1. Pre Qualification
2. Credit Reports
3. Mortgage Programs and Rates
4. The Application
5. Required Documents
6. Processing
7. Appraisal Basics
8. Underwriting
9. Closing
10. Summation

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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.

When approving homebuyers for a mortgage, lenders look at two key factors; the borrower’s ability and willingness to repay the loan.  

Ability to repay the mortgage is verified by your current employment and total income. In general, lenders prefer that you be employed at the same place for at least two years, or at least be in the same line of work for a two years.

The borrower's willingness to repay is determined by examining 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, you may have stronger areas which could over-write the weak ones. 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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Credit Reports

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.

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 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 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.

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 credit scores below 620 are sent to lenders who specifically specialize in people with less than perfect credit.  

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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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 each borrower's situation and recommend the most suitable Mortgage Program. This allows 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 will complete the application with the aid of a mortgage professional. Once the application is completed the mortgage professional will provided you with information regarding the required documentation.  You will need to gather the documentation and submit the documentation to the mortgage professional for your loan.  

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Required Documents

If you are purchasing or refinancing your home, and you are a salaried employee, 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. You should also provide the past three-months bank, stock and mutual fund account statements. In addition 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.

If you have declared bankruptcy in the past 7 years we will need FULL bankruptcy papers.  If you have been divorced, provide a copy of the divorce decree. If you are a US Citizen,  provide a copy of your current driver’s license. 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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Processing

Once the application and documentation has been given to the lender, the processing of the mortgage begins. The Processor requests any additional information and orders the Appraisal and Title Report. The information on the application, such as bank deposits, income documentation and credit history is then verified. Any credit derogatories, such as late payments, collections and/or judgments require a written explanation. Once the appraisal and title work has been completed the processor will check 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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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 borrower is contacted to supply more information and/or documentation.

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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 title company of the approval and verifies broker and closing fees.

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.

After the documents are signed, the title company returns the documents to the investor who examines them and, if everything is in order, arranges for the funding of the loan. Once the loan has funded, the title company arranges for the mortgage note and deed of trust to be recorded at the county recorders office. Once the mortgage has been recorded, the title company makes the disbursements.

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