Navigating the Loan Process

Congratulations!   You are ready to learn how to navigate the steps to your first home! To be a successful homeowner, please read the information and tips in the tabs below.

Applying for Your Loan

If possible, shop for a loan before shopping for a home. You may be able to get prequalified or preapproved for the loan.  This means that based on your credit report and other information, you would qualify for a loan.

Preapproval is better. It means that based on the lender's review of your finances, you are approved for a loan up to a certain amount. If you have a preapproval letter and are making an offer on a home at the same time as someone else, the seller may look more favorably on your offer because there is less chance of the deal falling through.

If you haven't been preapproved for a loan and have made a purchase offer, you will probably have a deadline to obtain a loan. If the lender determines you are eligible for either a First-Time Homebuyer Mortgage or a Mortgage Credit Certificate, you will complete a formal loan application. The lender may require you to pay a non-refundable application fee to cover the costs of the credit report and appraisal of the home.

When you apply for your loan, the lender will ask to see the following:

  • Purchase contract for the home.
  • Bank account numbers, address of bank branch, and latest statement. (Your lender may require previous statements as well.)
  • Signed federal tax returns for the past three years if you were legally required to file tax returns. If mortgage interest or real estate taxes are shown on any of the returns, you will have to write a letter explaining that you did not occupy the property as your principal residence and provide documentation supporting your explanation. (If the home you are purchasing is in a targeted area, the letter will not be necessary.)
  • Pay stubs, W-2 forms for the past two years, or other proof of employment and salary. (If you are self-employed, balance sheets, business tax returns for the past two years and a year-to-date profit and loss statement will be required.)
  • Information about debts, including loan and credit card numbers and names and addresses of your creditors.
  • Evidence of rental payments, such as canceled checks or money order receipts.

After receiving your loan application, the lender will reserve funds with the Montana Housing for either a First-Time Homebuyer Mortgage loan or an MCC tax credit and your interest rate will be "locked in" for 90 days. You also will be required to sign and date a Request for Conditional Commitment.

Some of the items this conditional commitment attests to are:

  • The property will be your principal residence within 60 days of closing.
  • You have not owned a principal residence within the past three years. (If you are purchasing a home in a targeted area, you are exempt from this requirement.)
  • The sales price of the home does not exceed our limits.
  • Your gross annual income does not exceed our limits.
  • No mortgage interest from the loan is being paid to a relative.
  • Your lender also will require the seller to sign an affidavit.

Waiting for Approval

Within three business days of accepting your loan application, the lender is required by law to provide you with an itemized list of costs needed to close the loan. This is known as a "Loan Estimate." The lender will arrange for an appraisal to estimate the market value of the house. If the appraised value is lower than the purchase price, you will have to come up with a larger down payment unless the original sales contract gives you the option to re-negotiate based on a lower-than-expected appraisal.

Another key component for loan approval is your credit report. If there is a negative item on your credit report, the lender may ask you for a letter explaining it. Respond promptly with a truthful statement of what caused the late payment.

Your lender also will verify other items on your loan application, such as your income and employment history, your assets, and your rent payment history. In addition, if you or any co-borrower has been married to someone else or receives alimony or child support, the lender will need a recorded/filed separation agreement or divorce decree that states you or your co-borrower are able to purchase real estate without the intervention of the other party. This is needed so that you can obtain clear title to the property.

Loan Approval

The lender will make the decision to approve the loan based on your ability to repay it, your credit history, your qualification for the loan program, your available savings, and the property itself. In the past, approval of a mortgage has taken 30-60 days. However, automated underwriting enables lenders to process applications in a quicker, more objective, and less costly manner. While the automated process will result in a recommendation about whether your loan meets the criteria for approval, the lender will make the final decision.

The lender's approval of the loan is subject to Montana Housing approval. The lender will send an underwriting package to us and we will review the loan request for compliance issues, and in some cases, for credit and property issues. Once we issue approval, your loan closing can proceed.

If you are approved for an MCC tax credit, the lender will provide you with a completed tax benefit worksheet.

What if My Loan is Denied?

The lender is required to explain the denial decision in writing. Common reasons for loan denial include the following:

  • Insufficient funds. If you don’t have enough money to cover the down payment and closing costs, you might still be able to qualify if you can get a gift from family or friends or use a local down payment assistance program. Find out more about down payment assistance.

  • Insufficient income. If there are extenuating circumstances that the lender didn’t consider, such as a yearly bonus or expected raise, discuss it with the lender to see if that would make a difference in gaining approval. If not, you may need to look for housing more affordable to your income.

  • Too much debt. Lenders approve loans based on a debt-to-income ratio. If your debt is keeping you from qualifying but you have an excellent credit history, you may be able to convince the lender to reconsider. Otherwise, you will need to pay off some of your debt or shop for a less expensive house.

  • Poor credit report. If you are denied credit, you are entitled to a free credit report from one of the three credit bureaus. Review it carefully and be sure to dispute any inaccuracies with the credit bureaus. Ideally, you should do this before applying for your loan. If your credit is poor, it is important to begin paying your debts off as soon as possible to build a stronger credit history. A housing counselor can help you develop a plan.

  • Low appraisal. If the appraisal comes back lower than expected, you have a few options. You can put down a larger down payment so that the loan is only for the appraised value of the property. Or, you can renegotiate with the seller (if permitted by your sales contract) for a lower purchase price.

Your application for the MCC tax credit will be denied if your income exceeds the limits, if the sales price of the home is too high, or if you don’t meet other program requirements.

If you are unable to secure a loan and need to put your dream of a new home on hold, contact a housing counselor to discuss how you can to buy in the future. Also, review the tips in Your Path to Home Ownership.

If you suspect that your application was denied unfairly, report it to the U.S. Department of Housing and Urban Development.

Closing on Your New Home

When your loan is approved, a closing date is set. You are now ready to take the final step toward your first home. Immediately before closing, you should do a walk-through of the home to ensure that the seller has fixed any deficiencies noted in the home inspection that were his or her responsibility. If the deficiencies cannot be corrected before settlement, the settlement attorney may withhold funds from the seller to pay for the repairs, subject to the lender’s approval. If there are major problems or violations of the purchase contract, you may delay settlement until they are corrected.

Prior to settlement, you have the right to review the Closing Disclosure (CD), since the Loan Estimate (LE) you received early in the process is subject to change. Your early review will allow time for any errors to be corrected. In addition, you will need to know the final down payment (minus any earnest funds that you deposited) and closing costs, since those funds often must be paid with a certified or cashier’s check.

At closing, you will sign several documents, including the following:

  • Loan Estimate (LE) – Itemizes the services and charges to you and the seller.
  • Closing Disclosure (CD) – Discloses the annual percentage rate, terms of the loan, the amount financed, and the total payments.
  • The Note – Binds you to pay the lender according to the terms of the loan and details the penalties if you default on the loan.
  • Assignment of Deed of Trust – Secures the note and gives the lender a legal claim to your home if you default.
  • The Deed of Trust – Transfers ownership of the home to you.  You also may need to sign other affidavits required by the lender or state law. In addition, the lender will provide you with a “Notice to Mortgagors of Potential Recapture of Federal Subsidy” at closing. For more information on recapture, read "What If I Sell My House?". After you and the seller have signed all the paperwork and you have paid your down payment and closing costs, the Warranty Deed and Deed of Trust will be recorded. Within one or two days, the property will be legally transferred to you.

Congratulations on making the move to your first home! Now, read information and tips to help you be a successful homeowner.

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