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The Loan Process

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First of all, as we begin the loan process it is important that you do not make any large purchases. Putting a large balance on your credit card or opening a new line of credit can have a negative impact on your credit score and affect your rate. Additionally, do not make any large cash purchases that will reduce the amount of your bank account. If you must make a large purchase or move money, please contact us first and we can discuss the best way to do it.

Also, to maintain your credit score it is also important to continue to pay all of your bills on time. Having a recent late on your credit score can also lower your credit score and affect the rate you can qualify for.

Finally, you may see advertisements for different mortgages on a daily basis. These advertisements often show a low payment or rate on a mortgage. While these types of loans do exist, they often only have that sort of rate for a short time before increasing. Keep in mind that if something sounds too good to be true, then it probably is. As mortgage professionals, we work with our clients to help them find the best rate and program for their financial situation and we will thoroughly explain the programs and rates that we recommend.

If you have any questions at this time, please contact us at 877-320-4762  so that we can make sure this process run as smoothly as possible.

 

Pre-Qualification

Pre-qualification is the first step in the loan process. We  gather information about your income and debts to determine how much loan you can afford and which loan types are suitable. In attempting to approve borrowers for the type and amount of mortgage they want, lenders 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, lenders 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.

Lenders estimate ability by measuring the ratio of monthly debt obligations to monthly income. An affordable loan is achieved with a debt-to-income ratio of 36% although lenders will approve higher ratios for individuals with exceptional credit and a reasonable justification for the higher ratio. Generally the higher the ratio of DTI the riskier the loan is to defaulting because an unexpected emergency may impact the borrower's ability to stay current on their bills.

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 Score 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. Lenders 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.

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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.

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. Our experienced team can evaluate a borrower's situation and recommend the most suitable mortgage program, thus allowing the borrower to make an informed decision. Which Loan is Best?

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The 5 Step Application

With our help you complete your online 5 Step Loan Application

Your loan application is not fully complete until you have given us at least the following information: (1) Your name, (2) Your income, (3) Your Social Security number (and authorization to check your credit), (4) The address of the home you plan to purchase or refinance, (5) An estimate of the home's value and (6) The loan amount you want to borrow.

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The Loan Estimate

A Loan Estimate is a three-page form that you receive after applying for a mortgage. The Loan Estimate tells you important details about the loan you have requested. We will deliver this to you within 3 days of your fully completed loan application. The Loan Estimate provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the Loan Estimate will also indicate if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). The form uses clear language and is designed to help you better understand the terms of the mortgage loan you’ve applied for. All lenders are required to use the same standard Loan Estimate form. This makes it easier for you to compare mortgage loans so that you can choose the one that is right for you. When you receive a Loan Estimate it does not mean that your loan has been approved or denied. The Loan Estimate shows you what loan terms we can offer you if you decide to move forward.

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The Intent to Proceed

After you receive your Loan Estimate, it is up to you to decide whether to move forward with us or not. If you decide not to proceed with an application for a particular loan, you don’t need to do anything further. If you do intend to proceed with us, you must take the next step and tell us in writing or by phone that you want to move forward with the application for that loan. All lenders are required to honor the terms of the Loan Estimate for 10 business days. So if you decide to move forward more than 10 business days after you receive a Loan Estimate, please realize that market conditions may make it necessary to revise the terms and estimated costs and provide you with a revised Loan Estimate.

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Processing

Once the application has been submitted, the processing of the mortgage begins. The Processor orders the Credit Report, Appraisal and Title Report. The information on the application, such as bank deposits and payment histories, are then verified. Any credit derogatory, such as a late payment, collections and/or judgment require a written explanation. The processor examines the Appraisal and Title Report checking for property issues that may require further investigation. The entire mortgage package is then put together for submission to the lender.

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Required Documents

We will request documents only after you have (1) received a Loan Estimate and downloaded a Home Loan Toolkit, and (2) you have provided us with your verbal or written "intent to proceed" with the mortgage application.  Before receiving the requested documents we may ask you to provide us with Information that will help us to evaluate your potential application for a mortgage loan. 

Some of the following documents that may be requested include:

  • Signed/completed loan application & disclosures
  • 1 Month current & consecutive paystubs (Salaried & W2)
  • 2 Years most recent tax returns – All Pages & Schedules
  • 2 Years W2’s for salaried employees
  • If Self-Employed- Need Partnership/Corporate Returns –
    All pages & schedules; (K1’s must be included)
  • Assets – 2 months current bank statements- all pages, including blank pages
  • Copy of drivers licenses for all borrowers
  • If Refinancing, a copy of your mortgage statement, homeowner’s insurance information, any/all HOA information if applicable.
  • Self-employed borrowers owning businesses must provide a copy of their business license, any permit, etc. if applicable.

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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, 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 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.

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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 dwellings. This approach provides an objective estimate of what a prudent investor would pay based on the net income the property produces.

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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 more information is needed, the loan is put into "suspense" and the borrower is contacted to supply more information and/or documentation. If the loan is acceptable as submitted, the loan is put into an "approved" status.

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Closing Disclosure

The Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).

We are required by law to give you the Closing Disclosure at least three business days before you close on your mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from us. The three days also gives you time to ask us any questions before closing.

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Closing

Once the loan is approved, the file is transferred to the closing and funding department. The funding department notifies the broker and escrow officer of the approval and verifies broker and closing fees. The escrow officer then schedules a time for the borrower to sign the loan documentation.

At the closing you 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 until the check clears your bank.
  • 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 and proof of insurance.

After the documents are signed, the escrow officer 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 escrow officer arranges for the mortgage note and deed of trust to be recorded at the county recorders office.

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