The Loan Process
- Pre-Qualification
- Mortgage Programs and Rates
- The Application
- Processing
- Required Documents
- Credit Reports
- Appraisal Basics
- Underwriting
- Closing
- Summation
Pre-Qualification
Pre-qualification starts the loan process. Once a lender has gathered information
about a borrower's income and debts, a determination can be made as to how
much the borrower can pay for a house. Since different loan programs can cause
different valuations a borrower should get pre-qualified for each loan type
the borrower may qualify for.
In attempting to approve homebuyers for the type and amount of mortgage
they want, mortgage companies look at two key factors. First, the borrower's
ability to repay the loan and, second, the borrower's willingness to
repay the loan.
Ability to repay the mortgage is verified by your current
employment and total income. Generally speaking, mortgage companies prefer
for you to have been employed at the same place for at least two years,
or at least be in the same line of work for a few years.
The borrower's willingness to repay is determined by
examining how the property will be used. For instance, will you be living
there or just renting it out? Willingness is also closely related to
how you have fulfilled previous financial commitments, thus the emphasis
on the Credit Report and/or your rental payment history.
It is important to remember that there are no rules carved
in stone. Each applicant is handled on a case-by-case basis. So even
if you come up a little short in one area, your stronger point could
make up for the weak one. Mortgage companies couldn't stay in business
if they didn't generate loan business, so it's in everyone's best interest
to see that you qualify.
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Mortgage Programs and Rates
To properly analyze a Mortgage Program, the borrower
needs to think about how long they plan to keep the loan. If you plan
to sell the house in a few years, an adjustable or balloon loan may make
more sense. If you plan to keep the house for a longer period, a fixed
loan may be more suitable.
Shopping for a loan is very time consuming and frustrating.
With so many programs to choose from, each with different rates, points
and fees, an experienced mortgage professional can evaluate a borrower's
situation and recommend the most suitable Mortgage Program. Thus allowing
the borrower to make an informed decision.
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The Application
The application is the true start of the loan process
and usually occurs between days one and five of the start of the loan
process. The borrower completes, with the aid of a mortgage professional,
the application and provides all Required Documentation.
The various fees and closing cost estimates will have
been discussed while examining the many Mortgage Programs and these costs
will be verified by the Good Faith Estimate (GFE) and a Truth-In-Lending
Statement (TIL) which the borrower will receive within three days of
the submission of the application to the lender.
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Processing
Once the application has been submitted, the processing
of the mortgage begins. The Processor orders the Credit Report, Appraisal
and Title Report. The information on the application, such as bank deposits
and payment histories, are then verified. Any credit derogatories, such
as late payments, collections and/or judgments require a written explanation.
The processor examines the Appraisal and Title Report checking for property
issues that may require further investigation. The entire mortgage package
is then put together for submission to the lender.
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Required Documents
If you are purchasing or refinancing your home, and you are salaried you
will need to provide the past two-years W-2s and one month of pay-stubs: OR,
if you are self-employed you will need to provide the past two-years
tax returns. If you own rental property you will need to provide Rental
Agreements and the past two-years tax returns. If you wish to speed up
the approval process, you should also provide the past three-months bank,
stock and mutual fund account statements. Provide the most recent copies
of any stock brokerage or IRA/401k accounts that you might have.
If you are requesting cash-out you will need a "Use of Proceeds" letter
of explanation. Provide a copy of the divorce decree if applicable. If
you are not a US citizen, provide a copy of your green card (front and
back), or if you are NOT a permanent resident provide your H-1 or L-1
visa.
If you are applying for a Home Equity Loan you will need to, in addition
to the above documents, provide a copy of your first mortgage note and
deed of trust. These items will normally be found in your mortgage closing
documents.
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Credit Reports
Most people applying for a home mortgage need not worry
about the effects of their credit history during the mortgage process.
However, you can be better prepared if you get a copy of your Credit
Report before you apply for your mortgage. That way, you can take steps
to correct any negatives before making your application.
A Credit Profile refers to a consumer credit file, which
is made up of various consumer credit reporting agencies. It is a picture
of how you paid back the companies you have borrowed money from, or how
you have met other financial obligations. There are five categories of
information on a credit profile:
- Identifying Information
- Employment Information
- Credit Information
- Public Record Information
- Inquiries
NOT included on your credit profile is race, religion,
health, driving record, criminal record, political preference, or income.
If you have had credit problems, be prepared to discuss
them honestly with a mortgage professional who will assist you in writing
your "Letter of Explanation." Knowledgeable mortgage professionals know
there can be legitimate reasons for credit problems, such as unemployment,
illness or other financial difficulties. If you had problems that have
been corrected (reestablishment of credit), and your payments have been
on time for a year or more, your credit may be considered satisfactory.
The mortgage industry tends to create its own language
and credit rating is no different. BC mortgage lending gets its name
from the grading of one's credit based on such things as payment history,
amount of debt payments, bankruptcies, equity position, credit scores,
etc. Credit scoring is a statistical method of assessing the credit risk
of a mortgage application. The score looks at the following items: past
delinquencies, derogatory payment behavior, current debt levels, length
of credit history, types of credit and number of inquires.
By now, most people have heard of credit scoring. The
most common score (now the most common terminology for credit scoring)
is called the FICO score. This score was developed by Fair, Isaac & Company,
Inc. for the three main credit Bureaus; Equifax (Beacon), Experian (formerly
TRW), and Empirica (TransUnion).
FICO scores are simply repository scores meaning they
ONLY consider the information contained in a person's credit file. They
DO NOT consider a persons income, savings or down payment amount. Credit
scores are based on five factors: 35% of the score is based on payment
history, 30% on the amount owed, 15% on how long you've had credit, 10%
percent on new credit being sought and 10% on the types of credit you
have. The scores are useful in directing applications to specific
loan programs and to set levels of underwriting such as Streamline, Traditional
or Second Review, but are not the final word regarding the type of program
you will qualify for or your interest rate.
Many people in the mortgage business are skeptical about
the accuracy of FICO scores. Scoring has only been an integral part of
the mortgage process for the past few years (since 1999); however, the
FICO scores have been used since the late 1950's by retail merchants,
credit card companies, insurance companies and banks for consumer lending.
The data from large scoring projects, such as large mortgage portfolios,
demonstrate their predictive quality and that the scores do work.
The following items are some of the ways that you can improve your credit
score:
- Pay your bills on time.
- Keep Balances <50% used
on credit cards.
- Limit your credit accounts to what you really
need. Accounts that are no longer needed should
be formally cancelled since zero balance accounts
can still count against you.
- Check that your credit report information is
accurate.
- Be conservative in applying for credit and make
sure that your credit is only checked when necessary.
A borrower with a score of 680 and above is considered
an A+ borrower. A loan with this score will be put through an "automated
basic computerized underwriting" system and be completed within minutes.
Borrowers in this category qualify for the lowest interest rates and
their loan can close in a couple of days.
A score below 680 but above 620 may indicate underwriters
will take a closer look in determining potential risk. Supplemental documentation
may be required before final approval. Borrowers with this credit score
may still obtain "A" pricing, but the loan may take several days longer
to close.
Borrowers with credit scores below 620 are normally locked
into the best rate and terms offered. This loan type usually goes to "sub-prime" lenders.
The loan terms and conditions are less attractive with these loan types
and more time is needed to find the borrower the best rates.
All things being equal, when you have derogatory credit,
all of the other aspects of the loan need to be in order. Equity, stability,
income, documentation, assets, etc. play a larger role in the approval
decision. Various combinations are allowed when determining your grade,
but the worst-case scenario will push your grade to a lower credit grade.
Late mortgage payments and Bankruptcies/Foreclosures are the most important.
Credit patterns, such as a high number of recent inquiries or more than
a few outstanding loans, may signal a problem. Since an indication of
a "willingness to pay" is important, several late payments in the same
time period is better than random lates.
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Appraisal Basics
An appraisal of real estate is the valuation of the rights
of ownership. The appraiser must define the rights to be appraised. The
appraiser does not create value, the appraiser interprets the market
to arrive at a value estimate. As the appraiser compiles data pertinent
to a report, consideration must be given to the site and amenities as
well as the physical condition of the property. Considerable research
and collection of data must be completed prior to the appraiser arriving
at a final opinion of value.
Using three common approaches, which are all derived from
the market, derives the opinion, or estimate of value. The first approach
to value is the COST APPROACH. This method derives what it would
cost to replace the existing improvements as of the date of the appraisal,
less any physical deterioration, functional obsolescence and economic
obsolescence. The second method is the SALES COMPARISON APPROACH, which
uses other "bench mark" properties (comps) of similar size, quality and
location that have recently sold to determine value. "This is the most commonly used
value in determining your maximum loan amount."
The INCOME APPROACH is
used in the appraisal of rental properties and has little use in the
valuation of single family dwellings. This approach provides an objective
estimate of what a prudent investor would pay based on the net income
the property produces.
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Underwriting
Once the processor has put together a complete package
with all verifications and documentation, the file is sent to the lender.
The underwriter is responsible for determining whether the package is
deemed an acceptable loan. If more information is needed the loan is
put into "suspense" and the borrower is contacted to supply more information
and/or documentation. If the loan is acceptable as submitted, the loan
is put into an "approved" status.
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Closing
Once the loan is approved, the file is transferred to the closing and funding
department. The funding department notifies the broker and title company
of the approval and verifies broker and closing fees. The title company
then schedules a time for the borrower to sign the loan documentation.
At the closing the borrower should:
- Bring a cashiers check for your down payment and closing costs if
required. Personal checks are normally not accepted and if they are
they will delay the closing until the check clears your bank.
- Review the final loan documents. Make sure that
the interest rate and loan terms are what you agreed
upon. Also, verify that the names and address on
the loan documents are accurate.
- Sign the loan documents.
- Bring identification and proof of insurance.
After the documents are signed, the title company returns
the documents to the lender who examines them and, if everything is in
order, arranges for the funding of the loan. Once the loan has funded,
the title company arranges for the mortgage note and deed of trust
to be recorded at the county recorders office. Once the mortgage has
been recorded, the title company then prints the final settlement
costs on the HUD-1 Settlement Form. Final disbursements are then made.
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Summation
A typical "A" mortgage transaction takes between 21-30
business days to complete. With new automated underwriting, this process
speeds up greatly. Contact one of our experienced Loan Officers today
to discuss your particular mortgage needs or Apply Online and a Loan
Officer will promptly get back to you.
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