| What
is the difference between pre-approval and pre-qualification?
When does it make sense to refinance?
What is a rate lock?
What's the difference between a mortgage broker and
a lender?
Will I save money going directly to a mortgage lender?
What is a full documented loan?
What are the other types of loans?
What is a good faith estimate?
What is a conforming loan?
What is a jumbo mortgage?
What are points?
What is a pre-qualification?
What
is the difference between pre-approval and pre-qualification?
The
pre-approval process is much more complete than pre-qualification.
For pre-qualification, the loan officer asks you a few questions
and provides you with a pre-qual letter. Pre-approval includes
all the steps of a full approval, except for the appraisal and
title search. Pre-approval can put you in a better negotiating
position, much like a cash buyer.
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When
does it make sense to refinance?
Usually people
refinance to save money, either by obtaining a lower interest
rate or by reducing the term of the loan. Refinancing is also
a way to convert an adjustable loan to a fixed loan or to consolidate
debts. The decision to refinance can be difficult, since there
are several reasons to refinance. However, if you are looking
to save money, try this calculation:
· Calculate
the total cost of the refinance
· Calculate
the monthly savings
· Divide
the total cost of the refinance (#1) by the monthly savings (#2).
This is the "break even" time. If you own the house
longer than this, you will save money by refinancing.
Since refinancing
is a complex topic, consult a mortgage professional.
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What
is a rate lock?
A rate lock
is a contractual agreement between the lender and buyer. There
are four components to a rate lock: loan program, interest rate,
points, and the length of the lock.
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What's
the difference between a mortgage broker and a lender?
A mortgage
broker counsels you on the loans available from different wholesalers,
takes your application, and usually processes the loan which involves
putting together the complete file of information about your transaction
including the credit report, appraisal, verification of your employment
and assets, and so on. When the file is complete, but sometimes
sooner, the lender "underwrites" the loan which means
deciding whether or not you are an acceptable risk.
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Will
I save money going directly to a mortgage lender?
Not necessarily.
In fact, if you are a reasonably astute shopper, you will probably
do better dealing with a mortgage broker. Mortgage brokers do
not add any net cost to the lending process, because they perform
functions that would otherwise have to be done by employees of
the lender. Furthermore, because mortgage brokers deal with multiple
lenders -- in a typical case, 25 to 30, sometimes more -- they
can shop for the best terms available on any given day. In addition,
they can find the lenders who specialize in various market niches
that many other lenders avoid, such as loans to applicants with
poor credit ratings, loans to borrowers who do not intend to occupy
the property, loans with minimal or no down payment, and so on.
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What
is a full documented loan?
Both income
and assets are disclosed and verified, and income is used in determining
the applicant's ability to repay the mortgage. Formal verification
requires the borrower's employer to verify employment and the
borrower's bank to verify deposits. Alternative documentation,
designed to save time, accepts copies of the borrower's original
bank statements, W-2s and paycheck stubs.
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What
are the other types of loans?
Stated income/verified
assets: Income is disclosed and the source of the income is verified,
but the amount is not verified. Assets are verified, and must
meet an adequacy standard such as, for example, 6 months of stated
income and 2 months of expected monthly housing expense.
Stated income/stated
assets: Both income and assets are disclosed but not verified.
However, the source of the borrower's income is verified.
No ratio:
Income is disclosed and verified but not used in qualifying the
borrower. The standard rule that the borrower's housing expense
cannot exceed some specified percent of income, is ignored. Assets
are disclosed and verified.
No income:
Income is not disclosed, but assets are disclosed and verified,
and must meet an adequacy standard.
Stated Assets
or No asset verification: Assets are disclosed but not verified,
income is disclosed, verified and used to qualify the applicant.
No asset:
Assets are not disclosed, but income is disclosed, verified and
used to qualify the applicant.
No income/no assets: Neither income nor assets are disclosed.
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What
is a good faith estimate?
It is the
list of settlement charges that the lender is obliged to provide
the borrower within three business days of receiving the loan
application.
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What
is a conforming loan?
A
loan eligible for purchase by the two major Federal agencies that
buy mortgages, Fannie Mae and Freddie Mac.
Conforming
loan limit is any loan amount under the following:
One Unit Property - $359,650.00
Two Unit Property - $690,600.00
Three Unit Property - $556,500.00
Four Unit Property - $691,600.00
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What
is a jumbo mortgage?
A
mortgage larger than the maximum eligible for purchase by the
two Federal agencies, Fannie Mae and Freddie Mac.
Jumbo Loan
limit is any loan amount over the following:
One Unit Property - $359,651.00
Two Unit Property - $690,601.00
Three Unit Property - $556,501.00
Four Unit Property - $691,601.00
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What
are points?
It is an upfront
cash payment required by the lender as part of the charge for
the loan, expressed as a percent of the loan amount; e.g., "2
points" means a charge equal to 2% of the loan balance.
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What
is a pre-qualification?
This is the
process of determining whether a customer has enough cash and
sufficient income to meet the qualification requirements set by
the lender on a requested loan. A pre-qualification is subject
to verification of the information provided by the applicant.
A pre-qualification is short of approval because it does not take
account of the credit history of the borrower.
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4.
The Loan Process
Pre-Qualification
Mortgage Programs and Rates
The Application
Processing
Required Documents
Credit Reports
Appraisal Basics
Underwriting
Closing
Summation
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 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 couldn't stay in business if they didn't
generate loan business, so it's in everyone's best interest to
see that you qualify.
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Mortgage
Programs and Rates
To properly
analyze a Mortgage Program, the borrower needs to think about
how long they 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.
Shopping for
a loan is very time consuming and frustrating. With so many programs
to choose from, each with different rates, points and fees, 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.
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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. The borrower
completes, with the aid of a mortgage professional, 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.
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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. The entire mortgage package is then put together
for submission to the lender.
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Required
Documents
If you are
purchasing or refinancing your home, and you are salaried you
will need to provide the past two-years W-2s and one month of
pay-stubs: OR, if you are self-employed you will need to provide
the past two-years tax returns. If you own rental property you
will need to provide Rental Agreements and the past two-years
tax returns. If you wish to speed up the approval process, you
should also provide the past three-months bank, stock and mutual
fund account statements. Provide the most recent copies of any
stock brokerage or IRA/401k accounts that you might have.
If you are
requesting cash-out you will need a "Use of Proceeds"
letter of explanation. Provide a copy of the divorce decree if
applicable. If you are not a US citizen, provide a copy of your
green card (front and back), or if you are NOT a permanent resident
provide your H-1 or L-1 visa.
If you are
applying for a Home Equity Loan you will need to, in addition
to the above documents, provide a copy of your first mortgage
note and deed of trust. These items will normally be found in
your mortgage closing documents.
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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.
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 persons
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've 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, but 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
Once the loan
is approved, the file is transferred to the closing and funding
department. The funding department notifies the broker and closing
attorney of the approval and verifies broker and closing fees.
The closing attorney then schedules a time for the borrower to
sign the loan documentation.
At the closing
the borrower 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 closing attorney 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 closing attorney arranges for the mortgage note
and deed of trust to be recorded at the county recorders office.
Once the mortgage has been recorded, the closing attorney then
prints the final settlement costs on the HUD-1 Settlement Form.
Final disbursements are then made.
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Summation
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.
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