Category — Mortgage

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There are many different types of loans but they can be grouped together in two main categories: conforming and nonconforming. The conforming category can be subdivided into what are called conventional and government loans. Conforming means that a preset criteria has been established and if you conform to the guidelines then you can get a conforming or “A” paper.

Government loans are subdivided into FHA and VA loans. VA is for veterans of the military. This type of loan is guaranteed by the federal government in the event of a default by the borrower. It is a true 100% loan, where the buyer literally borrows 100% of the purchase price in one loan. Most no-money deals have a little creativity in them with a grant, down payment assistance or some form of two loans, but they usually are not one sole loan for 100% of the purchase price.

FHA stands for Federal Housing Authority. FHA is a branch of HUD (Housing and Urban Development). When you hear the phrase “HUD home,” you’re hearing about a foreclosed home that had an FHA loan.

FHA is an insured loan. Typically if you have less than 20% for a down payment, a bank is not too excited about lending you money. Well if everyone had to have 20%, where would be? So to offset the risk to the bank, mortgage insurance or MI was developed. FHA has an upfront MI that can be financed in the loan.  MI paid on a monthly basis is another option. So all loans with less than 20% down have some form of MI and whether it is through a private MI or an FHA loan it will have a higher interest rate.

FHA requires a 3% down payment. The money can be a gift, it cannot be borrowed and the gift cannot be from the seller.

HOWEVER the minimum down payment for FHA is going to increase to 3.5% and the gift program is going to phased out by September 30th, 2008. To take advantage of the down payment assistance program you better hurry.

Utah Housing is another place to get a good loan with no money down. They have limits on the amount of income you can make. Because that income limit is fairly low it does limit how much house you can buy. However they are great for a one-income family (and the larger the family, the larger the limit) and they do offer a good loan.

Pre-Qualification

The process of getting a loan begins with pre-qualification. 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 yield different valuations, a borrower should get pre-qualified for each type of loan the borrower may qualify for.

In attempting to approve buyers 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 that you 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 could not stay in business if they did not generate business, so it is in everyone’s best interest to see that you qualify.

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 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.

The various fees and closing cost estimates will be 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.

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, is 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.

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. Also 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 your 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 also need to provide a copy of your first mortgage note and deed of trust. These items will normally be found in your mortgage closing documents.

Most people applying for a home mortgage need not worry about the effects of their credit history during the loan 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 negative aspects 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 are 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 (re-establishment 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 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. The scores are useful in directing applications to specific loan programs and to set 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 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.

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.

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.

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.

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.
 

Required Documnets

• Past two (2) years W-2 statements
• Pay Stubs covering the last (30) thirty days
• Three most recent monthly bank statements
• Most recent transaction summary of 401K, IRA, or Mutual Fund Accounts
• Photocopies of any stocks or certificates of deposits
• Copy of the purchase and sale agreement
• If you are currently renting….either 12 months canceled rent checks or the name and address of your current landlord
• If divorced…a fully executed divorce decree
• For a refinance…a copy of the deed, and most recent tax bill
• A letter of explanation for any known credit problemsFor self employed borrowers, employed in sales, paid by commission, or owns rental real estate:
• Two (2) years signed personal tax returns - including all schedules
• If self-employed through a corporation, last two years corporate returns as well as a year-to-date profit and loss statement and balance sheet

Different programs require varying amounts of documentation. The loan program you select may require more or less documentation. Please contact us for a free, no-obligation consultation.

You will here things like pre-qualified and pre-approved and wonder what is the difference? Pre-qualified simply states that based on a certain amount of information given you can qualify for a certain amount of money. This is subject to the verification of the information, of course.

To be pre-approved means that your credit has been pulled, your employment has been verified in writing, your income has been veriifed via employment letters, pay stubs and tax returns. Money has been verified via the bank statements.
 

Here is a pdf of the Uniform Residential Loan Application, a.k.a. the 1003 (the ten O three).

Below are instructions from eFannieMae. The basic idea of a 1003 is to determine how much money you can pay back.

You will list all your income, all your debts, etc. We all know that the loan process is boring, but if you want the American Dream you have two choices: cash or loan.

 Instructions

The lender may accept applications taken during a face-to-face interview, over the telephone, through the mail, or via the Internet. The lender should complete all blanks and attach any separate exhibits, details, or statements that are relevant to underwriting the mortgage. The borrower(s) must sign the original application at the time it is completed. If the application is taken over the telephone or via the Internet, the borrower(s) must sign the completed application as soon as possible thereafter. However, an electronic signature or facsimile of the borrower’s signature is acceptable as indicated in the “Acknowledgment and Agreement” section of the application. The lender should retain the original application with the supporting information provided by the borrower(s). Before or at the loan closing, the borrower(s) must sign the final application that the lender prepares based on its verification of the information that the borrower(s) provided in the original application.

The instructions at the top of Form 1003 are consistent with the permissible inquiries that creditors are allowed to make under the Equal Credit Opportunity Act (ECOA). Although ECOA permits the lender in a community property state to obtain information regarding the liabilities of a borrower’s spouse even though he or she is not applying for the mortgage and his or her income will not be considered for loan qualification purposes, we do not require the lender to obtain the information. This also means that in states where another person shares community property rights with the applicant, the lender does not need to include information on that person’s liabilities if he or she is not an applicant.

Note: The following instructions highlight certain sections of the form.

Introductory Statement

We recognize that the introductory paragraph of Form 1003 differs slightly from the introductory paragraph in the Uniform Residential Loan Application found on Freddie Mac’s website, Freddie Mac Form 65. However, because we have determined that these differences are not material, Fannie Mae will deem either version to comply with our requirements for use of the Uniform Residential Loan Application.

V. Monthly Income and Combined Housing Expense Information

Gross Monthly Income: If the net cash flow for an investment property (or the monthly operating income for a two- to four-family property for which the applicant occupies one of the units as a principal residence) is a positive number on the Operating Income Statement (Form 216), it should be listed as “net rental income.” If it is a negative number, it must be included in the applicant’s monthly obligations.

Combined Monthly Housing Expense: The present monthly housing expenses for the borrower and the co-borrower should be listed on a combined basis. The proposed monthly housing expense for a two- to four-family property in which the applicant will occupy a unit as a principal residence should reflect the monthly payment (PITI) for the subject property. For all one-unit investment properties and all two- to four-family properties in which the applicant will not occupy one of the units, the present monthly housing expense should reflect the applicant’s principal residence.

VI. Assets and Liabilities

When the borrower’s and co-borrower’s assets and liabilities are not sufficiently joined to make a combined statement meaningful, a separate Statement of Assets and Liabilities (Form 1003A) should be completed for the co-borrower.

VII. Details of Transaction

The purchase price shown on Line “a” under the “Details of Transaction” should not include any discounts or rebates or other allowances paid or allowed to the purchaser. For refinancing, the amount being refinanced should be shown on Line “d” — Refinance. The figure should include the total amount of all existing liens plus the costs of improvements that have been — or will be — made. Lines “a”, “b”, and “c” should not be used to describe a refinance transaction.

VIII. Declarations

Noncitizen Applicants: If an applicant indicates in his response to Question J that he is not a U.S. citizen, and also indicates in his response to Question K that he is not a permanent resident alien, the lender may wish to ask whether he is a nonpermanent resident alien or otherwise is lawfully present in the United States. Fannie Mae will purchase loans where the borrower is not a U.S. citizen provided that the borrower is lawfully present in the United States. We do not designate specific documentation that is required to establish lawful presence. Lenders should consult their counsel or other sources for information on standard documents that can be used to establish lawful presence. An Individual Tax Identification Number (ITIN) alone does not establish either that the holder is lawfully present or that he is not lawfully present. Fannie Mae does not require that the borrower have a Social Security Number.

Determining First-Time Homebuyers: The loan can be considered a loan to a first-time homebuyer if any of the applicants is an individual who (1) is purchasing the security property, (2) will reside in the security property, and (3) had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the security property, unless he or she is a displaced homemaker or single parent whose only ownership interest in a principal residence during the preceding three-year time period was a joint ownership with a spouse. (A displaced homemaker or single parent who during the three-year period owned a principal residence alone or with anyone other than a spouse, or who owned a second home or investment property, cannot be considered a first-time homebuyer.)

A displaced homemaker is an adult who:

• has not worked full time in the labor force for several years
• has worked in the home to care for the home and family during that time, and
• is currently unemployed or underemployed and is having difficulty finding or upgrading employment.

A single parent is a person who is unmarried or legally separated from his or her spouse and is pregnant or has custody (including joint custody) of one or more minor children.

The responses to questions in the Declarations section described below will enable lenders to determine whether an applicant qualifies as a first-time homebuyer. Note that if there is more than one applicant, only one of the applicants has to qualify for first-time homebuyer status in order for the mortgage to be considered a mortgage to a first-time homebuyer.

Instructions for translating these responses into a single “first-time homebuyer indicator” that can be reported to us when the mortgage is submitted for purchase or securitization follow.

The following may be added to Section IX: Acknowledgment and Agreement at the end of the paragraph.

Right to Receive Copy of Appraisal.
I/We have the right to a copy of the appraisal report used in connection with this application for credit. To obtain a copy, I/we must send Lender a written request at the mailing address Lender has provided. Lender must hear from me/us no later than 90 days after Lender notifies me/us about the action taken on this application, or I/we withdraw this application.

X. Information for Government Monitoring Purposes

This section is included to aid the federal government in monitoring compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. Supplying this information is strictly voluntary on the part of the applicant, but lenders should ask all applicants to provide it, including those who apply by telephone and through the Internet, and should describe the reason for collecting this data. Race and ethnicity are separate categories, and although the lender should ask applicants to furnish information for both, applicants may furnish one but not the other. Note that there is no longer a place for applicants to indicate race as “Other” but applicants may check as many races as apply.

The Home Mortgage Disclosure Act and its implementing Regulation C generally require Lenders to collect sex, race and ethnicity data on all applications.

When an application is taken in person and an applicant elects not to provide some or all of this information, federal law requires the lender to note the applicant’s sex, ethnicity, and race on the form, based on the lender’s visual observation or the applicant’s surname. To aid in identifying applicants who may be of Hispanic ethnicity and who elect not to self-identify, the lender may wish to consult the list of Spanish surnames developed by the U.S. Bureau of the Census. Furthermore, the lender may wish to advise the applicant that he may complete or change the information in this section after the application is approved, at any time up until closing.

To Be Completed By Interviewer

The interviewer must complete this portion of the form to indicate the method used to take the application and to provide the name and telephone number of the interviewer, as well as his or her employer’s name and address.

Continuation Sheet/Residential Loan Application

Lenders may amend this section by including space to evidence intent to apply for joint credit. Other approaches, such as including this information on a separate document, are also acceptable to Fannie Mae, provided they meet the requirements of applicable law. Lenders should consult counsel to determine their alternatives.

Special Notice for Balloon Mortgages

For each balloon mortgage, the lender must insert a special notice regarding the nature of the balloon features on Form 1003 or in a separate attachment to the form. If an attachment is used, the borrower(s) must sign the attachment. The following language must be inserted, using capital letters:

“THIS LOAN MUST EITHER BE PAID IN FULL AT MATURITY OR REFINANCED TO A MARKET LEVEL FIXED-RATE MORTGAGE. YOU MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE LOAN AND UNPAID INTEREST THEN DUE IF YOU DO NOT QUALIFY FOR THE CONDITIONAL RIGHT TO REFINANCE AS SPECIFIED IN THE NOTE ADDENDUM AND MORTGAGE RIDER. THE LENDER IS UNDER NO OBLIGATION TO REFINANCE THE LOAN IF QUALIFICATION CONDITIONS ARE NOT MET. YOU WILL, THEREFORE, BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT YOU MAY OWN, OR YOU WILL HAVE TO FIND A LENDER, WHICH MAY BE THE LENDER YOU HAVE THIS LOAN WITH, WILLING TO LEND YOU THE MONEY. IF YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE SAME LENDER.”