- The Washington Times - Friday, September 7, 2001

The Internet and sophisticated financial software are changing the business of making home loans, but the steps a home buyer takes from dreaming to settlement day remain the same.

Long before you ever think about buying, you need to be thinking about your credit history. Lenders speculate on your ability to pay them back, basing their speculations on your history of paying others.

If you have a number of late payments and a lot of debt, seek counseling and get those things under control before you try to buy a home.

If your credit is good, there are things you should avoid doing in the months before you apply for a home loan.

You can tarnish your good credit rating by applying for other loans or credit cards just before you seek a home loan.

Lenders don't look favorably on applicants who frequently take on more debt.

Other actions that might damage your ability to buy are job changes, big-ticket purchases or frequent credit report requests just before you apply for a mortgage.

Once you have these items squared away, it's time to take the first step toward getting your new home.

Choose a lender

If you haven't bought a home before or weren't completely content with the lender you used last time, shop around. Don't just look in the phone book, however. You need some recommendations.

"The referral system really is the best way to protect yourself," says Patrick Maloney, division manager at B.F. Saul Mortgage/Chevy Chase Bank. "If you have a Realtor that you trust, she is probably the best person to ask. She will know who is trustworthy and will get the job done."

You also can ask your friends and family. Asking officials at your title company is a good idea, too. They know who can get paperwork done on time with accuracy.

"When a lender messes up a deal for a title company or Realtor, they don't quickly forget about it," Mr. Maloney says.

If you get more than one recommendation and want to compare lenders, here's how to do it. By law, lenders are required to provide you with a "good-faith estimate" of closing costs, points and fees for the loan rate they are quoting you. They will fax, mail or even e-mail this to you. Get these estimates from two or three lenders. Feel free to tell them you are considering other lenders.

"Now you need to compare the good-faith estimates from the lenders," says Greg Fritz, vice president of residential lending at Wachovia Bank. "Lay them out on the kitchen table and look them over. Are the points different? Are the closing costs different? If so, ask why. Call them back, and ask them to explain the differences."

Be sure to ask specific questions if you see different closing costs for similar loan products. Some lenders will include low estimates for "prepaids." These are payments of interest, escrow and insurance that you have to make at settlement. By adjusting the estimate of prepaid interest from 15 days down to five, for instance, a lender can make his good-faith estimate appear hundreds of dollars cheaper. But when it comes to settlement, all the estimates go out the window.

"If you are considering online lenders, check them out the same way," Mr. Maloney says. "Call someone and ask them to fax you a good-faith estimate. Consider their responsiveness. Can they be reached by phone? How quickly did they respond? Do they know what closing costs are for your state?"

As you work through your questions with each lender, consider the chemistry you experience with each of them. You will want to work with someone you find comfortable.

Choose a loan

You need to decide whether you are applying for a fixed-rate, adjustable-rate, balloon or other type of mortgage. Don't worry, you can always change this decision later based on the results of the application and credit scoring.

"Base your loan type on the holding period," Mr. Fritz says. "Once you estimate how long you will live there, your lender can help you decide how to make it the most affordable for that period."

Now you fill out the application. This has become easier with the help of computers, although not every lender has caught up yet. Today's technology allows lenders to electronically check your credit and even analyze the risk you present as a borrower. This limits the amount of paperwork and documentation a lender needs with your application. You should be prepared, however, to provide a lot of documentation up front if your lender isn't completely automated yet.

"A lot of lenders are still asking for all the paperwork up front, even though they throw most it under a desk," Mr. Maloney says. "Filling out paperwork with the addresses of your banks and all that what for? I take applications over the phone in about 15 minutes."

This streamlined application and approval process is known as automated underwriting. While many lenders have automated systems, not everyone has gone as far as B.F. Saul or Wachovia. Using programs such as Desktop Underwriting or Loan Prospector, lenders quickly can tell you what documentation they need, after you complete a short loan application.

"The system goes to all three credit reporting agencies for your credit history and crunches in the other numbers you provided," Mr. Maloney says. "Then it will probably ask for a few documents."

If you have good credit and sufficient cash on hand, you might only have to provide a pay stub and a bank statement or two. The worse your credit and the smaller your down payment, the more documentation it will request.

Get a commitment letter

Soon after you complete your loan application, your lender will be able to give you a preapproval letter. This is an important tool when you go home shopping in today's hot market. Sellers like to know you have already spoken to a lender and can get a loan. Even better than the preapproval letter, however, is a commitment letter.

"A preapproval letter is not a firm commitment," Mr. Maloney says. "It is the opinion of a loan officer based on the information they have, but the last sentence usually says something like, 'Don't construe this to be a commitment … .'"

A commitment letter means your loan application already has gone through the underwriting process, where the approval is actually done. Many lenders don't do underwriting up front, waiting instead until you have a contract on a home and are approaching settlement. If this is how your lender does business and you are marginally qualified to buy, there is a risk of everything falling apart just before closing.

That's why a commitment letter is better for you and a better negotiating tool when you start making offers on homes.

Contract and lock-in

With your preapproval or commitment letter in hand, go home shopping. This isn't terribly easy in today's market, so be patient. Eventually, you will find a home you like. Hopefully, you will be able to afford it. Once you have a ratified (signed by both buyer and seller) contract, go back to your lender with a copy of it.

At this point, you can lock in your rate, if you choose. You don't have to lock in your rate at all. But if you want to because you are afraid rates will rise, this is when it is usually done.

"Once you have a ratified contract, you can usually lock in that day for 60 days," Mr. Fritz says. "Some lenders have programs that will allow you to lock in for 30 days before you find a property, for about $350. But you lose your $350 if you don't find a property in less than 30 days."

Papers to settlement agency

Now that you have a contract to buy a home, your Realtor and lender will forward some paperwork to the settlement agent. He, in turn, will forward some questions to you so the deed can be created. Your lender will need information about your insurance company, and you will usually prepay for one year of hazard insurance. Behind the scenes, the lender and settlement firm will be working to get piles of paperwork in order by the day of closing. Meanwhile, you are busy with other things.

Inspections and appraisal

If you did all the work with your lender correctly up front, the rest of the loan process should be quite easy. Although it doesn't really have anything to do with the loan process, your biggest concern at this point will be the home inspection. An inspection is optional, but for only $250 to $400 you will save yourself heaps of grief down the road.

Your lender will order an appraisal on the property you intend to buy to be sure it is worth as much as you are borrowing. The appraisal will cost $300 to $325, money that you will lose if you back out of the deal for any reason.

If you negotiated well, the appraisal will say that the home is worth what you paid or even more. But what if it is lower than the sales price?

"I've only seen that happen a few times," Mr. Fritz says. "When it does happen, it affects the loan amount and the amount of cash you have for closing."

Remember, you cannot borrow more than the home is worth, in most cases. A borrower making a small down payment may find that all of his cash on hand has to go to bridging the gap between the loan amount and the sales price. That could leave you short when it comes to paying closing costs.

How do you solve such a problem? If you cannot come up with some extra cash, the seller will often lower the sales price to make the deal work. Or the seller may choose to help you with your closing costs.

Wrap up

Now all that is left is a final walk-through usually the day before or the day of settlement and a bunch more paperwork. If your lender has done his job well, the day of settlement will arrive and all the necessary papers will be on the table when you arrive to close.

Be sure to read over the paperwork. If you have been working with a Realtor and lender you trust, everything should be in order. Don't be afraid to ask questions. The piles of papers and long forms can be intimidating, but you are probably signing into the biggest financial commitment of your life.

Make sure you know what you are signing. After you and the seller have signed your names a few dozen times, you are done. Be sure to keep copies of all the paperwork you have signed in a safe place.

And if you were happy with the service you received from your Realtor, lender and settlement agent, get a few business cards from each. One of the kindest things you can do for a friend is make their next home purchase as smooth and trouble-free as yours.

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