Face-to-Face with the Loan Officer

Despite improvement in the economy, the lending environment is still tough. Winning over cautious lenders requires creating a concrete case for a mortgage

By Marilyn Kennedy Melia
CTW Features

Have you ever checked off every item on your to-do list Friday, so that you can relax all weekend?

It's smart to apply the same strategy to homebuying.

First, you worry about what you can afford and whether you qualify for a mortgage. Then, comes the fun part: touring homes and envisioning yourself living there.

In the wake of the credit crisis, however, the business end of buying has taken a more serious turn. Lenders are asking borrowers to fully expose their financial life and are tougher on credit and other factors before they lend out mortgage money.

It can be intimidating, especially for first-time buyers who are unfamiliar with the process. Here, a look at your to-do list, a step-by-step guide to finessing financing:

Evaluate Your Lender

Yes, a lender will scrutinize your money life. But before that happens, make sure the lender passes your test.

Although seeking a mortgage may feel akin to asking for a favor, lenders are in the service business. They should be attentive to your questions, keep you informed about the status of your application and keep the loan on track for a timely closing.

Ask for the name of a loan officer at a lending or banking firm from a real estate agent who sells a lot of homes, suggests David Reed, author of "Decoding the New Mortgage Market" (AMACOM, 2009).

"Good loan officers rely on steady referrals from top agents and they know that if they mess up a transaction they no longer get that agent's business," Reed says.

If you're already banking with an institution you're happy with, apply for a mortgage there, suggests Leslie Linfield, executive director of the Institute for Financial Literacy, Portland, Maine.

Applying where you bank often means you don't have to gather records showing your savings, since the bank has the information, adds Jim Linnane, senior vice president of Wells Fargo Home Mortgage, Chicago.

Do a little comparison shopping before you walk in, suggests Barry Zigas, director of housing policy for the Consumer Federation of America. Study mortgage ads in the newspaper, says Zigas, or call a few firms and ask what their best rate on a mortgage of a certain size, and ask about fees.

If you have limited funds for a down payment, you may only qualify for a government-insured FHA loan. Find FHA-approved lenders at www.hud.gov. Moreover, first-time buyers with limited incomes may qualify for mortgages backed by states or localities, says Linfield. Many of these programs also are listed on the HUD site.

Prepare with Pre-Approval

Even if you wanted to put pleasure before business, today some real estate agents won't take you out to look at homes unless you're "pre-approved" for a mortgage of a certain amount and can submit a purchase offer with confidence, explains Brian Seibert, president of the Michigan Association of Mortgage Professionals.

Often, a pre-approval is free or available for a minimal fee. A lender will take your financial vital signs - credit score, income and savings - and then provide a preliminary idea of the amount you'll be able to borrow.

Some potential borrowers will be advised that they need to improve their credit standing or other factors before pre-approval. A lender should be able to give some guidance on how to boost your financial profile in order to eventually qualify.

Even if you're easily pre-approved, you'll want to be on your best financial behavior to ensure that you do actually qualify for the loan when you formally apply after finding a home.

Know the Terms

While pre-approval means that a lender has confidence in your ability to borrow and repay a loan, remember its only a preliminary judgment.

Your lender may ask for verification of your income and assets, including documents like your income tax returns, W2 forms, pay stubs and checking account and bank statements. If you don't get the paperwork in relatively quickly or if it doesn't match what you've told the lender, you may not get the loan.

The pre-approval offer doesn't stretch out forever; it usually must be renewed after 90 days.

Once you find a home and formally apply for a mortgage, make sure you understand all the papers you sign, Zigas says. You will receive a document outlining all the fees associated with the loan when you close on the loan. You may, for example, be charged a fee for an appraisal the lender orders. The fees outlined in this document should closely match what you actually pay at closing.

Knowledge is the key to confident home buying, Zigas says. If you're reading this, you're already following his advice to read as much as possible and ask questions about all aspects of homebuying.

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