Buying
commercial real estate may be the most exciting, confusing and stressful
financial transaction you ever undertake. Even if you
have done it several times you can still find the process
complicated and intimidating, particularly when it comes
to getting a mortgage loan. Countless loan documents,
unfamiliar terminology and uncertainty serve to temper
the joy of the purchase. As soon as the sales contract
is signed, obtaining the financing for the purchase
becomes paramount for all but a very few buyers. If
you understand the steps required to qualify for a mortgage
loan, however, much of the stress can be avoided. The
following explanation of the loan application process
is intended to help you through the complexities of
obtaining a mortgage loan.
The next step will probably
be a meeting with a loan officer or other lender representative,
whose job is to begin the collection of information
the lender needs to approve the loan. They will explain
the types of mortgage loans available to you, the
interest rates and fees for each type and the qualification
requirements. During the meeting, the loan officer will
fill out, or assist you in filling out, the loan application
form.
By
this time you should have a good idea of the general
interest rates and fees being charged in the area. The
total cost of a mortgage loan consists of the interest
rate on the loan, origination fees, discount points,
and miscellaneous other charges. One point is equal
to one percent of the amount of the loan and is usually
collected at the loan closing, or settlement. The interest
rate affects the amount of the monthly payment, while
points affect the amount of cash you must have at closing.
Most
lenders will offer a range of interest rate/point combinations
to meet the borrower needs. In general, the higher the
interest rate, the lower the points. For example, if
the current market provides for an 8.5 percent interest
rate with 2 points, a nine percent rate may be offered
at no points. If you are a first-time buyer, the
larger monthly payments on the 9 percent loan may be
easier to handle than the 2 points that will require
additional cash at settlement. If you are a corporate
transferee, however, your company's relocation policy
may pay all or part of origination costs and the lower
rate will have more appeal. The loan officer is prepared
to explain all of your options to you.
When
discussing the terms of the loan, make sure you understand
how and when the rate and fees on the loan are going
to be set. Most lenders will quote a rate and fee at
the time the application is taken and then will guarantee,
or "lock" the rate quote for a specified length
of time. A rate lock protects you from rising interest
rates while the loan is being processed, but it also
typically commits you to close the loan at the rate
and the fee even if rates decline prior to closing.
Lock periods may run from 10 to 30 days, with longer
periods available in some cases at an additional fee.
The lock period must be long enough to get you through
the estimated closing date. A 30-day lock affords you
no protection if closing is at least 60 days away.
You
may have the option to let the rate "float,"
getting the final rate and fees set nearer the settlement
date. If you believe rates are declining and are willing
to run the risk that interest rates could rise during
the processing of your loan, you may select this alternative.
Before you take a floating rate, make sure that the
rise in interest rates will not create a problem for
you because you have insufficient income to cover the
higher mortgage payments. In either case, make sure
you understand exactly the terms of the lock-in agreement.
The
loan application form asks for information on the property
you are buying, terms of the purchase contract and the
employment and financial history of all loan applicants,
including your spouse and/or other co-borrowers. The
lender will verify or not to make the loan, so it is
very important to make sure that it is complete and
accurate.
You
can complete the loan application process much more
easily and accurately if you prepare for it ahead of
time. A great deal of detail will be asked about your
personal finances, including bank account numbers and
balances, current loan amounts and payments, and credit
card account numbers. You will want to be thorough and
precise in your answers, so it will be to your benefit
to assemble this kind of information before the meeting
with the loan officer. The following is a summary of
the major kinds of information required on the loan
application, the documents that may be needed and the
questions that you should be prepared to answer.
Because
the property is security for the loan, the lender will
have an appraisal made of the property, and you need
to have the following information available:
- A
complete copy of the sales contract, including any
addendum's, signed by all parties, showing the full
names of the sellers and buyers as they will appear
on the new deed, the amount of earnest money deposit
and who is responsible for closing costs, origination
fees, etc.
- The
complete mailing address of the property, its age
and its full legal description.
- Name,
address and telephone number of the real estate agent
and/or the seller of the property who will assist
the appraiser in obtaining access to the property.
All
of this information should be in the purchase contract.
If not, consult the Realtor or the seller.
The
loan officer will want the social security numbers of
you and your spouse (or other co-borrowers), age, number
of years of schooling, your marital status, number and
ages of dependents and your current address and telephone
number. If you have lived at your current address less
than 2 years, be prepared to furnish former addresses
for up to seven years. You will also be asked to detail
your current housing expenses, including rent or mortgage
payments, real estate taxes and insurance (your mortgage
payment may include tax and insurance funds). You will
need the name and address of your
Required information includes:
- At
least two years employment history with employer's
name and address, your job title or position, length
of time on the job, salary, bonuses, commissions and
average overtime pay.
- Recent
paycheck stubs and Federal W-2 forms for two years
(some lenders may require full Federal tax returns).
- Records
of dividends and interest received from investments.
- If
you are self-employed, full tax returns and financial
statements for 2 years, plus a profit and loss statement
for the current year to date..
The
loan officer will have you sign a Verification of Employment
(VOE) form. This will be sent to your employer to verify
your employment and earnings. One will be sent to previous
employers if you have been on the job less than two
years. Many lenders now use a general authorization
form which allows them to verify employment and other
financial information on the application.
If
you are relying on income from other sources, such as
rental property, social security or disability payments,
child support, etc., you must provide adequate proof
of the source. Appropriate documents could include canceled
checks, copies of leases, certification of benefits,
divorce decrees and similar evidence.
A
detailed listing of your personal assets is required
on the loan application form. You will need to have
the following information available to complete the
form:
- All
bank accounts, both checking and savings, and money
market accounts, with the name and address of the
institution, name(s) on the accounts, account numbers
and current account balances.
- Recent
bank statements for at least two months.
- Current
market value of stocks, bonds, CDs and other investments.
- Vested
interest in all retirement funds.
- Face
amount and cash value of life insurance policies in
force.
- Make,
model, year and value of automobiles owned.
- Address
and market value of all real estate owned along with
the amount of rents collected, the mortgage on the
property and the monthly mortgage payments (a profit
and loss statement will be required for investment
properties).
- Value
of other personal property such as furniture.
As
with the Verification of Employment, the loan officer
will have you sign Verifications of Deposit (VOD) for
each of the institutions (or a general authorization)
where you have savings or checking accounts. Differences
between the account balances reported by the institution
and the balance you give for the loan application have
to be reconciled, so be sure you have your correct current
balances.
The
lender will look for the source of funds with which
you will make the down payment and pay closing costs
and fees.
You
will be asked to itemize all of your current bills,
loans and other debts, including current balances and
monthly payments. Debts include automobile loans, credit
cards such as Visa, Mastercard and other retail store
accounts, finance company, bank a and credit union loans
and existing mortgages, including home equity loans.
You should be able to give the account or loan number,
the monthly payment, the number of payments remaining
and the outstanding balance.
The
information you provide on the loan application will
later be verified by a credit report ordered by the
lender. Like employment and deposit information, differences
between your figures and those on the credit report
will raise questions and may delay the approval of your
loan. It is to your advantage to take time to get your
data right prior to filling out the loan application.
If
you have had credit problems, you should inform the
lender. Lenders recognize that unemployment, illness,
marital problems or other financial difficulties can
temporarily impair your credit rating. Provide a written
explanation of the circumstances regarding the problem
to be included with the loan application. The lender
must consider such a written explanation as part of
the underwriting analysis. If the problem has been corrected
and your payments have been made on time for a year
or more, your credit will probably be judged as satisfactory.
Chronic late payments, judgments or loan defaults, however,
severely damage your credit standing and may prevent
you from obtaining the financing you need to complete
the purchase.
If
you have been through bankruptcy or foreclosure proceedings
within the past seven years, be prepared to give full
details and copies of applicable documents regarding
them.
You
will also be asked to explain the details if you are
obligated to pay alimony, child support or separate
maintenance. Such obligations are treated like debt
payments by most lenders and will be part of the underwriting
analysis.
You
will be asked to sign a section of the loan application
form which contains your certification that the information
you have provided is correct to the best of your knowledge;
your promise to advise the lender of any material changes
in the information on; and your consent to (1) verification
of the application data, (2) submission of account history
to credit reporting agencies, and (3) transfer of the
loan or loan servicing to successors to the original
lender.
The
last part of the application form requests information
on the race and gender of the applicants. The Federal
Government uses this data to monitor lenders' compliance
with fair housing and equal credit opportunity laws.
Providing this information is strictly voluntary on
your part and has no effect on your loan application.
The lender, however, is required by federal law to request
the information.
Because
of the particular circumstances surrounding a loan application,
the lender may require additional information or documentation
regarding you or the property after the application
has been submitted for approval. Loan officers make
every effort to collect all data at the outset, but
cannot foresee every eventuality. Requests for additional
information are not necessarily bad omens and your primary
concern should be in responding promptly with the information.
At
the time the application is taken, you will probably
be asked to pay for the credit report and appraisal
fees. depending upon the locality and the type of the
loan.
Based
on the information collected in taking the application,
the loan officer may be able to pre-qualify you for
the loan requested, but cannot approve the loan. That
is done by the lender's underwriters after all documents
and information have been received and verified.
After
the loan application has been completed, it will be
turned over to the loan processing department
and then to the underwriter, where the decision to approve
or reject the loan will be made. Loan processors send
out the Verifications of Employment and Deposit and
order the credit report, property appraisal and other
documents. The time it takes to receive these documents
affects the length of time required for approval of
the loan. Processing times vary from
one lender to another, but the loan officer should be
able to give an idea of the processing time for your
application.
After
the lender has approved the loan, you will usually receive
a commitment letter which sets out the terms of the
loan and the length of time for which those terms are
offered. If the loan does not close within the specified
commitment period, the terms are subject to change.
You usually must accept the commitment by returning
a signed copy to the lender within five to ten days
and may have to pay part or all of the origination fees
at this time. The commitment may contain conditions
that you will still have to satisfy, so you should read
it carefully.
In
cases where closing is scheduled soon after approval,
the lender may give you verbal approval instead of a
commitment letter. This is not unusual, but make sure
you understand the terms of the approval.
Once
the commitment letter or approval has been received,
you are assured the financing you need to complete the
purchase of your property and you need to turn your attention
to completing the details required for settlement.
For
many buyers, the period of time between the submission
of the loan application and receipt of the commitment
letter is one of uncertainty and concern. Requests for
additional information, unexpected delays and lack of
communication all serve to increase the tension. There
are a number of things that both you and the lender
can do to reduce the stress.
Keep
in mind that the lender wants to make the loan. Loan
underwriters are looking for ways to approve loans,
not reject them. If you have come to the interview with
the loan officer fully prepared and have provided good
documentation, you have done a great deal to assure
prompt processing of your application and approval of
your loan.
You
and the lender need to make sure that lines of communication
are kept open. Your contact person may be the loan officer,
but often it might be someone in the lender's loan processing
department who can tell you the status of your application.
Remember, however, that it may take several weeks to
process the application and frequent inquiries from
you prior to that time will not speed things up.
You
should be accessible if the lender needs additional
information or documents during processing. If you are
from out of town, use your real estate agent as a contact
if necessary. Quick response to lender requests helps
keep the process on schedule. In order to protect both
you and the lender, mortgage loans require much more
paperwork and legal documentation than an automobile
or other installment loan, and lenders do not ask for
more than is absolutely necessary.
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