The Loan Process: How Does It Work?

Before You Apply

It's commitment time! Be sure you have shopped around before settling in with one lender and one loan. Once you apply for a mortgage, you must pay a non-refundable application fee of $300 to $400 to cover the costs of an appraisal and credit check. If you want to change your mind on either the lender or the loan, do it now. This is also the time to inquire about the lender's policy on credit problems, if you have any, to see if they're willing to be flexible.

Be Patient

First of all, make sure the loan officer answers all of your questions about the loan application. Be cooperative and patient, but don't be a push over. Ask questions and know what you are getting yourself into. Also know that it is common for a lender to call and requests documents a second or third time. Provide them as soon as possible since every day of delay could cause you to lose your lock-in agreement. But make sure you're treated cordially. There are several federal laws that protect your rights during your loan processing. These laws prohibit lenders from rejecting applicants on the basis of age, sex, race, color, religion or marital status. Stand up for your rights if you feel slighted or discriminated against.

Jumping the Hurdles to Qualification in Special Circumstances

Not everyone can meet the verification standards set by typical loans. However, there are alternative documentation loans available to those in special circumstances.

Skip the Paper Chase

Some loan programs allow the lender to skip time-consuming steps such as writing verification letters to employers, creditors or banks. These alternative loans minimize delays and the aggravation factor. And if you're prepared to make a larger down payment, ask lenders about loans that require only minimal information if your down payment is 20 percent or more.

Are You Self-Employed?

Verifying your income can be tough if you run your own business and write off a lot of business expenses against your income taxes. Even if you make a lot of money, it's not always so easy to demonstrate your gross income. Another alternative is a No-Documentation or Low-Documentation Loan. These loans reduce the paperwork and scrutiny, especially for self-employed people prepared to make a sizable down payment. These loans get around the problem of proving gross income to the lender. Good news is you don't necessarily have to be self-employed to qualify.

What's Up Doc?

What's the prescription for no paperwork? That depends on the lender you ask. In a true No-Doc loan there would be no verification of income, employment or assets. No hunting down of pay stubs, W-2s or tax returns. In a Low-Doc loan, at least one of the factors � income, employment or assets � will be verified but the overall paperwork is significantly less than a standard loan application. Asset verification, for example, might require you to provide bank statements to show you can make a down payment.

What's the Catch?

There is always a catch. The price for these quicker-to-obtain, nearly paper-less loans is typically a down payment of at least 20-25 percent. You will also pay a slightly higher interest rate of about 1/8 to 1/4 percent above the market for standard loans. To figure the extra cost, remember that your monthly payment will be 2-1/2 percent higher for every 1/4 percent you add to your interest rate. Thus, the difference in a monthly mortgage payment for a $200,000 loan at 7.25 percent interest vs. 7 percent would be $33.75 per month.

TERMS TO KNOW

Income

Amount earned or gained; not a return of capital.

Effective gross income

All annual income including salary, overtime and bonus that is regular or guaranteed from all sources.

Fair Housing Act

A law that prohibits discrimination in sales of property or the granting of loans on the basis of race, religion, color, national origin, sex, familial status, or handicap.

Think & Do Reminders

The Application Process

Make an itemized list of the application process-what you need and how to proceed starting now. Include Tips to remember.

Tips to Remember in the Process:

Shop Around

This is your last chance to find the best lender and loan for you. Once you apply you must pay for an appraisal and credit check.

Be Patient

This process can take time and require several copies of paperwork to be passed before it's done.

Be Respected

You have rights. There are laws protecting you from any discrimination during these proceedings. Be sure to be treated well.

Jumping Hurdles

There are some hurdles in the application process. Learn to jump them with ease. The biggest one is the paperwork and verification. Look to a No-Doc or Low-Doc option. List the pros and cons of these types of loans:

The No-Doc Option Pros:

No Paper Chase

These loans don't require verification like other loans so you don't need to chase paper.

Self Employed

These loans are great for people who have trouble verifying gross income.

Time

No verification means less time spent in the loan process.

The No-Doc Option Cons:

High Down payment

These loans require 20-25 percent.

Higher Interest rates

They also come at a higher rate of about 1/8 to � percent above the market.

Less Cash

The cash you could have used for moving and furnishings disappears into the down payment.

POP QUIZ - Pros & Cons of Pre-Approval

Question:

List 3 ways a No-Doc or Low-Doc loan could help you.

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