Loan Process Explained
Are you doing a little research to learn more about the mortgage process? Below is an overview of some of the key points during the mortgage process. Check them out to get a better understanding of what is involved and how best to prepare for each step.
Pre-qualification starts the loan process. Once we have gathered information about your employment, income, and debts, a determination can be made as to how much you can pay for a house. Since different loan programs can cause different valuations, you should get pre-qualified for each loan type you may qualify for.
To approve home buyers for the type and amount of mortgage you want, we must look at two key factors. First, your ability to repay the loan and, second, your 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. Your 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 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 weaker one. Mortgage companies could not stay in business if we did not generate loan business, so it is in everyone’s best interest to see that you qualify.
Keep in mind that pre-qualification is not a formal application, and the loan amount qualification may be subject to change depending on how accurate the income and debt information the applicant initially provided.
To accurately analyze a mortgage program, you need to think about how long you plan to keep the loan. If you intend 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 mortgage professionals can evaluate your situation and recommend the most suitable mortgage program, thus allowing you to make an informed decision.
First Time Home Buyer?
Several options provide a lower down payment requirement, lower interest rate and even closing cost assistance to new home buyers.
You could qualify for a VA loan that does not require a down payment. Ask your CFI loan officer what benefits you can receive with certain VA programs.
Once your application has been submitted, the processing of the mortgage begins. The Processor verifies the information on the application, such as bank deposits and payment histories. 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. The entire mortgage package is then put together for submission to the underwriter.
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 starting your application to increase your credit score and enjoy a lower interest rate.
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
NOT included in 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 our mortgage professionals 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. 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, the length of credit history, types of credit and number of 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 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 your credit file. They DO NOT consider your 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 setting 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 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 need. Accounts that are no longer needed should be formally canceled 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 typically 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 period are better than randomly late payments.
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 before the appraiser arriving at a final opinion of value.
Using three common approaches, which are all derived from the market, calculates 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 ‘benchmark’ 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.
Once the processor has put together a complete package with all verifications and documentation, the file is sent to the underwriter. They are responsible for determining whether the file is deemed an acceptable loan and analyzing the various aspects of the mortgage as well as issues to the approval decision. If more information is needed, your loan officer will contact you to supply more documentation. We know that each borrower and each loan is unique and may not fit every guideline, so our underwriters evaluate the entire loan as a whole and take into consideration certain aspects that go beyond the scope of automated underwriting.
Once the loan is approved, the file is transferred to the closing and funding department. The funding department notifies us and the closing agent of the approval and verifies lender and closing fees. The closing agent then schedules a time for you to sign the loan documentation.
At the closing you should:
- Bring a cashier’s 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. A wire from the approved bank account is also acceptable.
- 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 closing agent returns the documents to us for examination and, if everything is in order, we arrange for the funding of the loan. Once the loan has funded, the closing agent arranges for the mortgage note and deed of trust to be recorded at the county recorder’s office. Once the mortgage has been recorded, the closing agent then prints the final settlement costs on the Closing Disclosure (CD). Final disbursements are then made.
A typical ‘A’ mortgage transaction takes between 14-21 business days to complete. With new automated underwriting, this process speeds up greatly. Contact one of our experienced Loan Officers today to discuss your particular mortgage needs or Apply Online and a Loan Officer will promptly get back to you.