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The Loan Process
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Pre-Qualification
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Mortgage Programs and
Rates
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The Application
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Processing
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Required Documents
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Credit Reports
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Appraisal Basics
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Underwriting
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Closing
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Summation
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 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.
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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 to 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.
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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. 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 and these costs will be verified by the Good Faith
Estimate (GFE) 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.
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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 two 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.
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.
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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:
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, Experian and 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:
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Pay your bills on time.
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Keep Balances low on credit cards.
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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.
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Check that your credit report
information is accurate.
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Be conservative in applying for credit
and make sure that your credit is only checked when
necessary.
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
late payments.
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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 underwriter. 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
closing department notifies the title officer and verifies
closing fees. The title officer then schedules a time for
the borrower to sign the loan documentation.
At the closing the borrower should:
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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.
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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.
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Sign the loan documents.
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Bring identification.
After the documents are signed, the title officer 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 title officer arranges
for the mortgage note and deed of trust to be recorded at
the county recorders office. Once the mortgage has been
recorded, the title officer then prints the final settlement
costs on the HUD-1 Settlement Form. Final disbursements are
then made.
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