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, o 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.
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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.
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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 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.
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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.
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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.
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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.
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