|
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, hence 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 couldn't stay in
business if they didn't generate loan business, so it's 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 they plan 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.
Shopping for a loan is very time consuming and
frustrating. With so many programs to choose from, each with different
rates, points and fees, 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
an 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 a 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
derogatory credit items, 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 any 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 to, in
addition to the above documents, 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 persons 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've 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, but 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.
- 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 us today to get started.
|
