The Loan Process

Pre-Qualification

Pre-qualification usually starts the loan process. Once we have gathered certain information about the borrower’s income sources and debts, a determination can be made regarding how much they can pay for a home. Due to the wide variety of loan programs available, sometimes the borrower can make some tradeoffs in order to get what they want.

The approval process focuses on two main issues: the ability to repay the loan and the borrower's willingness to repay. The ability to repay the mortgage is determined by verifying and evaluating current employment and total monthly income. Generally speaking, mortgage companies prefer that the borrower has been employed by the same company for the last two years, or have at least been in the same line of work.

The borrower’s willingness to repay is determined by examining how the property will be used. For instance, will it be a primary residence, secondary residence (vacation home) or a rental? Willingness to repay is also closely related to how the borrower has handled previous financial commitments; thus the emphasis on credit scores and information contained in the credit report.

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Mortgage Programs and Rates

To properly analyze a mortgage program, the borrower needs to consider how long they plan to keep the loan and/or own the subject property. If they plan to sell the home in a few years, an adjustable rate mortgage (ARM) or a balloon loan may make sense. If the borrower plans to keep the home for a longer period, a fixed-rate loan may be more suitable.

Shopping for a loan can be very time consuming and frustrating. With many programs to choose from and many different cost structures, an experienced mortgage professional can evaluate your situation and recommend the best financing solutions.

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The Application

The application is the core of the loan file. The borrower usually completes this industry-standard form online, by telephone, or in person. Applicable supporting documentation is typically requested at this time, as well.
Various closing-cost options are discussed for a variety of loan programs and the anticipated terms will be disclosed on the Good Faith Estimate (GFE) and accompanying Truth-In-Lending Statement (TIL) within three business days of the lender's receipt of the completed and signed loan application.

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Processing

Once the borrower’s application has been submitted, the processing phase begins. The processor obtains a credit report, orders an appraisal and requests the escrow/title information. Certain information on the application, such as bank deposits and loan payments/balances are then verified. If the borrower has any credit issues, such as late payments, collections and/or judgments, the processor may request a written explanation. The processor then examines the appraisal and title report to see if either requires further investigation. If not, a complete loan file is assembled and submitted for underwriting.

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Required Documents

If the borrower is purchasing or refinancing a home and earns a salary, they typically need only to provide a copy of the last two paystubs and most recent W-2 statements. If the borrower is self-employed or retired, they may need to provide a copy of their last two 1040s (personal income tax returns). Owners of rental property may need to provide a copy of the lease agreement(s) and/or copies of their past two 1040s.

To help expedite the approval process, the borrower should also provide copies of the bank and/or brokerage statements for the past two months, and the most recent statement for any retirement accounts or other cash assets.

If the borrower is requesting cash-out, they may need to provide a "Purpose of Refi" letter explaining for what they intend to use the net proceeds (we have these forms). If they were recently divorced or are obligated to pay alimony/child support, they should be prepared to provide a copy of the final decree of dissolution, as verification.

If the borrower is not a US citizen, they will be asked to provide a copy of their green card and/or an explanation of their present status with the Immigration and Naturalization Service (INS). In many cases, this may result in a higher down payment requirement and/or a more limited product selection.
If the borrower is applying for a home equity loan, they will need to provide a copy of the note on the current first mortgage, as well as a copy of the most recent statement on any secondary financing.

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Credit Reports

A credit profile refers to a consumer credit file which is made up of information provided by the three main credit reporting agencies. It provides a picture of how the borrower handled prior financial obligations. There are five categories of information on a credit profile:

• Identification
• Employment
• Credit
• Public Records
• Inquiries

Information that is NOT reflected in the credit profile includes race, religion, health, driving record, criminal record, political preference and income.

If the borrower has had credit problems in the past, they should be prepared to discuss them openly and honestly with a mortgage professional, who will assist in writing a letter of explanation. Knowledgeable mortgage professionals know there can be legitimate reasons for certain credit problems, such as unemployment, unexpected illness or other financial difficulties. If there are problems that have been corrected and payments have been on time for the last year or more, these items may be overlooked.
Credit scoring is a statistical method of assessing the credit risks associated with a loan applicant. The scores are based on the following items: past delinquencies, derogatory payment behavior, current debt levels, the balance of an account in relation to the amount of credit available, credit history, types of credit and number of recent inquires.

The most common score is called the FICO score. This score was developed by Fair, Isaac & Company 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 the borrower's income, savings or down payment amount. 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 only factor involved in determining for which loan program the borrower will qualify.

Many people are skeptical about the accuracy of FICO scores. Scoring has only been an integral part of the mortgage process for the past few years. However, the FICO scores have been used since the late 1950s by retail merchants, credit card companies, insurance companies and banks for consumer lending, to help expedite the approval process. The available data from large loan portfolios demonstrates their ability to predict consumer behavior and reflects the fact that relying on credit scores is valid in most cases.

The following are some of the ways that credit scores can be improved:

• Paying mortgage and other bills on time
• Keeping balances well below the limit on credit cards
• Limiting credit accounts to those actually needed (most accounts that are no longer used should be cancelled)
• Checking that personal information is accurate
• Being conservative in applying for credit and making sure that credit inquiries are made by reliable parties only when necessary

A borrower with a low-mid score of 720 and above is considered an A+ borrower. An application for a borrower with a high score will be put through an "automated underwriting" system in the early stages of the process, and an approval will be issued within minutes. Borrowers in this category are typically eligible for the best interest rates and their loan transaction can close earlier in most cases.

A score below 720, but above 680 is considered an A loan, and usually requires about the same amount of processing time as an A+. However, the automated approval could come back with at a slightly higher pricing tier and/or an indication that the applicant does not meet the requirements of select loan programs.

A borrower with a score less than 680, but greater than 620 is considered A- and an underwriter may need to take a closer look at the complete loan file in order to determine the risks involved. Supplemental documentation may be required before final approval is issued. Borrowers with this credit score may still be able to obtain "prime" market-pricing, but the loan may take a little longer to close.

When the borrower has deficient credit, all of the other aspects of the loan must be in order. Equity, stability, income, liquidity, documentation and assets all play a larger role in the approval process. Recent (high) mortgage rates and bankruptcies or foreclosures are the most harmful, but credit patterns, such as a high number of recent inquiries or more than a few outstanding loans at any given time also may signal a problem.

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Appraisal Basics

An appraisal of real estate is the determination of its present value and rights of ownership. The appraiser does not create value; they simply interpret the market value of a property at a given time. As the appraiser compiles the various data needed to complete an appraisal report, consideration is given to the site and amenities, as well as the physical condition of the property. Considerable research and the collection of data must be completed prior to the appraiser arriving at a final opinion of value.

There are three common approaches used to derive the opinion of value. The first approach is called the COST APPROACH. This method is used to determine 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 comparable sales data from recently sold properties (comps) of similar size, quality and location. Finally, the INCOME APPROACH is used to appraise 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 for a commercial property based on the overall net income (return on equity) the property produces.

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Underwriting

Once the processor has put together a complete loan package with all verifications and documentation, the file is sent to the lender. The underwriter is responsible for determining whether the loan meets the underlying investor's requirements and/or if more information is needed prior to issuing an approval. If the latter is the case, the loan is suspended and the borrower is contacted by the loan officer or processor to request additional documentation. If the loan is acceptable as submitted, an approval is issued.

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Closing

Once the loan is approved and any/all “prior to doc.” conditions have been satisfied, the file is transferred to the closing department, and the final loan documents are prepared. The loan officer or processor notifies the parties involved, and schedules a tentative signing date. Once the documents have been signed by the borrower(s), a request for funding on a specific date is submitted to the lender. Once all funds are in place, the transaction is recorded and ownership is conveyed. In the case of a refinance, the old loan is paid and the new deed of trust is recorded for the borrower to sign.

At the closing, the borrower should:

• Bring a cashier's check (or utilize proper wire-transfer procedures) for the net amount needed to close (consult your escrow officer for details). Personal checks are not accepted, and may delay the closing until the check clears.
• Review the final loan documents to make sure that the interest rate and loan terms are what were agreed to. Verify that the name, social security number, street address and mailing address are accurate.
• Sign the loan documents and provide two forms of identification (one with photo).
• Confirm that there is adequate proof of insurance.

After the documents are signed, the escrow officer returns the documents to the lender for examination, and requests a funding date/time. Once the loan has funded, the title company releases a recording package to the county recorder's office. Once the deed of trust has been recorded, the escrow officer issues a Final Settlement Statement to the parties, and issues all remaining disbursements, e.g. net proceeds to the seller, commissions to the real estate brokers; third-party fees, payoffs and/or net proceeds to the borrower, if it's a refinance).

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