Understanding the US loan process

Whether you are looking to buy or refinance a home in the States, there are many important documents that will be needed in order for a company to process a loan for you.

Lizzy McNaney-Juster writes. If you are a Brit the process of obtaining the loan will depend on the status you currently hold in the US. Gathering the following documents, and understanding that the procedure of securing a loan in the States is more security conscious than in the UK, should make the process go more smoothly. US citizens/Green Card Holders will need W-2 forms (wage and tax statements) from the past two years and at least one months worth of pay stubs.

If you are self-employed you will need two years of tax returns, three months worth of checking/savings bank statements, and copies of any stock brokerage or IRA/401K accounts. If you own rental property you should provide rental agreements and its current market value.

If you have only been in America a few months and find yourself staring at a brick wall because of the Fair Isaac Corporation (FICO) and trade lines issues (FICO is the organisation that your credit score is referred to) there are several lenders that will now accept your UK credit report.
Non-Permanent Resident Aliens (visa holders) will need a W-2 form (if you have one), a pay stub, a copy of your visa and passport, three months worth of checking/savings bank statements, (if you own a house in the UK) a copy of the most up-to-date transactions and/or most recent mortgage statement, a copy of your UK credit report (this can be obtained from Experian or Credit Expert, and a copy of the rental agreement if you are renting our your home in the UK. Employment/assets verification and copies of the relocation package is also sometimes required. Foreign Nationals (holiday home buyers) would need three months worth of bank statements, a copy of the most up-to-date transactions and/or mortgage statement if you own a house in the UK, a copy of your UK credit report, a copy of your passport, and a copy of the purchase contract.

Deposits/Down Payments
Now you have figured out which category you fall into you need to decide how much you can afford to put down as a deposit. Take into account that the more down payment you put towards the loan the better interest rate you could get. To find the right loan for you, you  need to consider your long-term goals. If you plan to sell the house in a few years you may want to consider an adjustable rate loan.

On the other hand, if you plan to keep the house for a longer time you may want to look at fixed rate loan. Shopping for a loan can be difficult so an experienced loan officer can help you decide what's best for you. A reputable loan officer will also not avoid talking about closing costs (my experience has taught me that if they do avoid this subject, you will pay a hefty bill at closing).

Get Pre-Qualified
Pre-qualification occurs before the loan process actually begins and is usually the first step after the initial contact with the loan/mortgage broker is made. The broker gathers information about the income and debts of the borrower and makes a financial determination about how much you may be able to afford. By getting pre-qualified, or pre-approved, you don't waste time looking for properties that you can't afford. It also puts you in a stronger position when you are negotiating with the seller because the seller knows that your loan is already sorted and being handled by a mortgage broker. This step also helps you close more quickly. Don't hide anything from the broker. Any nasty shocks can wreck a deal. The mortgage officer will be able to deal with most problems and position the loan perfectly.

Applying for the loan
The buyer, now referred to as a 'borrower', completes a mortgage application with the loan officer and supplies all of the required documentation for processing. Various fees and down payments are discussed at this time and the borrower will receive a Good Faith Estimate (GFE) and a Truth-In-Lending statement (TIL) within three days of the application being agreed, itemising the rates and associated costs for obtaining the loan. 

The specific loan programme and rates will be determined at this time. Your lender is required by the Federal Real Estate Procedures Act to provide you with a GFE of the fess that will be due at closing within three days of the 'physical' loan application being made. These mortgage fees, sometimes referred to settlement fess, cover every expense associated with your home loan, inspections, title insurance, taxes and other charges. Closing costs typically amount to between 3 and 5 per cent of the sale price. It's best to wait until you receive the GFE before signing any loan. Remember, the GFE is called an estimate for a reason. If the loan officer cannot give you exact figures they should advise you prior to the GFE being given to you.

Title Insurance
Title insurance insures you against errors in the title search and guarantees that you and your lender retain financial interest in the property. A title search checks for liens, encumbrances and legal errors, as well as fraud, forgery, missing heirs or divorce proceedings that could affect your rights of ownership, possession and/or use of the property.

The required title insurance only protects the lender, so if the property has a long and checkered history, you may want to take out a separate owner's title insurance policy protecting yourself. If the property is relatively new, you may be able to lower the cost of the insurance by asking the insurer for a reissue rate if there have been no claims against the title since the previous search was done. If you and the seller are both getting the insurance, you may save money by using the same insurer, who then only has to research the property once for both of you.

Ways to save at closing
At closing you may have to put aside money into special escrow accounts to insure that such things as private mortgage insurance (PMI) property taxes and homeowners insurance are paid on time.  Federal law limits the amount of escrow 'cushion' to two months of payments. Be sure to ask the lender what escrow payments will be required at closing. Some companies may waive escrow requirements if you pay higher interest rates.

Many closing costs are standard, however, and won't vary from lender to lender, for instance appraisals, credit reports, title insurance, government stamps and recording fees – these are sometimes referred to as 'hard costs'. Others, though, may be eliminated simply by opting out of a service, such as overnight delivery of documents. If a fee seems vague or questionable, ask someone. Some mortgage companies include 'junk fees' that you can eliminate or reduce.

All mortgage loan payments are due on the first of the month; you can avoid or reduce the prepaid interest due by closing on or near the end of the month. Remember, you can always negotiate with the seller to have them split or pay outright some of the closing costs. This is sometimes referred to as 'Sellers Concessions'. Your real estate agent should negotiate the best possible deal for you on this. The Real Estate Settlement Procedures Act also prohibits 'kickbacks' among the settlement providers and stops the property seller from compelling the buyer to use a particular title insurance company (a law that a buyer should be very aware of).

Obtaining Loan Approval
Once the signed loan application has been received by the mortgage broker, the loan approval process begins immediately. The loan is passed to the lender or finance provider, and the underwriter, sometimes known as 'the higher power, then starts their part of the job. This involves them verifying your credit history, employment history, and assets.

To improve your chances of getting a loan approval, make sure you have filled out the loan application completely and honestly. As a 'New Arrival' you may find that you are scrutinised a little more thoroughly than a US citizen would be. Please don't take it personally. You too will become as protective about America as everyone else is. Do not make any other major purchases, such as a car, until after the loan is closed. This will affect your debt-to-income ratio and could ultimately kill the deal.

Finally, be sure that you can provide a written explanation for any unacceptable late payments, collections for judgment, change of name, location, etcetera, all of which can be verified if required.

Close the loan
Closing usually happens after between 25 and 45 days of the loan process, although this process can be longer when there are two different countries involved. At closing the lender 'funds' the loan with a cashiers' cheque, draft or wire to the selling party in exchange for the title to the property. This is the point at which the borrower finishes the loan process and actually buys the house.

You will be required to sign the final loan documents in front of a notary public. Make sure that the interest rate and loan terms are what you were promised, and that the name and address on the loan documents are accurate. Bring a cashiers' cheque for your down payment and closing costs if required. Personal cheques are not accepted. Congratulations. The house is now yours and ready to be called 'home'.

For further information:
Brits Finance in USA 

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22 January 2008