The Loan Process

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.

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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.

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The Application

The application is the true start of the loan process and usually occurs between days one and three 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.

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Processing

Once the application has been submitted, the Appraisal and/or Title Report may be ordered. 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 entire mortgage package is then put together for submission to an underwriter.

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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 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 requesting cash-out you will need a "Use of Proceeds" letter of explanation. 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.

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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:

• 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.

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.

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.

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Appraisal Basics

An appraisal of subject property. 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.

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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 lender. The underwriter is responsible for determining whether the package is deemed an acceptable loan. If the loan is acceptable as submitted, the loan is put into an "approved" status.

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Closing

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.
• 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.

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.

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