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, 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 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.
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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. 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. Back
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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. The borrower completes, with the aid of a mortgage
professional, the 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 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. Back
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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 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.
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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 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 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.
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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.
• 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 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.
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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. Back
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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.
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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. Back
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Summation
A typical "A" mortgage transaction takes
between 14-21 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. Back
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