The Mortgage Process

Pre-Qualification

Pre-qualification starts the loan process. Once information has been gathered about your income and debts, a determination can be made as to the size mortgage you can qualify for. Since various loan programs have different qualifying criteria, you should get pre-qualified for each loan type you may qualify for.

In attempting to approve you for the type and amount of mortgage you want, mortgage companies look at two key factors. The first is the your ability to repay the loan and, second, the your 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. Different loan programs have different requirements.

Your willingness to repay is determined by examining the your credit history. Willingness is closely related to how you have fulfilled previous financial commitments, thus the emphasis on the Credit Report and/or your mortgage or 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 points could make up for the weak ones. 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, you need to think about how long you 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. If a low payment is important to you an adjustable rate mortgage or an interest only loan should be considered.

Shopping for a loan can be very time consuming and frustrating experience. With so many loan programs to choose from, each with different rates, points and fees and qualification guidelines, an experienced mortgage professional can evaluate your situation and recommend the most suitable Mortgage Program allowing you to make a decision that will best fit your needs.

The Application

The Pre-Application Form is the start of the loan process. This form provides information on your income and cash available for the purchase of a home. It also gives permission for obtain a credit report which is crucial in evaluating the loan programs which would best fit your needs. Using the information provided on the Pre-Application Form a complete loan application is prepared to get you pre-approved for a mortgage loan prior to making an offer on a home. It is important to be pre-approved for a mortgage because most sellers will not accept your offer without having a pre-approval letter from a lender.

Required Documents 

The documents required will vary depending on the loan program selected. Salaried borrowers will need to provide their most recent W-2’s and their most recent pay-stubs. Some loan programs will require 2 years W-2’s and pay-stubs covering the most recent one-month period. If you are self-employed you will need to provide the most recent tax returns for one or two years depending on the loan programs requirements. If you own rental property you will need to provide the most recent tax return and may be required to provide rental agreements. Your assets will also need to be verified. Copies of the most recent months bank statements, stock and mutual fund account statements IRA/401(k) statements will need to be provided.

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 your payment history with the companies you have borrowed money from showing how you have met your financial obligations. There are five categories of information on a credit profile:

        Identifying Information

        Employment Information

        Credit Information

        Public Record Information

        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. Fair, Isaac & Company, Inc. developed this score 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 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. 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 be approved quickly.

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 approve.

Borrowers with credit scores below 620 are normally locked into the best rate and terms offered by the programs they qualify for. “Sub-prime” lenders usually offer these loan programs. 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 over a period of time.

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 owner occupied 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 information has been collected, your loan file will be reviewed by a mortgage loan underwriter. The underwriter determines whether the loan package meets the guidelines for the loan program your have applied for. If more information is needed the loan is put into "suspense" and you are contacted to supply more information and/or documentation. If the loan is acceptable as submitted, the loan is put into an "approved" status. A commitment letter will be sent to your home address after the loan is approved.

There will be conditions on your loan that will have to be completed prior to closing. Examples are:

        Sale and settlement of your current home prior to closing if the cash for closing is coming from the sale of your current home.

        Update of pay-stubs, bank statements and credit reports if your loan does not close in 90 days

        Copy of your homeowners insurance policy prior to closing.

        Pay off of debts on credit report if necessary to qualify.

        Proof cash to close has been saved prior to closing.

We will assist you in satisfying each of the conditions required on the loan commitment letter.

What Does A Lender Look For In Approving A Loan?

By now you have noticed there is much more to the loan process than interest rate and points. The mortgage approval process can be broken down into 5 very important parts.

Assets             We must first determine the amount of cash that will be available for a down payment and closing costs. There are guidelines that govern the documentation of these monies.

Liabilities        It is necessary to make sure that borrowers’ obligations do not exceed acceptable ratios for both housing and total debt for the loan program selected. Different loan programs have different guidelines.

Income            We are interested in how much income is available, where it is coming from and how long it is likely to continue. The gross monthly income, coupled with your monthly obligations, is used to determine the ratios for approval of your loan. Length, type and stability of employment are also key factors to consider. Some loan programs don’t have income ratio guidelines while others do not require the verification of income.

Credit              It seems that lenders are often more interested in buyers’ credit than the buyers themselves. Our concerns are: How much credit has been extended, and how timely have payments been made.

Equity             The final piece to the mortgage puzzle is the difference between the loan amount and value of the property. A property appraisal is conducted to determine value. Appraisers are licensed by the state and base their determination of value on the prevailing market. We have relationships with the finest appraisers in the area.