Eight Steps to Apply for a LoanDon't look back. You're not going that way. - Barbara Johnson
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Eight Steps to Apply for a Loan

Eight steps to applying for a loan.

Step 1:  Decide how much money you need.

The first thing you need to do is determine how much you want to borrow and for what period. Don’t be tempted to borrow more than you need since you will only end up paying more in interest. Now’s the time to know your limitations.

If you are applying for a mortgage, you can determine how much house you can afford by considering:

  • the total amount of equity in your current home (if you own one)
  • the total amount you can put down
  • the amount of the monthly payments you can manage
  • real estate taxes due yearly on your new mortgage
  • closing costs
  • the amount of insurance you will need: Homeowners Insurance and almost certainly Private Mortgage Insurance (PMI) if you put down less than 20%
  • monthly payments on your current debt obligations including credit cards, alimony, child support and student loans – these should not be more than 36% of your pre-tax income

Here's an easy way to figure out how much your payments will be. Try our easy to use loan calculator. It can be used as a mortgage calculator, car loan calculator or for any other kind of loan.


Step 2:  Find out your credit score

Mortgage rates and other interest rates can vary significantly, based on your credit score. Find your credit score.

Your credit score determines your loan approval and annual percentage rate. Getting your credit score allows you to know the position you are in and what to expect. Mortgage lenders and others will check your credit record to see whether they're willing to loan you money, AND to see what interest rate to charge you.

If you have bad credit and your FICO score is low, you'll end up paying a higher interest rate. It may also mean that you must pay a larger down payment than normally required if you do get the loan.

Maintaining your credit score should be an ongoing process. Now is not the time to try to clean up your credit. If you try to dispute items on your credit report, banks may reject you r loan until they are resolves. It can take 60 days to clean up your credit score, so don't apply for new loan until all disputes are resolved and you verified your FICO Score.

Step 3:  Find a lender

Mortgage Lenders and Other Lenders

Finding the right lender is not easy; each lender has its own criteria for lending. Get recommendations from your friends or family and check with the Better Business Bureau. Talk to at least three or four different lenders and ask lots of questions and be sure they adequately answer them.

Check with your credit union. Credit unions provide great rates because they exist only to benefit their members.

Check online sources as well.

Depending on the type of loan you need, you may want a mortgage lender, mortgage broker, a bank or credit union, or an internet lender.

Mortgage Brokers are large companies that offer to find you a mortgage lender that is willing to make you a loan. They originate (find and establish) loans and create pools of loans that they sell to Fannie Mae or Freddie Mac and other loan investors. Some mortgage bankers service the loans they originate; others outsource this responsibility.

Mortgage Bankers originate (find and establish) and also service the loans.

You might also receive a loan from your bank. Depending on the size of the bank, it may act as a mortgage banker or portfolio lender. A portfolio lender holds loans in their portfolio and does not sell in the secondary market.

Credit unions usually act as correspondents to larger institutions, but they may also act as a mortgage banker or portfolio lender.

Step 4:  Compare loans and review the fine print

The right loan for you will have a particular combination of features, service and interest rate. It’s highly unlikely it will be the first deal that’s offered to you.

Prior to making any decision

  • compare the APR
  • closing costs
  • loan terms and
  • monthly payments

Also, review the fine print and inquire about balloon payments, prepayment penalties, punitive interest rates in the event of default, and inclusion of credit insurance.

Factors that Affect Your Mortgage Interest Rate:





Amount of Loan Larger Amount Higher Rates  
  Lower Amount Lower Rates  
Length of Loan Longer Time Higher Rates Borrowing over a longer period may reduce your monthly payments but your loan will cost you more in interest charges. Keep your repayment period as short as you possibly can.
  Shorter Time Lower Rates  
Down Payment Larger Amount Lower Rates A larger down payment – greater than 20% - will give you the best possible rate.
  Lower Amount Higher Rates Down payments of 5% or less will cause you to pay a higher rate since you are starting with less equity as collateral.
Paying Points Larger Amount Lower Rates A one-time charge assessed at closing to discount (decrease) the interest rate. The points you pay are figured into the annual percentage rate.
  Lower Amount Higher Rates  
Closing Costs Larger Amount Lower Rates See our section on “Understanding Fees - Closing Costs
  Lower Amount Higher Rates  
Credit Quality Excellent Lower Rates Your FICO score (credit quality and debt-to-income-ratio) affect the terms of your loan. If you have good credit and your monthly income exceeds your monthly debt obligations, you will get approved at a lower interest rate.
  Poor Higher Rates If your FICO score is low because your monthly income barely covers your minimum debt obligations, your interest rate will be higher.
Income Level Larger Amount Lower Rates  
  Lower Amount Higher Rates  

Don’t take much notice of "unbelievable rates." For example, some lenders may offer "honeymoon" rates as low as 3.99% interest rates on some credit cards. But those eye- catching rates don’t last long. They change to a much higher standard rate after only a few months (the honeymoon period), and the fees can be huge. The loan with the incredible low rate may leave you paying more for many years to come. Or it may only be available under very strict conditions – conditions you don’t want to meet.

Step 5:  Apply for your loan

Eight Steps to Apply for a Loan

Once you decide on the right loan and the right lender, gather the documents necessary to complete the loan application . The loan application will ask for information about your job tenure, employment history , income, your assets ( real estate, vehicles, checking and savings accounts and investments) and your liabilities ( what you owe on your auto loans, installment loans, mortgage, credit cards , household expenses and others). You may also need proof of other income if you have a second job, get paid overtime, commissions/bonuses, interest or dividends, receive Social Security disbursements, VA and retirement benefits, alimony or child support.

So that t he lender can run a credit check on you to assess your credit status, you will also need to supply additional documentation that includes paycheck stubs, bank account statements, tax returns, investment earnings, apartment rental agreement or mortgage balance and monthly payments, divorce decrees, proof of insurance and other documentation.

Step 6:  Receive a Good Faith Estimate (Mortgage Loans)

After your loan application has been completed, you will receive a Good Faith Estimate within three days.  The Good Faith Estimate is a preliminary estimate of the fees associated with closing your loan. It is the basis for the final figures you will receive from the Escrow Company before closing on your loan.

Step 7:  Wait

Once your application is received, the lender will review it in order to confirm that the information you provided is correct. They will assess the risk involved with your particular loan and situation. Many lenders can approve a loan application within minutes.

On a mortgage loan it may take a few weeks and it may feel like nothing is happening. However, in deed, a lot is happening:

  • An appraisal is ordered for the home you are buying or refinancing. The appraiser’s report must comply with rigorous guidelines, which are issued by a large assortment of banks and mortgage lenders.
  • Your credit report is ordered. A complete Residential Mortgage Credit Report (RMCR) takes about 24 hours to obtain.
  • Depending on your loan type, supporting documentation from independent parties must be obtained to verify your income and employment stability that has been written on the loan application.
  • Additional supporting documentation must be obtained regarding your liquid assets to close on the transaction. Forms are usually sent out to banks or investment companies that hold your assets. As you can imagine, it usually takes a few days to get these forms back and then they need to be reviewed.
  • After receiving all this information, the paperwork is put together and submitted for final approval. The loan approval is known as underwriting. Underwriters are responsible for carefully reviewing your loan request and ensuring that it complies with all of the guidelines their institution has created.

Depending on the loan type, you can lock your rate at this time. A locked rate is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is being processed.

Step 8: Close on Your Loan

Once your loan request has been approved, the loan documents are prepared by the lender. At the closing, the lender "funds" the loan with a cashier's check, draft or wire to the selling party in exchange for the title to the property.

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