Applying for a Residential Mortgage Loan
Applying for a Residential Mortgage Loan
By: Clay Roe, Assistant Vice President

Most people cannot purchase a house for cash, so they borrow money. There are many sources for residential mortgage loans. The first question will be whether you contact lenders directly or use a "go-between."

Over half of all home mortgage loans are generated by "mortgage brokers" - companies that charge you a fee to help you find a loan. If you are considering using a mortgage broker, you need to know the fees that will be charged and who will pay for them. The fees could be paid by the lender, by you, or by both. You should note that the mortgage broker's fee is in addition to fees charged by the lender and can increase the cost of the loan.

Computer loan origination systems (CLOs) allow you to look at loans from a variety of lenders. Real estate companies may have CLO terminals. If you use a CLO, the CLO operator may charge a fee. Find out what the fee is and who pays it - you, or the lender you select.

Of course, you may contact lenders directly. Each lender or mortgage broker will want information about your assets and liabilities and your income. The lender or broker may also want copies of your most recent tax returns and other information. By promptly providing the lender or broker with requested information, you can reduce the chance of delay in processing the loan. In addition to information you provide, the lender or broker will obtain a report on your credit history from a consumer reporting company and will obtain an appraisal on the property that will serve as security for the loan.

Note that if you are turned down for the loan, the lender must tell you why.

Loan Costs
Another article in our library, "Navigating the Complexities of Home Mortgage Financing," discusses different types of residential mortgage loans that may be offered by lenders. In addition to choosing the type of loan that best suits your needs, you need to evaluate the cost of the loan. The loan with the lowest interest rate isn't always the best loan, as there are other costs involved.

"Points" are up-front fees charged by the lender at closing. One point is 1% of the loan amount. Often, you can get a lower interest rate by paying more in points or you may pay fewer points, but get a higher interest rate.

There are other costs or fees that you may have to pay in connection with the loan. These may include attorney fees, title insurance, recording fees, transfer taxes, survey charges, appraisals, and credit reports. You should receive a "good faith estimate" of all of the closing costs you will be required to pay in connection with the transaction. You may want to see if you can obtain such an estimate before choosing the lender.

At some point, you should be provided with a disclosure that shows the estimated or actual Annual Percentage Rate (APR) on the loan. This rate will almost always be higher than the interest rate because it takes into account points, any mortgage broker fees, and other fees that you have to pay in connection with the loan. You may be able to obtain an estimated APR on the loan before you apply.

You may have the option of "locking in" an interest rate or points when you apply for the loan. You should ask if there is a lock-in fee, the duration of the lock-in period, and whether any lock-in fee is refundable if your application is denied.

Monthly Payment
Some lenders may require you to pay with your monthly payment a pro rata portion of annual taxes and insurance on your home. In addition, depending on the amount of the down payment you make, you may be required to pay the cost of mortgage insurance to protect the lender from loss if you default on the loan. You may be required to pay the cost of such insurance as part of your monthly payment or in a single payment at closing. Sometimes, mortgage insurance is required only for a specified period of time. Ask your lender if mortgage insurance will be required, for how long it will be required, and how the lender will require that it be paid.

Now that you have a loan, what can you expect at closing? See "Making Settlement on Your New Home."

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

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