The loan process starts with pre-qualification. The lender gathers information about your income and debts. This information allows the lender to calculate the amount that you can borrow. There are different loan programs that are available, so it is important to get pre-qualified for the best loan options available for you.
There are three key factors that mortgage companies take into consideration when approving homebuyers for their desired amount and type of mortgage:
- Ability to pay – lenders verify your total income and current employment. Most mortgage companies prefer borrowers to have consistent employment in their field for a minimum of 2 years.
- Willingness to pay –Your payment history and credit report are used to determine your willingness to repay the mortgage.
- Reserves – lenders consider the current equity in the home and amount of liquid asset reserves a borrower can document to determine what they can “fall back” on.
You should consider how long you plan to keep the property in order to choose the right mortgage program. If you don’t plan on keeping the property for a long time, a balloon or adjustable-rate loan may be a good option. If you plan to keep the house for a long time, it typically makes sense to choose a fixed-rate loan.
There are many different mortgage programs, each with different rates, fees and points. It can be challenging to understand the many options and know which is the right program for you. An experienced mortgage professional can help you make the right decision. He or she can evaluate your specific situation and recommend the right loan program for you.
This is where the actual loan process begins. The borrower, along with the help of a mortgage professional, fills out the application form and provides all the necessary documents.
The closing costs and the different fees that are involved are discussed while the mortgage programs are examined. The Loan Estimate verifies the costs involved. This document is provided 3 days after a complete application is submitted to the lender.
Processing starts once you submit the completed application. The Processor orders the Title Report, Appraisal, and Credit Report. Next, the information provided on the application form is verified. This includes payment histories and bank deposits. When there are credit issues like judgments or late payments, a written explanation should be provided. The processor examines the Title Report and Appraisal to identify any property issues that require further investigation. All the information and documents are then submitted to the lender.
If you are planning to refinance or purchase a home and are currently employed, you should provide your pay stubs for 1 month and your W2s for the last 2 years. If you are self-employed, your tax returns for the last 2 years are typically required. If you have a rental property or investment income, you should provide your tax returns for the past 2 years along with your Rental Agreements or Investment Statements. These documents demonstrate your monthly income.
To show your total assets, you will be asked to provide your mutual fund, bank, and stock account statements for the last 2 months. You also need to provide the latest copies of your IRA/401k or stock brokerage accounts.
A few additional documents are needed for special situations: A “Use of Proceeds” explanation letter is needed if you request a cash-out (e.g. using part of your loan for home improvements, debt consolidation or other use). If you are divorced, you will need to provide a copy of your divorce decree as well. If you are not a permanent US resident, you will have to provide your L-1 or H-1 visa. If you are not a US citizen, you will have to provide a copy of your green card (front and back).
If you apply for a Home Equity Loan, a copy of your deed of trust and your first mortgage note are also needed. You can find these items in the closing documents of your mortgage.
Before applying for a mortgage, it is a wise move to review your Credit Report. This gives you an opportunity to correct any errors, if there are any.
A Credit Report is your credit profile and consists of information from different consumer credit reporting companies. It shows whether you pay your credit cards, loans, and other financial obligations on time or if there have been payment issues.
The information is contained in five categories:
- Employment Information
- Identifying Information
- Public Record Information
- Credit Information
Your credit profile does not include any criminal record you may have, your race, health, religion, driving record, income or political preference.
If you have had credit problems in the past, be sure to provide details to your Mortgage Consultant so that a “Letter of Explanation” can be provided to the Underwriter. It is a good idea to get the help of your mortgage professional. Credit problems can occur for many reasons such as illness, financial difficulties or unemployment and mortgage professionals know how to explain these in a way that puts you in the best possible position for your loan.
A satisfactory credit record results from paying your financial obligation on time or correcting problems that have occurred. Credit scoring is a way of evaluating the credit risk of a borrower. The following factors are considered when it comes to the score: current debt levels, types of credit, past delinquencies, number and types of inquiries and derogatory payment behavior.
The most common credit score is known as a FICO score. It was created by Fair, Isaac & Company, Inc. for the 3 main credit Bureaus: Empirica (TransUnion), Experian (formerly TRW) and Equifax (Beacon). FICO scores are repository scores, which means they only take into consideration the information within your credit file. They don’t consider your savings, down payment, or income.
There are 5 factors that are used to determine credit scores:
- 35% – payment history
- 30% – amount owed
- 15% – period of credit
- 10% – new credit
- 10% – types of credit you currently have
Credit scores are important because they determine which loan programs are appropriate for you. They also help in choosing the underwriting approach that will work best for you, like Traditional, Streamline or Second Review. It is important to note though that these are only guidelines and don’t determine if you qualify for a specific loan or a particular interest rate.
How can you improve your credit score? Here are some tips:
- Pay your bills promptly.
- Make sure your credit report information is correct.
- Keep balances low on your credit cards.
- When applying for credit, remember to be conservative.
- If you don’t need a line of credit, don’t apply for it. Apply only for accounts that you really need.
Borrowers are grouped into different categories. Those with credit score of 680 or higher are considered as A+ borrowers. When you are an A+ borrower, your loan is put in an “automated basic computerized underwriting” system. This can typically be completed in just a few minutes. Plus, you will likely get the lowest interest rate and have your loan approved in just a few days.
Scores from 620-679 require a closer look. Underwriters determine the potential risks and if necessary, the borrower might need to provide additional documentation. Borrowers with scores in this range can usually obtain “A” pricing but their loan might require several more days to be approved.
Borrowers with scores below 620 typically get less attractive interest rates and terms. “Sub-prime” lenders usually handle loans for these borrowers. Plus, they require more time to process.
All these factors play an important role in your credit score. Worst-case scenarios such as foreclosure or bankruptcy and late mortgage payments will typically have a big impact on your credit score. Also, if you have several outstanding loans, several recent inquiries about your credit score, or late payments, this can lower your credit score. “Willingness to pay” is an important factor for lenders.
An appraisal is the process of evaluating the value of a real estate property. The lender typically chooses the appraiser. Remember, the appraiser does not determine the value of the property. The appraisal is an estimate based on the current market. The location, amenities and the property’s physical condition are assessed during an onsite inspection and market research before the appraiser arrives at the final value.
There are 3 approaches commonly used:
- Cost Approach – this determines the total cost of replacing the existing improvements, excluding economic obsolescence, physical deterioration and functional obsolescence.
- Comparison Approach – this makes use of other benchmark properties of the same size, location and quality in the same general area, which were sold recently, in order to determine the property value.
- Income Approach – this is used when appraising rental properties. It is not usually used for single-family homes. It offers an objective estimate of the price an investor would pay depending on the net income that is being produced by the property.
Once all the files are completed and verified, they are sent to the lender. The underwriter is the one who determines if the all the necessary files are present. When there is more information that is required, the loan is set as “Suspense”. The borrower is then contacted and informed of the additional information or documentation that is needed. Once all is settled, the loan is then set to “Approved” status.
When your loan is been approved, the file is then sent to the closing and funding department. The funding department notifies the escrow officer and mortgage broker when the loan is approved. Additionally, the closing costs are verified with the mortgage broker. The closing is then scheduled with the borrower by the escrow officer based on when he or she can read and sign the loan documentation.
You should do the following at the closing:
- Bring proof of insurance and identification.
- Review and understand the final loan documents. Check the loan terms and interest rates to ensure they are what you agreed upon. The names and address should be checked as well to make sure they are accurate.
- Sign the documents.
- Bring a cashier’s check or preferably arrange a wire transfer to pay for the closing costs and down payment. Personal checks are not usually accepted. If they are accepted, they can cause a delay because they have to clear first.
After signing the documents, the escrow officer sends them to the lender. The lender will then examine them and if everything is fine, the funding of the loan is arranged. Once the loan is funded, the deed of trust and mortgage note are arranged by the escrow and title officers. These are recorded at the recorder’s office of your county. Next, the final settlement costs are printed on the Closing Disclosure. Finally, the final disbursements are made.
Typically, an “A” mortgage process takes 21-28 business days to be finished. In some cases, this process can go faster because of the new automated underwriting. Feel free to talk to one of our experienced Loan Officers if you have any questions about the mortgage loan process or your specific situation. You can also Apply Online and one of our friendly Loan Officers will contact you.