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LOAN PROCESS
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 could not stay in business if they
did not generate loan business, so it is 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 he plans 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.
With so many programs to from which to choose, each with different
rates, points and fees, shopping for a loan can be time consuming and
frustrating. 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. With the aid of a mortgage professional, the
borrower completes 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).
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Processing
Once the application has been submitted,
the processing of the mortgage begins. 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 underwriting for final approval.
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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, in addition
to the above documents, to 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:
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 person's 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 have 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. However, they are not the final word
regarding the type of program you will qualify for or your interest
rate.
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 low on credit cards,
Ideally below 50% of the credit card max balance.
-
Limit your credit accounts to what you really need.
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Check that your credit report information is accurate.
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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 not 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 COMPARISON APPROACH, which uses
other "bench mark" properties (comps) of similar size, quality and
location that have recently sold to determine value. 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 underwriter. 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 closing
department prepares the final loan documents and sends them to the
title company. Once received, the title company will prepare the final
settlement statement (HUD 1) and contact the client to schedule their
signing appointment.
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.
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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.
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Bring identification.
After the documents are signed, the
closing attorney returns the documents to the funding department 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.
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