With the historically low interest rates currently available, many people are now buying homes for the first time. If you’ve never been through the mortgage application and closing process, you might not know what to expect during this 30 to 60 day window that it takes. To be forewarned is to be forearmed, so here’s what you need to know about the mortgage closing process:
Information you will need handy when applying for a loan
There’s no getting around it. The mortgage process requires a lot of paperwork involving both your own and also the paperwork generated by the lender. Being prepared ahead of time can help you through the home finance process making things easy and efficient as possible.
If you’re considering a refinance or the purchase of a new home, a little prep work and organization can GREATLY help to smooth out the process. The following are the most commonly required information and supporting documentation needed during a residential home loan process:
- Your Social Security number and date of birth (for each applicant)
- Recent Paystubs (covering 30 days) showing year-to-date earnings
- W2 Tax forms from the past two years, or personal returns if you are self employed
- Information on all of your employers for the past two years including the address and the phone number of the Human Resources Department
- Current asset statements (IRA’s, checking/savings accounts)
- Addresses of all properties you currently own or have lived in for the past two years.
- In case of a home purchase, contact information of your realtor along with a copy of either your offer to purchase or sale agreement.
- If you currently have a mortgage loan(s), provide statements indicating terms of loan.
Keep in mind that the lender may require additional documentation they deem necessary to make a final lending decision.
Should I Escrow Taxes and Insurance?
While the vast majority of borrowers choose to escrow their real estate taxes and homeowner’s insurance monthly, still many are not quite sure if it is the most appropriate thing to do in a financial sense. As long as you have a minimum of 20% equity in your property, you actually have the choice of “waiving escrows” or paying the real estate taxes and homeowner insurance on your own when the bills become due each year. The only caveat being that most residential mortgage lenders charge an “escrow waiver fee”, which is commonly .25% or a quarter of one percent of the final loan amount. This is a one-time fee due at the mortgage closing, not something added to the loan’s interest rate.
Upon first glance, one would think that the answer lies in whether you could get a better rate of return on the money that you’d be putting into escrow each month if you kept it and invested it versus the escrow waiver fee. But there are several factors that come into play when considering which way to go. For starters, it is convenient for most folks because it is budgeted for and handled by the lender at no extra cost. This way you’re not hit with a lump sum bill that you hadn’t budgeted for. If you do have a tight budget, this is probably the way you should go.
On the flip side, most home lenders require three months of reserves to start out an escrow account. This is a cushion should the taxes or insurance premium go up (as they generally do) the following year. And if there aren’t enough funds, they hit you up with a shortage which is due either as a lump sum or they will conveniently add it to your monthly payment, which can crimp your budget.
The biggest problem is that escrow accounts can be difficult for the average person to reconcile, although the lender sends an “Escrow Analysis Statement” at the end of the year. But too many people rely on the lender to be correct, and millions of dollars go unaccounted for each year by way of escrow accounts. So the best way forward would be to pony up the fee and waive the escrow account. However, if you’re more comfortable carrying an escrow account, be sure that you can account for every penny flowing in and out of the escrow account. If you don’t understand the analysis statement, be sure to contact the lender and go over it in detail until you do.