You’ve found the perfect house, shopped for a mortgage and chosen a lender. The rest is easy, right? Not always. Before your home loan closes, you will need to make sure all of the paperwork and legal requirements are in order to ensure your loan stays on track. Here’s what you should consider:
The down payment
Your lender will want to know if your down payment is “seasoned” -- that is, if it comes from your own savings, as opposed to being a gift from family or friends. Borrowers who use their own funds tend to be lower risk and so often receive better rates. The lender will typically ask for bank statements from the last 60 days. Any funds that have been in your account for two months are considered seasoned. If you have made a large deposit recently, however, the lender will ask you about its source. If you sold investments for your down payment, be prepared to produce the statements from those transactions. If the money was a gift, the family member may be required to supply a letter confirming that the money is not a loan.
Your reserve assets
Lenders consider you a lower risk if you have liquid assets (cash or investments) that you can draw on should the need arise. Ideally, you should be able to cover at least two or three months of mortgage, tax and insurance payments from these reserves. You will most likely need to make copies of your recent bank statements and be prepared to show them to the lender.
One of the important measures lenders use to determine your ability to carry a loan is your debt-to-income ratio. As a rule of thumb, your debt payments -- including your mortgage, property taxes, insurance, vehicle loans and credit cards -- should not be more than 36 percent of your income before taxes. Lenders also like the total of your housing expenses alone to not exceed 28 percent. To keep your loan on track, be sure to disclose all loans and other financial obligations to your mortgage lender, including alimony and child support payments. If your lender discovers that you have not been fully honest in your application, you risk having your loan declined, even after pre-approval.
Your lender will arrange for your new house to be appraised in order to determine what percentage of the home’s value you are borrowing. This is called your loan-to-value ratio. Occasionally, the appraisal comes in lower than your agreed upon purchase price, and this may affect your ability to obtain the amount of financing you need. For example, you might offer $300,000 for a home, intending to put down 10 percent and obtain a mortgage for 90 percent of that amount, or $270,000. But if the home’s appraised value turns out to be $290,000 ($10,000 less than your purchase price), you may have to make up the difference between the appraised value and the purchase price by increasing the down payment.
The title search
A title search involves looking through legal records to make sure the person selling the house actually owns it, and to see whether there are liens or unpaid taxes on the property. Your lender will hire someone to do this and the process is usually very straightforward, however, if the title search reveals a problem, your mortgage is unlikely to be approved until the issue is resolved. For more on title insurance and why it’s important, read Title insurance basics.
Lenders require that any mortgaged property be insured against fire and other hazards. This protects both the lender and the homeowner in the event of a disaster. Ask your lender about the coverage you need and then shop around to find a policy that meets all these requirements and your personal needs. In some areas, for example, you may be required to have flood insurance.
By understanding all of these steps in the mortgage process and your role in them, you can help keep your mortgage on track and avoid any unnecessary delays.