Loan Process

The first step in the loan process is PREPARATION. The organization and compilation of all requested financial documentation is an absolute must for a borrower. This file of documents will be a resume of sorts that will give lenders an up-close look at what kind of debtor you might be. The typical file should contain the following:

• Financial statements
• Bank accounts
• Investments
• Credit card
• Auto loans
• Recent pay stubs
• Tax returns for two years

Another means by which lenders gauge your trustworthiness as a borrower is through your credit rating. A recent credit report will allow the underwriter to review critical information as the number of active accounts, open loans and the promptness of all past payments.

There will be three credit scores on the tri-merge credit report the Mortgage Broker pulls for a borrower(s). The middle of three scores will be used. This score is extremely important as based on the credit score reflected on the report, the underwriter determines whether a borrower qualifies or not. Thus, you cannot take your credit seriously enough! We suggest checking your credit reports at least once a year or before making any major purchase to ensure the accuracy of the information contained there.

Credit score ratings usually vary between 400 and 800. Anything above 620 is good. If you exceed 680, you are considered premium and may even get a lower interest rate.

When purchasing real estate, it is wise to prioritize your costs. Down payments, closing costs and additional expenses (such as inspections) should be at the top of your list. On the other hand, be sure to pay down (or pay off in full) on your current revolving and high-interest rate debts, such as credit cards.

Most important to remember is that underwriters are looking for stability when reviewing each loan submission they underwrite. A borrower can instill confidence in the lender by avoiding any big, sudden moves both in your career and your finances. If that job change or big budget purchase absolutely cannot be postponed, check with your lender first and consider the consequences.

When securing financing, a borrower must remember that this is a decision that he/she may have to live with for thirty years. It is integral to spend time comparing different mortgage brokers before making a final decision as to who to obtain financing through.

There are also several considerations to keep in mind when shopping for the right lender and program:

• Price: Consider the competitiveness of a lender’s prices with that of others, especially for mortgage rates, interest rates, and additional costs.
• Diversity of products: Price is important but by no means should it be your only determining factor. How extensive is the lender’s range of offered loan programs? Check the availability of the program most appropriate to your credit profile and property.
• Rapport: Does your Mortgage Consultant communicate effectively and thoroughly? Are they attentive and prompt? You aren’t looking for just a guide but a partner—someone you can work with and trust every step of the way.
• Connections: Check whether the lender has access to the lenders Underwriter to ensure that he/she understand your goals as a borrower.

When choosing a loan, there are many different options for a borrower to chose from. Here are some of the options:

• Fixed loan: This long-term option requires monthly payments that will remain the same throughout the duration of the loan, which may vary from fifteen to thirty years. Though it’s the most affordable short-term solution, it may cost more than shorter term mortgages over the life of the loan.
• Adjustable rate mortgage (ARM): The loan rate here will be determined by factors such as index, readjustment intervals, and capitalization rate. The initial interest rate can be as much as 2 to 3 percent lower than a comparable fixed rate mortgage, which can make homeownership more affordable. However you should first examine variant factors and downside risks before seriously considering this option.
• Hybrid loan: Also known as an intermediate or convertible ARM, it offers a fixed interest rate for a specified initial period before it ‘switches’ to an ARM and adjusts with the market every six months or every year.

Don’t be intimidated by the jargon used in financing. Here are a number of key terms you’ll see frequently in your process.

• Credit report.: A tri-merge credit report will be pulled by your Mortgage Consultant to obtain information/credit scores for all three credit reporting agencies. The credit report should contain information on all your outstanding loans and repayment history, and will typically cost less than thirty dollars.
• Application/Processing Fee: This is the lender’s fee for the assessment of your capacity for repayment as a borrower and will usually be charged upon closing of the loan. The price for this fee is usually around $700.00
• Annual Percentage Rate (APR): The APR expresses the sum total of all your borrowing costs as a percentage interest rate charged on the loan balance. For Example: After fees, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).
• Indexes: Changes in indexes such as the Federal Funds Rate and the Treasury Bill are used to periodically readjust the interest rates in adjustable rate mortgages (ARMs).
• Points: When mortgage companies are competing by offering lower interest rates, they may charge you a “point,” which is a one-time pre-paid interest fee, calculated as a percentage of the loan. Points are considered part of the cost of credit to the borrower, and part of the investment return to the lender. They may range from 0.25% to 2% of the loan balance, and are usually paid up front.
• Appraisal Cost: This is the fee given to an independent appraiser who may be hired by your lender to evaluate the property’s purchase price, condition and size in relation to similar recent neighborhood sales. This is useful to the lender because it ensures repayment in case the borrower defaults, forcing them to sell the property.
• Miscellaneous Fees: Various costs will be incurred during the processing of your loan request, such as notary, courier, and county recording fees.

How is pre-approval different from pre-qualification? What are the advantages of each and which option would be the best for you?

Pre-Qualification
This is an assessment by the lender, based on certain basic information given by the borrower (e.g. employment, income, asset information, current monthly debt, and credit worthiness). Based on this quick evaluation the lender makes a tentative decision to pre-qualify the borrower for a certain loan amount. This does not commit the lender at all to the applicant, being only an opinion of the lender.

Pre-Approval
Like a pre-qualification, a pre-approval involves a lender making an assessment of a borrower’s buying capacity based on her or his income. But unlike a pre-qualification, a pre-approval letter also checks the applicant’s credit and is a surer verification of a borrower’s income. It takes longer to process and will require more comprehensive documentation, but gives a clearer and more definitive guarantee of the loan amount a borrower is entitled to.

Why Choose Pre-Approval?
It’s advisable to go straight to a pre-approval for several reasons. A pre-approval can strengthen your purchasing power: as a far more accurate evaluation of how much house or real estate you are capable of buying, it will be more appealing and thus perform better than a pre-qualification in a competitive sellers’ market. It’s also more time-effective since it reduces the time your lender will need to process and fund your loan.

Brokers and lenders: The lender or creditor is the party who 1) disburses or provides funds to the borrower at the end of a successful loan application process, and 2) receives the note attesting the borrower’s obligation to repay. The broker, meanwhile, acts as an intermediary between the borrower and the lender and serves as the applicant’s main contact throughout the process. The mortgage broker usually receives a service fee from the lender for customer services rendered.

Loan application forms: Most forms can be downloaded from the Mortgage Consultant’s website or completed electronically online. Fill out all forms accurately and completely, and contact your lender for any questions or clarifications.

Documentation: It’s highly recommended to keep an organized file containing both originals and copies of all documents accumulated throughout the entire application process. The following items are needed for each borrower on the loan:

• Two most recent paystubs
• Two most recent years W2’s
• Two most recent years personal/business tax returns (all pages and schedules)
• Brokerage, mutual fund and retirement account statements
• Proof of other income sources (alimony, trusts, rental income, etc.)
• Credit card statements
• Auto / boat / student / miscellaneous loans
• Drivers’ license or Social Security Card
• Copies of visa or green card (for non-US citizens)
• Copies of existing mortgage statements
• Bankruptcy paperwork if filed in the past ten years (all pages)

Underwriting: The Underwriter is hired by the lender to analyze and examine the documentation contained within the loan submission package. They are ultimately determining whether or not a mortgage should be issued to the applicant and do so by evaluating the applicants’ creditworthiness. The Mortgage Consultant may contact you in the course of the underwriting process, so prompt communication is necessary to keep the process running smoothly.

It is imperative to remember that every single transaction is unique, so what you may have experienced in previous transaction won’t necessarily be the same in your current transaction. With the myriad of changes in the mortgage industry, lenders have tightened their underwriting guidelines significantly. In light of this, you will most likely be asked to provide more documentation than was necessary in the past. Unfortunately there is no way around this as lenders must abide by their Investor’s requirements and therefore ensure they underwrite each loan to their Investor’s specific loan guidelines.

The end if finally in sight once the Underwriter has issued the final loan approval. At that point, the loan submission will be placed in line with the document drawing department. When loan documents have been prepared, they will be emailed to the closing agent for an estimated HUD (settlement statement) to be prepared and approved by the lender. Once your lender has agreed to close or fund your loan, the signing can begin. Before this happens, however, be sure to verify and finalize all the documents, and to supply any additional requirements (such as photo IDs or cashiers’ checks). The final loan documents are usually signed in the presence of an escrow officer or a notary.

Wiring funds: Your payment is either automatically deducted or wired—in the latter case, the money is electronically transferred between financial companies. Make sure that the wiring instructions as well as all important numbers are clarified and checked for accuracy by both parties.

Give yourself a pat on the back. Your loan is now funded! Tie up any loose ends by confirming the money transfer with your broker and filing all pertinent documents of the transaction. The closing agent will contact the borrower to let them know the loan has funded.