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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, thus 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 could not stay in business if they did not generate loan business, so it is in everyone's best interest to see that you qualify.
House Hunting and Purchase Agreement
House Hunting and Purchase Agreement
Once you’ve been pre-approved for a certain amount, you can shop more confidently within that price range. And that brings you to the second major step in the mortgage approval process — house hunting.
We’ve written extensively about the house hunting process. Here are some house hunting tips geared toward first-time home buyers in particular.
Your mortgage lender isn’t heavily involved at this stage. The house hunting work is primarily done by the buyers and their real estate agents.
But the lender does come back into the picture once you’ve made an offer to buy a home. That’s when you move into the next step of the mortgage approval process — filling out an application.
Mortgage Loan 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 the 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 the 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.
Once you have a purchase agreement and a completed loan application, your file will move into the processing stage. This is another important step in the broader mortgage loan approval process.
Loan processors collect a variety of documents relating to you, the borrower, as well as the property being purchased. They will review the file to ensure it contains all of the documents needed for the underwriting process (step 5 below). These documents include bank statements, tax records, employment letters, the purchase agreement, and more.
The loan processor may also:
order credit reports (if this hasn’t been done already),
begin verifying income, assets and employment, and
order a home appraisal to determine the value of the property.
The exact steps performed by the loan processor can vary slightly from one company to the next. It also varies based on the type of mortgage loan being used. But this is usually how it works. After this, you’ll move into one of the most critical steps during the mortgage approval process — underwriting.
Underwriting is where the “rubber meets the road,” when it comes to loan approval. It is the underwriter’s job to closely examine all of the loan documentation prepared by the loan processor, to make sure it complies with lending requirements and guidelines.
The underwriter is the key decision-maker during the mortgage approval process. This individual (or team of individuals) has authority to reject the loan if it doesn’t meet certain pre-established criteria. The underwriter will double-check to ensure both the property and the borrower match the eligibility requirements for the specific mortgage product or program being used.
The underwriter’s primary responsibility is to evaluate the level of risk associated with your loan. He or she will review your credit history, your debt-to-income ratio, your assets, and other elements of your financial picture to predict your ability to make your mortgage payments.
Mortgage underwriters focus on the “three C’s” of underwriting — capacity, credit and collateral:
Capacity — Do you have the financial resources and means to repay your debts, including the mortgage loan? To answer this question, they’ll look at your income history and your total debts.
Credit — Do you have a good history of repaying your debts, as evidenced by your credit reports and scores?
Collateral — Does the property serve as sufficient collateral for the loan, based on its current market value? The underwriter will use the home appraisal report to determine this.
If the underwriter encounters issues during this review process, he or she might give the borrower a list of conditions that need to be resolved. This is known as a conditional approval. A common example of a “condition” is when an underwriter asks for a letter of explanation relating to a particular bank deposit or withdrawal.
If the issues discovered are minor in nature, and the borrower(s) can resolve them in a timely manner, then the mortgage loan can move forward and eventually result in approval. However, if the underwriter discovers a serious issue that is outside the eligibility parameters for the loan, it might be rejected outright. Some borrowers sail through the underwriting process with no issues whatsoever. It varies.
Underwriting is arguably the most important step in the mortgage approval process, because it determines whether or not the loan is ultimately approved. You can learn more about the process here.
Mortgage Loan Approval and Closing
If the mortgage underwriter is satisfied that the borrower and the property being purchased meet all guidelines and requirements, he will label it “clear to close.” This means all requirements have been met, and the loan can be funded. Technically speaking, this is the final step in the mortgage approval process, though there is one more step before the deal is done — and that’s closing.
Prior to closing, all of the supporting documentation (or “loan docs,” as they are called) are sent to the title company that has been chosen to handle the closing. And there are a lot of documents. The home buyers and sellers must then review and sign all of the pertinent documents, so the funds can be disbursed. This happens at the “closing” or settlement.
In some states, the buyer and seller can close separately by setting up individual appointments with the title or escrow company. In other states, the buyers and sellers sit at the same table to sign documents. The procedure can vary depending on where you live.
You can ask your real estate agent or loan officer how it works in your area.
Prior to closing, borrowers should receive a Closing Disclosure. This is a standardized five-page form that gives you finalized details about the mortgage loan. It includes the loan terms, your projected monthly payments, and the amount you will need to pay in fees and other closing costs.
Mortgage Programs and Rates
Mortgage Programs and Rates
To properly analyze a mortgage program, the borrower needs to think about how long he plans 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.
With so many programs from which to choose, each with different rates, points and fees, shopping for a loan can be time consuming and frustrating. 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.
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:
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 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 have 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. However, they 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.
Public Record Information
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.