monthly debt payments
This will be a list of your outstanding debts and what you must pay each month for things like credit cards, student loans, auto loans, alimony and child support, outstanding medical bills and the like. For credit cards, list the minimum payment required, even if you're paying more – your mortgage lender wants to know what you're obliged to pay, not what you're actually paying.
You'll generally list these on your loan application form itself; you don't need to list them separately unless you run out of room.
Your lender will verify these through your creditors and credit reports, so be accurate.
Note that your debt payments don’t include ongoing expenses such as utility payments, phone bills, Internet service, cable or satellite TV, etc.
Your lender will obtain your credit scores and reports directly from the credit reporting agencies, so all you have to do is give permission to obtain them. However, it's a good idea to obtain your credit scores ahead of time, so you know what your credit standing is going into the process.
Several months before applying, you should obtain your credit reports from the three major credit agencies and check them for errors, to ensure they're not hurting your score. You're entitled to a free copy of your credit report once a year from each of the three major credit reporting companies, which you can order through the official site at www.annualcreditreport.com.
It's also a good idea to obtain your FICO credit score from at least one of the three companies so you know where you stand. Be sure it's your FICO score; other credit scoring systems are not necessarily comparable. You may need to pay for this, though many credit cards now include an updated FICO score with your monthly statement.
To get the actual loan application process rolling, you'll need to have a completed sales contract if buying a home. If you're simply refinancing, the lender will verify that you have a clean title during the approval process.
What about loan application fees?
You generally should not have to pay any fees up front to apply for a mortgage. Fees are typically billed as part of the closing costs when the mortgage is finalized.
You may be asked to pay a small fee upfront to lock in your mortgage rate for 30-60 days or so. This protects you against possible increases in mortgage rates between the time you submit your loan application and the day you close the loan. It also gives the lender some assurance you won't keep shopping for lower rates while they're processing your application.
You will need to pay fees for such things as the property appraisal and credit report but these should be billed as part of the closing costs and not charged up front.
Some lenders may charge an application fee of several hundred dollars, but this is rarely billed up front. If it is, it should be fully refundable if the mortgage is denied. If not, you should look elsewhere. Be sure to take such fees into account when comparison shopping among loans.
Applying for a home loan
The first step in applying for a home loan is finding the lender you want to do business with. This means shopping around among multiple lenders to compare rates and terms before choosing the one offering the best deal for you.
You'll want to get rate quotes from each, which involves providing basic information about your income, credit and the loan amount you're seeking so lenders can give you an accurate estimate of the mortgage rate and terms they can offer someone with your profile. Better credit = better rates.
When you're ready to apply for a home loan, assemble your financial information and meet with your lender. Your lender can assist you in completing your mortgage loan application and will identify any additional information or documentation you need to provide.
These days, many lenders will let you apply for a home loan online. You fill out an online mortgage application and submit your documentation electronically. Many of your documents may already be in electronic form; otherwise, you can simply scan them and submit them as PDFs. During the process, you can correspond directly with your loan officer by email or instant messaging to handle any questions you might have and guide you through the process.
When you apply for a home loan online, your lender doesn't even have an office in your community or even your state. When it comes time to close the loan, you can sign all the paperwork at the office of an attorney or title company. In some cases, the lender's representative may even come to your home.
When to apply for a home loan
You don't want to wait until you've found the home of your dreams before you start the mortgage loan application process. If you do, you may find that the sellers have accepted another bidder while you've been getting your paperwork in order.
This is why it's a good idea to get preapproved before you start home shopping in earnest. Getting preapproved is a lot like actually applying for a home loan. You'll fill out a mortgage loan application, with the relevant information, and based on that, the lender will provide you with a letter saying you've been pre-approved to borrow up to a certain amount.
This does several things. First, it gets the process going, so once you find the home you want, you can move forward with your application with a minimum of fuss. Preapproval also lets you know how much you can borrow, so you can target homes in the appropriate price range.
Finally, you can show the letter to home sellers as evidence you can qualify for a mortgage, which puts you in a better position when bidding on a home.
Of course, the actual approval will depend on your lender being able to verify the information you've provided on the loan application form and on the home being able to appraise for a sufficient value.
If you're refinancing, you don't need to get preapproved. Once you've determined that you would benefit from refinancing and found a lender you like, you can just go ahead and apply.
Locking your rate
Once you've completed your home loan application, it may take 4-8 weeks before the application is approved and you can close on the loan. Mortgage rates can change quite a bit over that period, so market rates on the day you close may not be the same as the day you submitted your application.
To avoid this, lenders allow you to lock in your rate for a period of time. This means that if rates go up between the time you apply and the day you close, you still get the lower rate you applied for. Rate locks also will often have a provision where you can reset them one time if rates fall by more than a certain amount during that time, so you aren't locked into a higher rate.
You can usually lock a rate anywhere from 30 to 90 days, though longer locks cost more. The cost of the rate lock is typically figured into the loan itself.
Most borrowers lock a rate when they have a purchase contract in hand or when they submit their application to refinance. You can lock a rate while you're still shopping for a home, but that runs the risk the lock will expire before you can find a home and close on the loan and purchase.
What about the down payment?
You don't have to post your down payment at the time you apply for a mortgage. That will be paid at closing, along with any other fees being paid up front. However, you will have to show that you can afford the down payment your loan requires.
That proof is normally provided by your banking statements or other financial assets. If you are receiving down payment assistance from another person (not all lenders allow this) or from a public agency, you will need to show proof the funds will be provided to you.
Most lenders will require at least a 3-5 percent down payment, though you'll need to pay ongoing fees for mortgage insurance if you put less than 20 percent down. The major exception are VA loans, which usually allow no down payment and charge no mortgage insurance. FHA mortgages allow down payments as small as 3.5 percent.
If refinancing, your accumulated home equity serves the same purpose as a down payment.