The Loan Process

The 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.

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.

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) which the
borrower will receive within three days of the submission of the application to
the lender.

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.

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.

Credit Report
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
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.

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 low 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 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.

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.

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.

Closing
Once the loan is approved, the file is transferred to the closing and
funding department. The funding department notifies the broker and closing
attorney of the approval and verifies broker and closing fees. The closing
attorney then schedules a time for the borrower to sign the loan documentation.

At the closing the borrower should:

• · Bring a cashier’s 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 closing attorney 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 closing
attorney arranges for the mortgage note and deed of trust to be recorded at the
county recorder’s office. Once the mortgage has been recorded, the closing
attorney then prints the final settlement costs on the HUD-1 Settlement Form.
Final disbursements are then made.

Summation
A typical ‘A’ mortgage transaction takes between 14-21 business days
to complete. With new automated underwriting, this process speeds up greatly.
Contact me today to discuss your particular mortgage needs or Apply Online and I
will promptly get back to you.