Loan Process Steps
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 become 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 to have been 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 to repay is also closely related to how you have fulfilled previous financial commitments; this explains 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 weaker 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.
When analyzing a borrower’s loan application (Form 1003), lenders use two different debt ratios to determine if the borrower can afford his obligations. Known as the “Top” and “Bottom” ratios, the top ratio consists of monthly housing expenses know as PITI (principal, interest, taxes, home owner’s insurance and home owner’s dues, if any) divided by gross monthly income. The bottom ratio consists of PITI plus all monthly consumer debt payments (cars, credit cards, student loans) divided by gross monthly income.
Fannie Mae/Freddie Mac guidelines say that the top and bottom ratios shouldn’t exceed 28 over 36 (28/36) but they will go to 32/38 if the borrower is employed. Since ALL borrowers are employed one way or another, 28/36 has become the industry standard. If your ratios exceed the standard don’t worry as lots of programs will let back end ratios go as high as 50% with compensating factors such as a low Loan to Value (LTV) or high borrower liquidity.
It’s best to have your loan officer pull your credit report early in the process so you know exactly what consumer debt shows on it. This will also give you a chance to improve your ratios by maybe paying off low consumer debt balances or rescoring your credit to reflect your real financial picture.
With new automated underwriting, this process speeds up greatly.
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.
A borrower should also understand the relationship between rates and points. Points are considered to be prepaid interest and may be tax deducible (consult your tax advisor). Each point is equal to one percent of the loan. The more points you are willing to pay, the lower the interest rate will be.
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, allowing the borrower to make an informed decision.
Since professional mortgage brokers only broker Mortgage Programs that are priced below retail, the borrower is getting an experienced mortgage professional at no extra cost. In fact, because of the mortgage professional’s extensive knowledge of the mortgage industry, he or she can often save the borrower extra money.
The application is the true start of the loan process. It 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. 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.
Once the application has been submitted, the processing of the mortgage begins. The Processor opens Escrow and orders the credit report, Appraisal, and Title Report. The information on the application, such as bank deposits and payment histories, is 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.
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 and a YTD (year-to-date) profit and loss statement. 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 applying for a Home Equity Loan you will need to provide a copy of your first mortgage note and deed of trust in addition to the above documents. These items will normally be found in your mortgage closing documents.
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 from whom you have borrowed money, or how you have met other financial obligations.
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” or helping you remove erroneous information. 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. . 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 inquiries.
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’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.
A General Guide to Credit Scoring
Lates Mortgage Lates Revolving Lates Install A+ 670+ 36 100 0 0 0 2 0 0 1 0 0 A- 660 45 100 1 0 0 3 1 0 2 0 0 B 620 50 85 2 1 0 4 2 1 3 1 0 C 580 55 75 4 2 1 6 5 2 5 4 1 D 550 60 70 5 3 2 8 8 4 7 6 2 E 520 65 60 6 4 3 10 10 6 10 8 3
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.
For questions about your credit history you can contact the credit bureaus that maintain this data. But before you do you should discuss your credit report with your loan officer as he or she has extensive experience working with borrowers with all kinds of credit issues.
1600 Peachtree St. NW
Atlanta, Georgia 30309
34405 W. 12 Mile Rd.
Farmington Hills, MI 48331
Trans Union Corp.
Consumer Disclosure Center
2 Baldwin Place
P.O. Box 1000
Chester, PA 19022
Bankruptcy & Foreclosure
A+ None allowed within 10 years A- Minimum 2 years with re-established credit B Minimum 2 years with some lates C Minimum one year D Discharged E Current bankruptcy possible
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 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.
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.
The appraiser will need to know what the purpose of the appraisal is, when the appraisal needs to be completed, and if the property is listed for sale. If the property is listed, the appraiser will need to know for how much and with whom. The appraiser will also need to know if there is an existing mortgage and what personal property, such as appliances, is included. The appraiser requires any pertinent papers pertaining to the property, such as deeds, surveys, purchase agreements, copies of utility and tax bills and, if income property, income and expenses for the past two years and a copy of the leases.
Once the processor has put together a complete package with all verifications and documentation, the file is sent thru email and overnight mail 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
Once the loan is approved, the file is transferred to the closing and funding department. The funding department notifies the broker and Escrow Company of the approval and verifies broker and escrow fees. The Escrow Company then schedules a time for the borrower to sign the loan documentation.
At the Escrow Company the borrower should:
- Bring a cashier’s 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 Escrow Company 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 Escrow Company arranges for the mortgage note and deed of trust to be recorded at the County Recorders office. Once the mortgage has been recorded, the Escrow Company then prints the final settlement costs on the HUD-1 Settlement Form. Final disbursements are then made and escrow “closes.”
A typical “A” mortgage transaction takes between 10-14 business days to complete.