Loan Process

Pre-Qualification

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 is determined by review of your current employment income along with evaluation of your employment history over the last two years. In general one must have been continuously employed for the last six months and show employment history for the last two years, with employment gaps allowed when related to relocation, education and other life events. Your projected housing cost is divided by your qualifying income to produce a “debt ratio”, which in most cases should  not exceed 45% but may be higher or lower depending on other aspects of your loan request.

Willingness to repay is determined by an evaluation of your credit history. A number of factors influence your credit scores, including payment history, current revolving account (credit card) balances relative to credit limits and length of credit history. As a general rule, the lower the down payment the higher the required credit scores. Your rent payment history is also reviewed as part of this process. 

Mortgage loan underwriters employ the practice of “compensating factors” in evaluating loan applications. This means that weaknesses in one area can be offset by strengths in other areas. For example, a higher debt ratio may be allowed when the applicant has very high credit scores and/or a higher down payment.

Formal Preapproval

In today’s competitive real estate market it is often essential to have full underwriting approval before making an offer. The purpose of this is to make you more competitive than other buyers by removing your loan contingency, offering a shorter closing period and making the seller aware that you’re a serious buyer.

The same documents that you provide for loan prequalification are used to secure formal loan approval. The approval is generally made for the highest purchase price/loan amount for which your loan officer thinks you are qualified. This gives you total flexibility to make any appropriate offer with the assurance that your loan will go through, subject to a satisfactory property appraisal.

It is at this stage that your loan officer will submit your loan request to an automated underwriting system (AUS) to secure preliminary approval. An AUS “accept” finding means that your application profile appears to meet the key requirements for the financing you have requested. It is not a formal approval, however, as this is only provided after review by a human underwriter.

 

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.

The 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.

Once your loan details are known (for a home purchase this is the purchase price, loan amount and loan program; for a home refinance this is the loan amount and loan program) a Loan Estimate is sent to you electronically for you to view and electronically acknowledge. It spells out your estimated closing costs and monthly housing expenses.

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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 derogatories, such as late payments, collections and/or judgments require a written explanation. The processor examines the Appraisal and Title Report checking for property issues that may require further investigation. 

Once your file is complete it is submitted to the loan underwriter for approval. Once the approval is issued your loan officer will advise you of any additional items needed. For preapproval applications there may be a gap of time between issuance of the loan approval and when you actually buy a home. In this case you will be asked for documentation periodically to update your file.

Required Documents

If you own rental property you will need to provide two years of tax returns along with your most recent mortgage, property tax and property insurance statements for all properties owned. For home purchase transactions we also need the last two monthly account statements for any funds to be used for the down payment and closing costs. If you receive retirement income we will need your last two months account statements for all IRA/401K accounts along with statements from pension payers, including Social Security, showing your monthly benefit amount.

If you are buying a home you will be asked to provide “evidence of insurance” showing your proposed insurance coverage for your new home. If you are refinancing you will be asked for your insurance information along with your most recent mortgage and property tax statements.

Other documents that may be applicable: divorce decree, K1s for employment or investment income, green card or visa.

The home loan underwriting process requires very thorough documentation, so please expect to be asked for supporting documents several times during the process.

 

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Credit Reports

After our initial interview with you to discuss your home financing objectives the next step is to run your credit report. That’s because your credit profile will have a major effect on the amount you can borrow and your loan terms.

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

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 Experian. Other scores are determined for the other two bureaus, the Empirica score for Transunion and the Beacon score for Equifax. Scores for these three credit repositories tend to be very similar if the same credit data has been reported to all three by creditors. The lowest middle score of all of the applicants is used for loan evaluation purposes.

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.

In general you will get the best loan terms if your middle score is 740 or above. Your terms will get a little worse with a score between 700 and 740 and then the terms will drop significantly when the score is under 700 and you may become ineligible for certain loan programs. When credit score is a problem, we work with your credit profile to recommend specific steps you can take to bring up your scores, including:

  • Reducing credit card balances to under 30% of your credit limit
  • Having you check that your credit report information is accurate and challenging erroneous items
  • Managing potential credit applications 
  • Other steps as warranted

If you have had credit problems, be prepared to discuss them honestly with us. After we have taken any steps to improve your credit profile, we will assist you in writing your "Letter of Explanation." Mortgage underwriters 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 Letter is designed to provide a clear roadmap of your credit profile for the underwriter to make him/her confident in your “intent to repay” the mortgage obligation.

Appraisal Basics

Since the home is the security for your loan (in other words the lender is willing to lend you a large amount of money only because it knows that if needed it will be able to rely on the value of the home to recover the funds it loaned you) a requirement of home financing is the completion of an appraisal report by a licensed appraiser. The appraiser is selected by an independent appraisal management company (AMC), not by your lender. The purpose of this process is to protect you and the lender by ensuring that the appraisal process is done in a completely impartial manner.

The appraiser measures and photographs the home, identifies its most important features (such as view, lot size, overall condition, and many others) and then compares your home to other homes that have sold in the last 3-6 months that are in close proximity to your home and most closely match your home’s size and features. The properties that are used in this comparison are referred to as “comps”. Based on this evaluation the appraiser provides an opinion of the value of your home.

In home purchase transactions, it is very common for the appraised value to be the same as your purchase price. This is because your real estate agent very likely has advised you properly about the appropriate offer price that is supported by sales of other homes.

On rare occasions home appraise for less than the purchase price. This happens most commonly when your home is located in an area in which comparable homes have not sold recently and home prices generally have been rising. In these cases financing may not be affected if you are making a large down payment because the loan amount may still be within loan requirements relative to the appraised value of the home. For example, if your price is $800,000 and you were going to borrow $400,000, or 50% of the home price, and the appraisal comes in at $600,000 (very unlikely!) your loan amount would still be just 67% of the appraised value, well within loan guidelines.

Apart from establishing market value, the other main purpose of the appraisal is for the appraiser to confirm that the home has smoke detectors in each bedroom, a CO detector on each floor and a double strapped water heater (for earthquake safety). The appraiser is also supposed to note any obvious health, safety or structural defects of the home. Any of these that are identified must generally be corrected prior to closing. Very few homes warrant reference to these types of defects in the appraisal, so home buyers are free to make any property modifications after closing.

 

Underwriting

The appraiser measures and photographs the home, identifies its most important features (such as view, lot size, overall condition, and many others) and then compares your home to other homes that have sold in the last 3-6 months that are in close proximity to your home and most closely match your home’s size and features. The properties that are used in this comparison are referred to as “comps”. Based on this evaluation the appraiser provides an opinion of the value of your home.

In home purchase transactions, it is very common for the appraised value to be the same as your purchase price. This is because your real estate agent very likely has advised you properly about the appropriate offer price that is supported by sales of other homes.

On rare occasions home appraise for less than the purchase price. This happens most commonly when your home is located in an area in which comparable homes have not sold recently and home prices generally have been rising. In these cases financing may not be affected if you are making a large down payment because the loan amount may still be within loan requirements relative to the appraised value of the home. For example, if your price is $800,000 and you were going to borrow $400,000, or 50% of the home price, and the appraisal comes in at $600,000 (very unlikely!) your loan amount would still be just 67% of the appraised value, well within loan guidelines.

Apart from establishing market value, the other main purpose of the appraisal is for the appraiser to confirm that the home has smoke detectors in each bedroom, a CO detector on each floor and a double strapped water heater (for earthquake safety). The appraiser is also supposed to note any obvious health, safety or structural defects of the home. Any of these that are identified must generally be corrected prior to closing. Very few homes warrant reference to these types of defects in the appraisal, so home buyers are free to make any property modifications after closing.

Closing

Once your loan has final loan approval the closing department takes over to prepare your loan document in accordance with your final loan terms (loan amount, loan program and interest rate). Loan documents are sent to the title company that is handling your escrow. The escrow officer arranges for you to sign these documents and advises you on the amount of funds needed to close. You then make arrangements to wire these funds to the title company.

Once you have signed the documents and provided your closing funds the closing department reviews the signed documents to make sure everything was done properly and then loan fudns are wired to the title company. The transaction officially closes the following day when the property transfer deed is recorded at the county recorder office.

Summation

The loan closing process generally takes from 21-45 days depending on the type of transaction (purchase vs. refinance), level of loan volume in the mortgage industry at that time, the complexity of the loan request and the requirements of the purchase contract.

You will be given clear instructions and deadlines throughout the process to make sure your financing closes on a timely basis. The key to a successful close is appreciation and acceptance of the fact that the mortgage underwriting process is very thorough because of lenders commitment to ensuring that closed home loans are of the highest qualify. This is designed to protect the ultimate holders of the loan (usually government agencies or major financial institutions like banks and insurance companies) and also to protect consumers by ensuring that they are fully capable of managing the financial obligation of home ownership.

Loan Process

Holmgren and Associates

DBA of Finance of America
1900 Mountain Boulevard
Oakland, California 94611
Phone: 510-339-2121
NMLS 0910184/1071
 

Holmgren & Associates is a branch of Finance of America. We are a full service mortgage banker with an experienced staff offering expertise in residential mortgage lending, with primary focus on loans for home purchase, refinance, and reverse mortgages.

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