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- 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 home buyers 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.
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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) 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.
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
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 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 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 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 recorders 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 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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