Be Prepared for Mortgage Application and Rate Locks
The mortgage markets are quite volatile right now with rates ebbing and flowing up and down. To get the best deals, one has to be prepared and be prepared to act quickly.
Two things any borrower must factor in are personal preparation and rate locks. Reader Kirsten writes: Nigel, when you refer to organizing your personal paperwork and having a “clean file,” what does that mean? If I plan on making the mortgage app leap at some point, is that something I should know about?
Good question. The amount and type of paperwork you’ll need depend on whether you are self-employed, commissioned or a regular W-2 employee. Regular employees have it the easiest as they need only bring in two years of tax returns, the last two pay stubs, financial information substantiating assets like bank statements, 401k statements and the homeowners insurance agent information.
Commissioned, overtime and other W-2 employees who have been on the job for less than two years can only have their base income considered, unless they use a stated income loan…one of the legitimate uses for them.
Self-employed borrowers need to have their last two years of tax returns to verify income. Let’s remember that only net self-employed income is considered. Some lenders will allow depreciation to be factored back in, but many self-employed workers write off every thing they can on their taxes, thus lowering their income.
When I say organize your paperwork, it means having two years of tax returns, most recent pay stubs if W-2, all proof of assets and insurance information. Why is this important? Because a loan application can’t be fully processed, or approved without it. RESPA asserts that gathering certain basic information constitutes and application and therefore deserves disclosure, but in real life to get a final approval, one needs to have the paperwork.
More importantly, a loan rate cannot be locked in without a complete application. We hear day in and day out about mortgage rates. The media typically reports on rates in a weekly article. However, rates are constantly changing and often change multiple times throughout the day. Sometimes those swings are minimal, sometimes significant. To take full advantage of your mortgage loan or refinance, you’ll want to lock into the best rate you can. That can’t be done without an approved application and once a lock is set, the clock starts ticking to close the loan.
Rate locks come in three different time periods depending on the lender - 15, 30, 45 days. The shorter the lock is the better the rate for both the borrower and the broker. Rate locks cost money to the broker and the lender and cannot be done without an approved, complete application. We are in a time period where short term rates (ARMs) are trending down, while fixed rates are much more volatile, moving in both directions.
When a borrower applies for a mortgage, they are actually doing two things; applying for a loan approval and applying for a rate lock. Remember this when shopping around for mortgage rates.