How Do I Apply for a Loan?

• Applying for a loan is different from getting pre-qualified for one.  Getting pre-qualified simply means that a lender suggests a dollar amount that you can borrow based on a list of your assets and liabilities.  When you actually apply for the loan, however, the lender will want to examine documents that prove your worth. 
• Here’s a list of some items a loan officer will probably ask about:

1. Copies of all bank statements for the past three months;
2. Copies of all accounts, including stock brokerage accounts;
3. Most recent pay stub;
4. W2 form for the past 2 years;
5. If you’re self-employed, your last 2 years of tax returns plus a profit-and-loss statement for the year to date;

• Here are some important decisions you’ll have to make at that time:

1. What type of mortgage should you choose?  It all depends on how much risk you’d like to assume. For less risk, you’ll want a fixed-rate.  For more risk, you can try a 7/23 or a 5/25.  And for the most risk, there’s always an adjustable-rate (ARM).  The loan officer should help you decide which is best for your situation.
2. Should you float the rate or lock it in?  If you think the mortgage rate will drop before you close, float it.  If you don’t want to take the risk of it rising, however, lock it in.
3. How long should the lock be?  The longer the rate lock, the higher the rate will generally be.  You should base the length of the lock on when you’re supposed to close the loan.  The shorter the lock, the more important it is to furnish your lender with everything he or she will need to get your loan approved.
4. How many points do you want to pay?  Most first-time borrowers don’t realize that there’s an inverse relationship between the number of points you pay (a point is one percent of the loan amount) and the interest rate you receive.  Points are paid in cash at the closing, but the federal government allows you to deduct them from your income taxes during the year of the closing.  Or you can also pay them over the life of the loan, which will increase your rate.  For instance, if you need a $100,000 mortgage, each point is $1000.  If you decide to “buy down” your loan (paying more points to get the lender to lower your rate) with five points, you’ll need $5000 in cash at closing just to pay the lender.

• You receive two significant benefits from a buy down:

1. A larger tax deduction;
2. A lower interest rate for the life of a loan.

• Every time you apply for a loan, the lender, by law, has to provide you with a “good faith” estimate of your closing costs.  You may even be asked to sign the document, to prove you’ve seen it.
• If the actual closing costs turn out to be significantly higher than the estimate, you may need to consult a real estate attorney to re-negotiate it.  If any charge seems particularly unfair – and was not part of the estimate – you should refuse to pay it.
• Always read every document before you sign it, take a copy with you, and don’t be afraid to ask questions.  It pays to be cautious.