Mortgage Process Explained
The 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:
- The borrower’s ability to repay the loan.
- 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.
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.
The application is the next step of the loan process. With the aid of a mortgage professional, the borrower completes the application and provides all Requested Documentation.
A loan application is not considered complete until you have given us at least the following information: (1) Your name, (2) Your income, (3) Your Social Security number (and authorization to check your credit), (4) The address of the home you plan to purchase or refinance, (5) An estimate of the home’s value and (6) The loan amount you want to borrow.
The Loan Estimate
A Loan Estimate is a three-page form that you receive after applying for a mortgage. The Loan Estimate tells you important details about the loan you have requested. We will deliver this to you with in 3 days of your fully completed loan application. The Loan Estimate provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the Loan Estimate will also indicate if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). The form uses clear language and is designed to help you better understand the terms of the mortgage loan you’ve applied for. All lenders are required to use the same standard Loan Estimate form. This makes it easier for you to compare mortgage loans so that you can choose the one that is right for you. When you receive a Loan Estimate it does not mean that your loan has been approved or denied. The Loan Estimate shows you what loan terms we can offer you if you decide to move forward.
The Intent to Proceed
After you receive your Loan Estimate, it is up to you to decide whether to move forward with us or not. If you decide not to proceed with an application for a particular loan, you don’t need to do anything further. If you do intend to proceed with us, you must take the next step and tell us in writing or by phone that you want to move forward with the application for that loan. All lenders are required to honor the terms of the Loan Estimate for 10 business days. So if you decide to move forward more than 10 business days after you receive a Loan Estimate, please realize that market conditions may make it necessary to revise the terms and estimated costs and provide you with a revised Loan Estimate.
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.
Once you have completed the loan application, accepted the loan estimate and indicated your intent to proceed we will request documents from you in order to obtain your loan approval. The following statements are not a complete list of what will be needed but are intended to give you some idea of what we will need from you. Once you get to this stage of the loan process, we will give you a specific set of documents that we will need for your particular loan. 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 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 H-1 or L-1 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.
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
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 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 have 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. However, they 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.
- 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.
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.
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.
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.
The Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).
We are required by law to give you the Closing Disclosure at least three business days before you close on your mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from us. The three days also gives you time to ask us any questions before you go to the closing table.
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.
A typical “A” mortgage transaction takes between 21-30 business days to complete. With new automated underwriting, this process speeds up greatly. Contact one of our experienced Loan Officers today to discuss your particular mortgage needs or Apply Online and a Loan Officer will promptly get back to you.