Loan Programs
* Pre-Qualification * Mortgage Programs and Rates * The Application * Processing
* Required Documents * Credit Reports * Appraisal Basics * Underwriting * Closing * 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, hence 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.
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.
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 an 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 a 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 your loan officer will order your Credit Report, Appraisal and Title Report and have a Processor begin
processing the file and the information on the application, such as bank deposits and payment histories, are then verified.
Any derogatory credit items, 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 underwriter for approval.
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 both personal and corporate. If you own
rental property you will need to provide Rental Agreements for the past two-years tax returns. You should also provide the
past three-months bank, stock and mutual fund account statements (3 months statements on all asset accounts including checking
and savings) including the most recent copies of any stock brokerage or IRA/401k accounts that you might have.
If
you have a recent divorce or are in the process of a divorce, provide a copy of any 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.
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.
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.
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.
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.
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.
NISA Financial Tel: (760) 670-3174
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