A lender requires detailed information about the borrowers in order to assess their ability to repay a loan. An application will be completed that asks the borrower about their employment, income, credit, assets and existing debts such as car loans, credit cards balances, etc. The borrower is also required to provide documentation such as income tax returns, W-2s, paycheck stubs, and bank statements to verify the information they listed on the application.
Most lenders require the borrower to have a certain amount of money to use as a down payment toward the purchase of the house. For example, if a borrower wants to purchase a house for $150,000.00 and the lender requires a down payment of 5% ($7,500.00), the borrower would apply for a loan of $142,500.00 and make the down payment at the closing.
Through the process of underwriting, the lender will determine if the borrowers are qualified to borrow the amount of money they requested. Any approval at this time would be subject to an appraisal and a title search.
The appraisal is completed by an outside, certified appraiser. The appraisal provides the lender with a market value for the property being mortgaged.
A title search is ordered from a title company. Using the legal description for the property, the title company will research the history of the property. They will then provide the lender with a title insurance policy. The title policy insures there is clear title to the property and the new mortgage will be the priority lien on the property.
When all the requirements are met, the lender grants the loan. The promissory note specifies the interest rate and the repayment terms. The repayment terms specify the amount of the monthly payments and over how many years. The principal amount combined with the interest rate and length of term determines the payment amount. Payments are usually made on a monthly basis. The length of the mortgage typically can be from 10 to 30 years.
To accept the loan the borrowers sign a promissory note that obligates them to repay the mortgage debt. The borrower is responsible to insure the property against fire and other property damage. They are also responsible to pay the property taxes. If the borrower fails to keep any of these obligations, the loan is considered to be in default and subject to foreclosure.
The signing of the documents and transferring of funds and ownership of the property takes place at a closing. During the closing, the lender transfers money to the borrower to purchase the house and the borrower signs the mortgage documents. The borrower also pays the lender any fees associated with borrowing the money. These fees are called closing costs which include origination fees, fees for credit reports, flood certifications, appraisal, recording and title insurance. The closing costs are approximately 3% of the principal loan amount.