Step 10. THE LOAN PROCESS IN ARIZONA FROM APPLICATION TO CLOSING
When you are buying a home, you will want to know the details of the loan process in Arizona from application to closing.
Loan Application and Required Disclosures
As soon as you have a fully accepted purchase contract, you need to contact the loan officer that you have been working with in order to let him or her know of your intent to proceed with the mortgage application process. Your real estate agent will probably advise you that you have to move quickly because you are now contractually bound to close the purchase transaction by an agreed upon date. The legal term for this is “Time is of the Essence”.
Your loan officer will set an appointment with you to complete the loan application. The loan application is commonly completed face to face, by phone, by internet or by mail. The application form that is almost always used for a mortgage is referred to as a 1003 (Ten-O-Three). It is officially known as Fannie Mae Form 1003 or the Universal Residential Loan Application. It hasn’t changed much over the years other than updates required when there are changes to governing laws. The loan application contains the following sections:
Type of Mortgage and Term of Loan – Examples of a type of mortgage include Conventional, FHA, VA and USDA; however, there are other loan types. This section will also include the loan amount, the interest rate and the loan term (the period of time you agree to make regular payments) and the amortization type (commonly a fixed or adjustable interest rate).
Property Information and Purpose of Loan – This section contains the property address and other information specifically related to the home that you are buying. It will cover the purpose of the loan (typically purchase vs. refinance) and how you intend to occupy the home (primary residence, second home or investment property). It also will cover how you will hold title and your source of funds required to close the loan. This amount includes your down payment.
Borrower Information – This section is where you will provide personal information such as your name, social security number, date of birth, years of school completed, marital status, how many dependents you have and their ages, the address(es) where you have lived for the last two years, your mailing address and whether you rent or own where you currently reside.
Employment Information – Here you will provide your employment information that includes the name and address of the company where you work, your job title, your work phone number and your length of employment. You must provide this information for all of the jobs you have had in the last two years.
Monthly Income and Combined Housing Expense Information – This section will detail all of your current disclosed sources of income, your current rent or mortgage payment and the proposed payment for the new loan. It will break down the payment into any of the applicable items such as principal and interest, taxes, insurance, mortgage insurance and monthly homeowner association dues.
Assets and Liabilities – This section covers the details of the disclosed assets that you intend to use to meet the loan approval requirements. You are required to disclose all of your current liabilities with your obligated monthly payments because the lender needs this information in order to determine your ability to repay the loan. You must also provide details of any existing real estate that you currently own.
Details of Transaction – This section covers various details of the mortgage loan including the purchase price of the home, your closing costs, loan amount and amount of required cash to close. This section is completed by the loan officer and is for your benefit. You should review and make sure you understand this information.
Declarations – This section asks you a series of standardized questions related to any current legal issues, any past or recent major credit issues (such as bankruptcy or foreclosure), any other debt obligations not previously disclosed in your liabilities, if you are a US citizen or permanent resident alien, if you intend to occupy the property as your primary residence and if you have owned property in the last three years. You are required to answer Yes or No.
Acknowledgement and Agreement – In this section you acknowledge that the information that you have provided is true and accurate and agree that the lender can verify the information. This is where you sign and date the application.
Information for Government Monitoring Purposes – This section is where information related to your ethnicity, race and sex is requested by the Federal Government to monitor that lenders are in compliance with laws pertaining to equal credit opportunity, fair housing and home mortgage disclosure. You are not required to furnish this information but are encouraged to do so. It is illegal for a lender to discriminate based on this information.
Along with your loan application, you will be provided a batch of various disclosure forms that you are required to sign and date. Which forms you will receive and are required to sign depend on the loan program for which you are applying, different federal laws and the laws governing mortgage lending in the state where the property is located.
The following is a list of some the various important laws governing mortgage lending that result in the disclosures that you receive at the time of application.
Truth In Lending Act (TILA) -Initially passed in 1968 and revised various times since then, this federal law requires that mortgage lenders clearly disclose rates, terms and fees in a standardized manner to protect borrowers and allow them make informed decisions.
Real Estate Settlement Procedures Act (RESPA) – This act became effective 1975 and has been revised various times to provide additional protection to borrowers. It requires mortgage lenders disclosure relevant costs within certain timeframes and in a specific manner. It also prohibits kickbacks in real estate transactions.
TILA-RESPA Integrated Disclosure rule (TRID) – TRID attempts to make borrowing easier for consumers to understand by simplifying and combining certain TILA and RESPA disclosures. It establishes new disclosure requirements and implements requirements imposed by the Dodd-Frank Act. For example, in the past a mortgage lender would provide a disclosure called a Good Faith Estimate for fees and another Truth-In-Lending disclosure that covered the rate, term and finance charges at the time of application. These two forms have been replaced by one disclosure called the Loan Estimate.
Equal Credit Opportunity Act (ECOA) – This law was originally enacted in 1974 to prohibit discriminatory lending practices against women. It has been amended since then to add more protected classes. It now makes it unlawful to discriminate against a loan applicant with respect to sex, marital status, race, color, religion, national origin, age (provided the applicant has the capacity to contract), or because all or part of the applicant’s income derives from any public assistance program.
Fair Housing Act – Title VIII of the Civil Rights Act of 1968 prohibits lenders from considering your race, color, national origin, religion, sex, familial status, or disability when applying for residential mortgage loans.
Home Mortgage Disclosure Act (HMDA) – HMDA requires financial institutions to report information collected on mortgage applications to make sure that they are serving the housing credit needs of the neighborhoods and communities in which they are located. It also requires the collection and disclosure of data about borrower characteristics to help identify possible discriminatory lending patterns so that the abovementioned anti-discriminatory laws can be enforced.
Fair Credit Reporting Act (FCRA) – This act promotes the accuracy, fairness, and privacy of information contained in a borrower’s credit report. It restricts access to this information and guides how credit information is used.
Fair and Accurate Credit Transaction Act (FACTA) – FACTA was passed in 2003, and amends the Fair Credit Reporting Act. It allows consumers to request and obtain a free credit report once every twelve months. It also contains provisions to help reduce identity theft and requires secure disposal of confidential consumer information.
Gramm-Leach-Bliley Act (GLB) – Part of GLB created safeguard rules that require financial institutions to have reasonable policies and procedures to ensure the security and confidentiality of customer information. It also requires financial institutions to disclose to consumers their information sharing practices.
Homeowners Protection Act – This act establishes provisions for canceling and terminating private mortgage insurance and establishes disclosure and notification requirements.
The Patriot Act – USA Patriot is an acronym. The official name is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. It amended the Bank Secrecy Act of 1970 in order to combat terrorist financing. As a result of the Patriot Act, financial institutions must request information to verify the identities of mortgage applicants and alert law enforcement when suspicious activity or individuals are identified. Mortgage lenders must also disclose to applicants that they are requesting information to verify their identity to comply with the act.
The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) – In response to the mortgage meltdown, the SAFE Act was passed in 2008 to create nationwide licensing requirements for mortgage loan originators (loan officers). It created a nationwide registry called the Nationwide Nationwide Licensing System (NMLS) and it requires that all loan officers obtain an identification number for the system and disclose their NMLS ID to borrowers. It also allows consumers free access to the database to look up the employment history of a loan officer and any publicly adjudicated disciplinary action against him or her.
Arizona Specific Mortgage Disclosure Laws
Advance Fees Disclosure – Arizona law requires a mortgage lender to notify an applicant in writing if they require any fees to be paid in advance (before the closing appointment when the final loan documents are signed) in connection with a mortgage application. There must be a written agreement that details the amount charged for the application, an appraisal and a credit report. Further, the agreement must specify if the fees are refundable or non-refundable whether the loan is closed or not and explain the conditions for the return of the advance fees.
Authorization to Complete Blank Spaces – Arizona law says that it is fraudulent for a mortgage company to require or permit an applicant to sign any document (other than specific verification forms) that contain blank spaces that are to be filled in after it has been signed. However, the borrower can sign a document allowing the mortgage company to fill in blank spaces if it specifically states what spaces can later be filled in by the mortgage company.
Also, if you have provided the following six pieces of information on your loan application, the lender is required by federal law to provide you a Loan Estimate within a specific amount of time. These six pieces of information are: (1) your name, (2) your income, (3) your social security number, (4) the property address, (5) an estimate of the value of the property, and (6) the loan amount requested. A Loan Estimate is a form that you receive after applying for a mortgage. It contains the most important details about your mortgage such as your estimated interest rate, monthly payment and closing costs.
The Consumer Financial Protection Bureau offers a good tool that explains the Loan Estimate here.
It is important that you review and sign the disclosures as soon as you can because they expire after so many days. Make sure you understand what you are signing. If you don’t, ask your loan officer questions so he or she can provide you a clear explanation.
When applying for a loan, there are various documents that you will have to provide to support the information that you provided on you loan application. Because each individual’s employment and financial situation is different, the documents required can vary. However, we have tried to provide a comprehensive list. These documents are commonly known as “Mortgage Paperwork” or “Needs List Items”.
Standard Documents Required To Support Your Mortgage Application and Obtain A Mortgage Loan Approval:
- Employment history for the last two years (name of employer, address of employment and phone number — must address any gaps of employment)
- Paycheck stubs for the last 30 days (most current)
- W-2’s for the previous two years
- Signed personal tax returns (including all schedules) from the last 2 years
- Checking and saving account statements for last 2 months (all pages)
- Any assets used for down payment, closing cost, and cash reserves must be documented by a paper trail
- Residency history over the last two years, with name and contact information of landlord (or copy of most recent mortgage statement)
- Legible copy of photo identification for applicant and co-applicant
- Copy of signed purchase contract (with all addendums)
- Name, phone number and email address of your real estate agent
- Name, phone number and email of your insurance agent
Additional Documents Typically Requested If You Are Self-Employed:
- Copies of most recent 2 years corporate tax returns (with all schedules including year-to-date profit & loss)
- Year-to-date profit & loss statement and balance sheet
- 1099s if applicable
Documents Typically Requested For VA Loans:
- DD214 & Certificate of Eligibility
Other Documents That May Be Required Upon Request:
- Letters of explanation for recent credit inquiries, derogatory credit, address discrepancies, employment gaps, non-sufficient funds notifications, etc.
- Documentation supporting moneys received from social security/retirement/disability, i.e. copies of direct deposit bank statements, awards letter, evidence income will continue for at least 3 years.
- Statements for 401(k)s, stocks, other investments (most recent)
- Relocation Agreement if move is financed by employer, i.e. buyout agreement plus documentation outlining company paid closing costs benefits
- Previous bankruptcy, need copies of petition for bankruptcy and discharge, including supporting schedules
- Divorce Decree if applicable;
- Rental property copies of leases plus mortgage information.
Locking Your Interest Rate
It is fairly standard for a homebuyer to lock in their interest rate once they have an accepted contract and completed application. Many first time homebuyers in Arizona are aware that mortgage interest rates change frequently. If you want to be sure that the rate that is available when you apply is the same rate you receive when you close on your home, you need to obtain a rate lock. A rate lock is a commitment from the lender that your interest rate won’t change between the time you lock the rate and closing, as long as you close within the specified time frame and there are no changes to your application.
Rate locks are typically available for 15, 30, or 60 days. In Arizona, it is typical for purchase contracts to have a close of escrow date that is close to 30 days after the contract is accepted. So, most rate locks are for 30 days. You want to make sure that your rate lock period expires after your close of escrow date. It is possible to lock your rate for an extended period of time, but it will usually cost you more money to do so.
Locking your rate at the time of application gives you peace of mind that the interest rate won’t go up while you are waiting to close. However, it also means that you may not be able to take advantage of a lower rate if rates fall after you have locked the rate. There is an option to float your interest rate. This simply means that you choose not to lock the rate. By doing so, your rate isn’t guaranteed and if rates go down, you can close with a lower interest rate. Likewise, if rates go up, you will close with a higher interest rate. Keep in mind that in this context, lock vs. float is referring to before your final loan documents are signed. It is not the same is obtaining a fixed vs. a variable rate for the life of the actual loan.
In order for you to be sure that your rate is locked, you can check on the top of page 1 of your Loan Estimate. It will tell you if your rate is locked and for how long.
You need to be aware that if the information that the lender is relying upon when the rate is locked changes, your rate may change too. Examples of this is if your loan program, down payment, credit score or income changes. If changes occur after you have locked your rate, make sure you talk to your loan officer to see if your rate lock is still valid.
Finally, you should know that if your rate lock expires before you close, you can extend the rate lock. However, there is typically a cost to extend the rate lock. Again, talk to your loan officer to find out what your options are if you need to extend.
Loan Submission to the Operations Department
After your signed loan application and disclosures are delivered to your lender, he or she will organize your loan file and prepare to submit it to the mortgage operations department. The operations department typically consists of processing, underwriting and closing teams.
The loan processing team is in charge of preparing the loan file for underwriting. The processing team is tasked with making sure that the information and documentation provided is complete, accurate and has not expired. It’s likely that the loan processor will contact you to ask for additional documentation.
In addition, the processing department will communicate with others to verify the information that you provided on your application (ex. employment, tax transcripts, rental history and bank balances).
Finally, they will request all information from third parties that is needed to support the loan file. These items can include title insurance, homeowner’s insurance, appraisal report, flood certification, government loan program items, and down payment assistance.
Once the file is ready, it will be turned over to the underwriting team.
The underwriter is the person that will provide the final approval of your loan application. An underwriter will either approve or decline a mortgage application after they have reviewed the file and have been able to adequately assess the level of risk involved in offering the loan.
The underwriter needs to ensure that the loan file meets all of the guidelines and requirements of the selected loan program. This includes guidelines set by the mortgage lender, the government agency that will insure or guarantee the loan, the agency that is offering the Arizona down payment assistance and the investor who will purchase the loan once it closes.
Many times, after the underwriter has initially reviewed the loan file, they will issue an approval subject to additional conditions. This means that more information is needed in order to issue a final approval. The mortgage lender will contact you to let you know what additional steps are needed to issue the final approval. Once the conditions are met and the final approval is issued, the file is commonly referred to as clear to close.
Once your loan file is clear to close, the mortgage lender will inform you of your final loan approval. At this point, you will be provided a document called a Closing Disclosure. By law, your mortgage lender must provide you your Closing Disclosure three days prior to the date of your loan closing. It is a five-page form that provides the final details about your mortgage loan. It includes the loan terms, your projected monthly payments, how much you will pay in closing costs, how much money you will need to close the loan and additional important information.
The Consumer Financial Protection Bureau offers a good tool that explains the Closing Disclosure here.
After you have signed your Closing Disclosure, your mortgage lender will prepare all of your loan documents and send them to the title company that was indicated in your purchase contract. The title company will set appointments with you, the buyer, and the seller to sign all of the required paperwork. They will instruct you how to deliver your money that is needed to close the transaction. Once you have signed, the necessary documents have been recorded with the county and all monies have been accounted for, you will receive the keys to your new home.
Previous Step: WHAT TO DO AFTER YOUR OFFER IS ACCEPTED
Next Step: WHAT DO YOU HAVE TO DO TO CLOSE ON YOUR NEW HOME
This home buyer series is intended to provide general information regarding the process of how to buy a house in Arizona. It is not intended to provide buyers with legal, accounting or financial advice. You are advised to seek the services of a skilled professional this those fields.
Additionally, this home buyer series does not set forth all qualification criteria for any of the loans described herein; all interested persons must successfully meet qualification criteria and complete the application process to obtain such loans.
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