• Application review

If denied, lenders have 30 days from the application date to explain in writing why you were denied a loan. If you were denied because of credit, you are entitled to a free copy of your credit report. If there are any errors, you may challenge them. Some lenders have a second level of review. You also have the right to apply at another institution. This does not guarantee success; you may need to correct problem credit.

• Application Information 

Your lender will need a complete picture of your financial situation. You and the loan officer will fill out the Uniform Residential Loan Application, a four-page document that asks in-depth questions about you, your income, your assets and liabilities and your credit, as well as a description of the property you wish to buy. The process will go much smoother if you have everything with you when first meeting with the loan officer.

• Determining your down payment

As part of the application process, you must state how much of a down payment you can make. Obviously, the bigger the down payment, the smaller the mortgage. As little as three percent down may be possible. Qualified veterans may be able to obtain a loan with no down payment at all through the VA home loan program. On loans with less than 20 percent down, you may be required to purchase private mortgage insurance (PMI) which protects lenders against losses. The cost of PMI will be reflected in slightly higher monthly payments and, possibly, an additional fee at settlement.

• What you will need for the application

• Agreement or contract of sale

• Employment history

• Income information

• Source of down payment and closing costs

• Credit information

• Real estate owned

• Application fee

There are special situations regarding self-employment, rental income and the like which require additional information. Your loan officer can tell you what else you will need. If you are in doubt, feel free to call and ask!

• Application fees

Typically, lenders charge an application fee which covers the cost of a credit report, an appraisal of the property, and possibly, determining if the property is located on a floodplain.

Some lenders may not charge an application fee, but may increase the loan rate or other costs to cover these charges. It's important to have a clear understanding of the services covered by the fee and how they may be paid.

• Application legal requirements

Within three days of your loan application, your lender is required to furnish you with a copy of Settlement Costs, a booklet prepared by the Department of Housing and Urban Development. It describes the settlement process and the typical costs that buyers and sellers often must pay at settlement. You may even want to ask for a copy before applying because the information is valuable.

You'll also receive a Good Faith Estimate of settlement charges, based on your lender's past experience in the area where the property is located.

TYPES OF LOANS

While finding the financing package that best suits your needs can be a complicated process.  Remember that financing options are affected by local and regional real estate and banking practices and in some areas by state law.  Below are some of the different types of loans. 

• Conventional fixed-rate mortgages

This traditional, "tried and true" mortgage option is a loan with a constant interest rate and level, equal payments during a set period of time -- most commonly, 30 years. The biggest selling point of fixed-rate loans is predictability, and they are particularly suited to people with steady incomes.

If lower rates indicate the time is right to refinance, it's a good idea to compare the costs of incurring a new mortgage -- such as prepayment penalties and loan origination costs. You may want to refinance your loan or pay it off early to eliminate thousands of dollars in interest.

• Adjustable-rate mortgages (ARMs)

As the name implies, the interest rate on an adjustable-rate mortgage changes throughout the term to stay current with the present interest rates. ARMs are most popular when rates are relatively high and appear to be dropping and when the difference between the ARM and the fixed-rate is greater than two to three percent. Different lenders offer variations in the front end of their ARM plans, such as the points you pay or discounted initial rates.

• Jumbo loans for bigger homes

Mortgages are called jumbo when they exceed the maximum conventional loan limit, currently $275,000.00-$3 million, set by the Federal National Mortgage Association (FNMA, or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC, or “Freddie Mac”), the largest national investors in mortgages.  Loan to value limits for Jumbo loans range from 60% to 95% depending on the loan amount. 

Because of the greater risk to the lender by the higher-than-average loan amount, some lenders charge slightly higher interest rates for loans in the jumbo category.

• Balloon mortgages

Balloon mortgages are fixed-rate loans. Although based on a longer term, the mortgage must be paid in full with a balloon payment, usually in five to seven years. The advantage is that interest rates are generally set well below current market rates. Many borrowers of balloon mortgages refinance their loan before the balloon payment is due.

• Two-step loans

Two-steps are adjustable rate mortgages that have only one adjustment during the loan term. They let you take advantage of the reduced start rate of an ARM while still enjoying the security of a fixed rate for some time.

Because the adjustment does not usually occur until several years into the loan term, two-step loans are particularly attractive to buyers who do not plan to stay in their new home more than a few years.

Federal government programs

• Federal Housing Administration (FHA) insured loans

Lenders offer FHA mortgages on a new or existing single-family home for as little as three percent down. FHA mortgages are also assumable. Sometimes a premium is required when the mortgage is assumed, then refunded when the note is paid off. Down payments are usually low.

• Veterans Administration (VA) guaranteed loans

The Veterans Administration guarantees lenders against loss if a property is foreclosed due to default. These assumable loans are available to eligible veterans and may be used to buy, refinance, construct or repair a house. If the VA property appraisal is less than the sale price, the borrower pays the difference as a down payment.

• Farmers Home Administration (FmHA) loans

The government makes these loans available to persons of moderate to very low income in rural or non-metropolitan areas.

Alternative financing

• Lease/purchase agreements

Borrowers can lock in the price of a house today and postpone financing for 12 to 18 months with these agreements. The borrower gives the seller a deposit which is applied to the purchase and makes monthly rental payments. Lease/purchase agreements are used by sellers who want to keep a home occupied and receive rental money after they've moved out, and by buyers who are not in a position to commit to a property at a particular time.

• Installment contract

Buyers and sellers work out a contract which states a down payment, interest rate and term. Some contracts have long terms; others are short-term with balloon payments. Regulations about title transfer in a contract sale vary from state to state.

• First mortgages from relatives or others

Sometimes relatives or private investors will purchase a home outright then offer a borrower a first mortgage. The terms are worked out to the mutual satisfaction of both parties.

Note: The Internal Revenue Service will impute higher rates on the lender for loans arranged below market rates.

• Second mortgages

These are used when a borrower needs additional financing to buy a home. This mortgage may be financed by the seller, another lender, relative or investor, and terms are negotiated between buyer and lender. Often, second mortgages are used when a borrower assumes a guaranteed first mortgage with a lower interest rate and needs to make up the difference between the loan and the sale price.

• Equity financing

An equity plan allows buyers to buy new homes by borrowing against a portion of the equity in their present home. A six-month "bridge" is secured on which no monthly payments are required and that money is used to purchase the new home. When the present home sells, the loan is paid off with the proceeds of the sale. If the home doesn't sell within six months, the owner may renew the loan or choose from other "backup" options.

Interest Rates 

• Rate Comparison

Compare not only interest rates, but also other related charges. Lenders are required by the federal government to provide you with the annual percentage rate (APR) in order to help you make comparisons.

The APR is the cost of your credit expressed as a yearly rate, and is generally higher than the note rate. This is because the APR includes the interest rate on which your monthly payments will be based plus related costs such as points, fees for processing the loan and other pre-paid charges.

Points are also important. One point is equal to one percent of the mortgage amount, not the sale price. Points are a one-time cash payment usually made at settlement. Lenders charge points so they're able to offer lower rates while still receiving a fair return on their investment. With most loan types, borrowers can choose to pay fewer points if they are willing to accept a higher rate.