The Loan Process

1. Pre-Qualification
2. Mortgage Programs and Rates
3. The Application
4. Processing
5. Required Documents
6. Credit Reports
7. Appraisal Basics
8. Underwriting
9. Closing
10. Summation
    
    

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 house.  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 you have 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 will it be rented out?  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.

It is important to remember that most guidelines are not completely carved in stone.  Each transaction is looked at on a case-by-case basis, so even if you come up a little short in the income area, a high credit score or strong cash postion may make up for it.  Mortgage brokers and lending companies wouldn't be able to stay in business if they didn’t continue to generate new loan business, so it’s our objective to find a loan solution every time.

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Mortgage Programs and Rates

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

Shopping for a loan can be very time consuming and frustrating.  With so many programs to choose from and all of the 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 nucleus of the loan file and usually gets completed between day one and day five of the loan process. 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 anticiapted terms will be disclosed on the Good Faith Estimate (GFE) and accompanying Truth-In-Lending Statement (TIL) within 3 business days of the lender's receipt of the completed and signed loan application.

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Processing

Once your 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 is then verified.  If you have any credit derogatories, such as late payments, collections and/or judgments, the processor may request a written explanation from you.  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 to underwriting.

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Required Documents

If you are purchasing or refinancing your home and you earn a salary, you typically only need to provide a copy of your last two paystubs and your two most recent W-2 statements.  If you are self-employed or retired, you may need to provide a copy of your 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, you should also provide copies of the past two months worth of bank and/or brokerage statements and the most recent statement on any retirement accounts or other cash assets you might have.

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

If you are not a US citizen, you will be asked to provide a copy of your green card and/or an explanation of your present status with the INS.  In many cases, this may result in a higher down payment requirement and/or a more limited product selection. 

Finally, if you are applying for a home equity loan, you will need to provide a copy of the note on your current first mortgage, as well as a copy of the most recent statement on any secondary financing you may have at this time.

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Credit Reports

Most people applying for a home mortgage have good credit and don't need to worry about the effect their credit history may have on the approval process.  However, you can be better prepared if you obtain your credit report before you apply for a home loan. That way, you can take certain steps to correct any negatives before making your application.

A credit profile refers to a consumer credit file, which is made up of information provided by the three main credit repositories.  It provides us with a picture of how you handled prior loans and financial obligations. There are five categories of information on a credit profile:

• Identifying Information
• Employment Information
• Credit Information
• Public Record Information
• Inquiries

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

If you have had credit problems in the past, be prepared to discuss them openyl and honestly with a mortgage professional who will assist you 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 you had problems that have been corrected and your 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.

A few years ago this was a relatively new concept in the mortgage indutry, but by now most people have heard of credit scoring.  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 borrwer'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 which loan program you will qualify for.

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 1950’s 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 that relying on credit scores does work in most cases.

The following items are some of the ways that you can improve your credit score:

• Pay your mortgage and other bills on time.
• Keep balances well below the limit on credit cards.
• Limit your credit accounts to what you really need.  Most accounts that are no longer used should be formally cancelled.
• Check that your personal information is accurate.
• Be conservative in applying for credit and make sure that your credit is checked by reliable parties and 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.  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 we may need to have an underwriter 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.

Borrowers with credit scores below 620 are normally considered to be a candidate for a "subprime" loan (sometimes referred to as BCD loans).  Although the approval process can be fairly simple and swift, this is due to the fact that we are now dealing with a whole new world of mortgage investors.  Of course, since these are typically loans that are held onto by the investor (portfolio loans), the interest rate,  loan  programs and overall terms/conditions are considerably less attractive.

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, liquidity, documentation and assets all play a larger role in the approval process.  Recent mortgage lates 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 may signal a problem. 

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Appraisal Basics

An appraisal of real estate is the determination of the presnt value and rights of ownership. The appraiser does not create value, he/she simply interprets 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 to determine the market value of a property.  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 so, 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

   At the closing the borrower should:

• Bring a cashier's check (or investigate proper wiring procedures) for the net amount needed to close (consult your escrow officer for details).  Personal checks are normally 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 you agreed to.  Verify that your name, social security number, street address and mailing address is accurate.
• Sign the loan documents and provide 2 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 release 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 (ie: 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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Summation

A typical mortgage transaction takes between 15-30 business days to complete.  With new automated underwriting systems, turn-around time have greatly imporved.  Contact Todd today to discuss your home loan needs or simply utlize the convenient Get Pre-qualified or Apply Online links on this website and he will get back to you.

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