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.
Ratios
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.
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.
Mortgage
calculator
The Application
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.
Processing
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.
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 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.
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 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.
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.
Equifax, Inc.
1600 Peachtree St. NW
Atlanta, Georgia 30309
1-800-685-1111 www.equifax.com
Experian
34405 W. 12 Mile Rd.
Farmington Hills, MI 48331
1888-EXPERIAN (1-888-397-3742) www.experian.com
Trans Union Corp.
Consumer Disclosure Center
2 Baldwin Place
P.O. Box 1000
Chester, PA 19022
1-800-888-4213 www.transunion.com
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.
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.
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.
Underwriting
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
Closing
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. With new automated underwriting, this process speeds
up greatly.
Contact
one of our experienced Loan Officers today to discuss your
particular
mortgage needs.
