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 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.

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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. You will also need to provide the past two months' bank, stock and mutual fund account statements. You may also provide 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 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 several categories of information on a credit profile, including:

  • Identifying Information
  • Credit Information
  • Public Record Information
  • Recent Credit Inquiries

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. 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, Experian, and 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: payment history, amount owed, how long you have had credit, new credit being sought, types of credit you have. The scores are useful in directing applications to specific loan programs, however, they are not the final word regarding the type of program you will qualify for or your interest rate.

A borrower with a score of 740 and above is considered top credit tier borrower, although many Jumbo loan products offer best terms for borrowers with credit scores 760 and above. Borrowers in this category qualify for the lowest interest rates. Rates gradually worsen with lower credit scores on most loan products, depending on loan-to-value (LTV) ratio. Borrowers with lower LTV, such as 60% or less would not be impacted as much by lower credit scores than borrowers with higher LTV. Loan term is also a factor - rates on 10 and 15 year fixed Conforming loans, for example, are not particularly sensitive to credit scores.

Borrowers with credit scores below 660 may have a harder time qualifying for reguar loan programs, depending on factors such as loan term, loan-to-value ratio, amount of debt relative to income and available post-closing reserves.

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.
  • 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.

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.

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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 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 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.

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.

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