Loan Process

Pre-Qualification

Pre-qualification initiates the loan process by allowing lenders to gather pertinent information regarding a borrower’s income and debts. This assessment aids in determining the borrower’s affordability for a home. Given the variability of loan programs and their respective valuations, it’s advisable for borrowers to seek pre-qualification for each loan type they may potentially qualify for.

When mortgage companies evaluate homebuyers for their desired mortgage type and amount, they focus on two primary factors: the borrower’s ability and willingness to repay the loan.

The ability to repay the mortgage is verified through the borrower’s current employment status and total income. Typically, mortgage companies prefer stable employment, ideally with a minimum of two years at the same job or within the same field.

Assessing the borrower’s willingness to repay involves examining the intended use of the property. Factors such as whether the borrower plans to reside in the property or rent it out are considered. Additionally, the borrower’s track record in meeting past financial obligations is scrutinized, with a particular emphasis on credit history and rental payment reliability.

It’s crucial to note that lending criteria aren’t set in stone and are evaluated on a case-by-case basis. Even if a borrower falls short in one aspect, strengths in other areas may compensate. Mortgage companies thrive on facilitating loan transactions, making it in everyone’s interest to ensure borrowers meet the necessary qualifications.

Mortgage Options and Interest Rates

When considering a mortgage program, it’s crucial for the borrower to assess the duration they intend to maintain the loan. If the plan involves selling the property within a few years, opting for an adjustable or balloon loan might be advantageous. Conversely, if the intention is to retain ownership for an extended period, a fixed loan could be more appropriate.

Navigating through the multitude of available programs, each with its unique rates, points, and fees, can be a daunting and time-consuming task. However, seeking guidance from a seasoned mortgage professional can streamline this process. By carefully evaluating the borrower’s circumstances, they can recommend the most suitable mortgage program, empowering the borrower to make a well-informed decision.

The Application

The application marks the subsequent phase of the loan process. Assisted by a mortgage professional, the borrower fills out the application and furnishes all requested documentation.

A loan application is deemed incomplete until the following information is provided: (1) Your name, (2) Your income, (3) Your Social Security number (along with authorization for credit check), (4) The address of the intended home purchase or refinance, (5) An estimate of the property’s value, and (6) The desired loan amount.

The Loan Estimate

Upon applying for a mortgage, you’ll receive a three-page document known as a Loan Estimate. This form provides essential details about the loan you’ve requested and will be delivered to you within three days of submitting your fully completed loan application. Within the Loan Estimate, you’ll find crucial information such as the estimated interest rate, monthly payment, and total closing costs for the loan. Additionally, it outlines anticipated expenses related to taxes and insurance, as well as potential changes in interest rates and payments in the future. Moreover, the Loan Estimate highlights any special features of the loan, such as prepayment penalties or negative amortization. Designed with clarity in mind, this form aims to enhance your understanding of the mortgage terms you’ve applied for. It’s important to note that all lenders are obligated to utilize the same standard Loan Estimate form, facilitating easier comparison of mortgage options to help you select the most suitable one. Receiving a Loan Estimate doesn’t imply approval or denial of your loan; rather, it presents the loan terms available should you choose to proceed.

The Intent to Proceed

After receiving your Loan Estimate, the decision to proceed with us or not rests with you. If you opt not to pursue an application for a specific loan, no further action is required. However, if you choose to move forward with us, you must inform us in writing or via phone that you wish to proceed with the application for that loan. It’s important to note that all lenders are obligated to honor the terms outlined in the Loan Estimate for a period of 10 business days. Therefore, if you decide to proceed more than 10 business days after receiving a Loan Estimate, please be aware that market conditions may necessitate revisions to the terms and estimated costs, prompting us to provide you with a revised Loan Estimate.

Processing

Upon submission of the application, the mortgage processing commences. The Processor initiates requests for the Credit Report, Appraisal, and Title Report. Subsequently, the details provided in the application, including bank deposits and payment histories, undergo verification. Any adverse credit remarks, such as late payments, collections, or judgments, necessitate a written explanation. The Processor meticulously reviews the Appraisal and Title Report for any property-related concerns warranting further inquiry. Finally, the entire mortgage package is assembled for submission to the lender.

Requested Documents

Upon completion of your loan application, acceptance of the loan estimate, and confirmation of your intent to proceed, we will request documents from you to facilitate your loan approval. While the following statements do not encompass the exhaustive list of required documents, they offer a preliminary overview of what will be needed. Upon reaching this stage of the loan process, we will provide you with a specific list tailored to your loan requirements. For home purchases or refinancing, if you are a salaried individual, you will need to furnish your W-2s from the past two years along with one month of pay stubs. Alternatively, if you are self-employed, you will be required to provide your tax returns from the past two years. If you own rental property, you will need to submit rental agreements along with the past two years’ tax returns. To expedite the approval process, it is advisable to also provide the past three months’ bank, stock, and mutual fund account statements, along with the most recent copies of any stock brokerage or IRA/401k accounts you possess. In case you are requesting a cash-out, a “Use of Proceeds” letter of explanation will be necessary. Additionally, please provide a copy of the divorce decree if applicable. For non-US citizens, submission of a copy of your green card (front and back) is required. If you are not a permanent resident, please provide your H-1 or L-1 visa.

Should you be applying for a Home Equity Loan, apart from the aforementioned documents, you will need to furnish a copy of your first mortgage note and deed of trust. These documents are typically found within your mortgage closing paperwork.

Credit Reports

For most individuals applying for a home mortgage, the impact of their credit history during the mortgage process is typically not a major concern. However, obtaining a copy of your Credit Report before applying for your mortgage can better prepare you for any potential issues. This report reflects your consumer credit file, encompassing various consumer credit reporting agencies, and depicts how you’ve managed repayments with companies you’ve borrowed from or met other financial obligations. The Credit Profile consists of five categories of information:

1. Identifying Information
2. Employment Information
3. Credit Information
4. Public Record Information
5. Inquiries

It’s important to note that certain personal attributes such as race, religion, health, driving record, criminal record, political preference, or income are not included in your credit profile.

If you’ve encountered credit problems, it’s crucial to discuss them candidly with a mortgage professional who can assist you in crafting your “Letter of Explanation.” Recognized mortgage professionals understand that legitimate reasons, such as unemployment, illness, or financial difficulties, may have contributed to credit issues. If these problems have been rectified (reestablishment of credit) and your payments have been consistently on time for a year or more, your credit may be deemed satisfactory.

The mortgage industry employs its own terminology, and credit rating is no exception. BC mortgage lending derives its name from the evaluation of one’s credit based on factors such as payment history, debt payment amounts, bankruptcies, equity position, and credit scores. Credit scoring utilizes a statistical approach to assess the credit risk of a mortgage application, considering past delinquencies, derogatory payment behavior, current debt levels, length of credit history, types of credit, and number of inquiries.

Credit scoring is a well-known concept, with the most common score being the FICO score, developed by Fair, Isaac & Company, Inc. for the three main credit bureaus: Equifax (Beacon), Experian (formerly TRW), and Empirica (TransUnion). FICO scores rely solely on the information contained in a person’s credit file and do not consider factors such as income, savings, or down payment amount. These scores are based on five factors:

1. Payment history (35%)
2. Amount owed (30%)
3. Length of credit history (15%)
4. New credit being sought (10%)
5. Types of credit in use (10%)

While credit scores guide applications to specific loan programs and determine levels of underwriting, such as Streamline, Traditional, or Second Review, they are not the sole determinant of the type of program you will qualify for or your interest rate.

Despite skepticism in the mortgage business regarding the accuracy of FICO scores, they have been utilized since the late 1950s by retail merchants, credit card companies, insurance companies, and banks for consumer lending. Scoring projects, such as large mortgage portfolios, have demonstrated their predictive quality and effectiveness.

There are several ways to improve your credit score:

1. Ensure timely bill payments.
2. Keep credit card balances low.
3. Limit your credit accounts to necessities and cancel unnecessary accounts, as zero balance accounts can still count against you.
4. Verify the accuracy of your credit report information.
5. Be cautious in applying for credit and ensure credit checks are only conducted when necessary.

A borrower with a score of 680 and above is considered an A+ borrower, qualifying for the lowest interest rates and a quick loan closure. A score between 620 and 680 may prompt underwriters to scrutinize potential risks more closely, requiring supplemental documentation before final approval. Borrowers with credit scores below 620 may face less favorable terms and conditions, often resorting to “sub-prime” lenders.

When faced with derogatory credit, all other aspects of the loan need to be in order. Factors such as equity, stability, income, documentation, and assets play a significant role in the approval decision. Late mortgage payments and bankruptcies/foreclosures are particularly critical. Credit patterns, such as numerous recent inquiries or multiple outstanding loans, may also signal potential issues. Since a “willingness to pay” is essential, several late payments within the same period are preferable to sporadic or scattered late payments.

Appraisal Basics
Real estate appraisal involves valuing the rights of ownership, with the appraiser tasked with defining these rights. It’s important to note that appraisers don’t create value; rather, they interpret the market to arrive at an estimate of value. In compiling data for a report, the appraiser considers factors such as the property’s site, amenities, and physical condition. Extensive research and data collection are essential before the appraiser can form a final opinion of value.

Three common approaches, all rooted in market data, are used to derive the opinion or estimate of value. The first is the COST APPROACH, which calculates the cost of replacing existing improvements as of the appraisal date, adjusted for any physical deterioration, functional obsolescence, and economic obsolescence. The second is the COMPARISON APPROACH, which involves comparing the subject property to similar-sized, quality, and located “benchmark” properties (comps) that have recently sold to determine value. The INCOME APPROACH is primarily used for rental properties and less applicable to single-family dwellings. This approach offers an objective estimate of what a prudent investor would pay based on the property’s net income.

Underwriting
After the processor has assembled a comprehensive package containing all verifications and documentation, it is forwarded to the lender. The underwriter assumes the responsibility of assessing whether the package qualifies as an acceptable loan. Should additional information be required, the loan is placed in “suspense,” prompting the borrower to be contacted for further information or documentation. Conversely, if the loan is deemed acceptable in its current state, it is classified as “approved with conditions”

Closing Disclosure
The Closing Disclosure is a five-page document that offers comprehensive information about the mortgage loan you’ve chosen. It encompasses details such as the loan terms, projected monthly payments, and the total amount of fees and other expenses associated with acquiring your mortgage (closing costs).

By law, we are obligated to furnish you with the Closing Disclosure at least three business days prior to the closing of your mortgage loan. This three-day period allows you ample time to compare the final terms and costs with those initially estimated in the Loan Estimate you received from us earlier. Furthermore, it provides you with the opportunity to address any inquiries or concerns before proceeding to the closing table.

Closing
Upon approval of the loan, the file is forwarded to the closing and funding department. Subsequently, the funding department informs both the broker and closing attorney of the approval and verifies broker and closing fees. The closing attorney proceeds to schedule a convenient time for the borrower to sign the loan documentation.

At the closing, it is essential for the borrower to:

1. Bring a cashier’s check for the down payment and closing costs if required. Personal checks are generally not accepted, and if they are, they can cause delays until they clear the bank.
2. Review the final loan documents to ensure that the interest rate and loan terms align with what was agreed upon. Additionally, verify that the names and addresses on the loan documents are accurate.
3. Sign the loan documents.
4. Bring identification and proof of insurance.

Following the signing of documents, the closing attorney returns them to the lender for examination. If everything is in order, the lender arranges for the funding of the loan. Once funded, the closing attorney coordinates the recording of the mortgage note and deed of trust at the county recorder’s office.

Frequently Asked Mortgage Questions
Do you have questions? We can help! You will find the answers to several frequently asked mortgage questions below.

What is the difference between pre-approval and pre-qualification?
The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qual letter. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, much like a cash buyer.

When does it make sense to refinance?
Usually, people refinance to save money either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation: Calculate the total cost of the refinance Calculate the monthly savingsDivide the total cost of the refinance (#1) by the monthly savings (#2). This is the “break even” time. If you own the house longer than this, you will save money by refinancing. Since refinancing is a complex topic, consult a mortgage professional.

What is a rate lock?
A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock.

What is the difference between a mortgage broker and a lender?
A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender “underwrites” the loan, which means deciding whether or not you are an acceptable risk.

Will I save money going directly to a mortgage lender?
Not necessarily. In fact, if you are a reasonably astute shopper, you will probably do better dealing with a mortgage broker. Mortgage brokers do not add any net cost to the lending process, because they perform functions that would otherwise have to be done by employees of the lender. Furthermore, because mortgage brokers deal with multiple lenders — in a typical case, 25 to 30, sometimes more — they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings, loans to borrowers who do not intend to occupy the property, loans with minimal or no down payment, and so on.

What is a full documented loan?
Both income and assets are disclosed and verified, and income is used in determining the applicant’s ability to repay the mortgage. Formal verification requires the borrower’s employer to verify employment and the borrower’s bank to verify deposits. Alternative documentation, designed to save time, accepts copies of the borrower’s original bank statements, W-2s and paycheck stubs.

What are the other types of loans?
Stated income/verified assets: Income is disclosed and the source of the income is verified, but the amount is not verified. Assets are verified, and must meet an adequacy standard such as, for example, 6 months of stated income and 2 months of expected monthly housing expense. Stated income/stated assets: Both income and assets are disclosed but not verified. However, the source of the borrower’s income is verified. No ratio: Income is disclosed and verified but not used in qualifying the borrower. The standard rule that the borrower’s housing expense cannot exceed some specified percent of income, is ignored. Assets are disclosed and verified. No income: Income is not disclosed, but assets are disclosed and verified, and must meet an adequacy standard. Stated Assets or No asset verification: Assets are disclosed but not verified, income is disclosed, verified and used to qualify the applicant. No asset: Assets are not disclosed, but income is disclosed, verified and used to qualify the applicant. No income/no assets: Neither income nor assets are disclosed.

What is a good faith estimate?
It is the list of settlement charges that the lender is obliged to provide the borrower within three business days of receiving the loan application.

What is a conforming loan?
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

What is a jumbo mortgage?
A mortgage larger than the maximum eligible for conforming purchase by the two Federal agencies, Fannie Mae and Freddie Mac.

What are points?
It is an upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “2 points” means a charge equal to 2% of the loan balance.

What is a pre-qualification?
This is the process of determining whether a customer has enough cash and sufficient income to meet the qualification requirements set by the lender on a requested loan. A pre-qualification is subject to verification of the information provided by the applicant. A pre-qualification is short of approval because it does not take account of the credit history of the borrower.