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Loan Process FAQ’s

Loan Process FAQ’s The loan process can be both confusing and overwhelming for most people.  For many individuals that purchase their first home or refinance their existing mortgages, they are unaware of what happens during the loan origination process.  We hope to help answer these questions and to clarify the key factors that you should understand as you go through your new mortgage or refinance process.

What is the difference between a Mortgage Broker and Mortgage Banker?
When you are ready to shop for a loan, you can work directly with a Mortgage Banker or with a Mortgage Broker.  Mortgage Bankers are direct lenders because they lend their own money, have their own in-house programs, and make the final decision on your application. Mortgage Brokers are intermediaries who represent many lenders and loan programs from which to choose.  Because Mortgage Bankers control the entire loan origination process, they are often able to more quickly and efficiently process, underwrite, and fund your mortgage as compared to a Mortgage Broker that has to send the file to another lender, where the Mortgage Broker cannot control the process.  Whether you choose a Mortgage Banker or a Mortgage Broker, you will always need to shop for the best deal for you taking into consideration the total costs of the loan, including the interest rate, origination fees, application fees, points, prepayment penalties and loan terms.
Should I get pre-qualified before I shop for a home?
You don’t have to apply for a loan before looking for a property, but it’s a good idea to get pre-qualified for a home loan before you find a home to purchase.  When you get pre-qualified, you know ahead of time how much house you can afford, what you can expect your monthly payment to be, and how much money you will need for the down payment and settlement costs at closing.  Also, many real estate agents will take your offer more seriously if you have been pre-qualified. 

Remember, a pre-qualification is just an overall assessment of what you can afford to pay monthly for your mortgage and how much you can afford to spend on your new home.  When a lender gives you a pre-qualification, this is not a formal commitment from the lender that your loan will be funded with the terms stated in the pre-qualification.  In order to be assured that you can obtain the loan that you are shopping for, you will need to be pre-approved.  After you are pre-approved by a lender, real estate agents and potential sellers will have more confidence in your ability to close your loan which may help you win the house of your dreams!

What is the difference between a pre-qualification and a pre-approval?
The terms pre-qualification and pre-approval are often used interchangeably.  But, there are significant differences between the two that you should be aware of as you begin shopping for your new home. 

Pre-Qualification
A mortgage loan pre-qualification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you.  The best time to get a pre-qualification is right at the beginning of your home buying process, before you even start looking at houses.  This involves either sitting down with a lender or talking with one on the phone, and providing information on your income, assets, debts, and a potential down payment amount.  The lender would then provide you with a ballpark figure in writing of how much he thinks you could afford to pay for a monthly mortgage.  There is no cost involved and there is no commitment on either side. This estimate is just helpful in helping you figure out if buying a home is a viable option, and if so, what your price range would probably be.

Pre-approval
Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. In this case, you provide a home loan lender with actual documentation of your income, assets, and debts. This process typically requires an application fee as well, since the bank will run a credit check and work to verify all your employment and financial information. Once you are approved, the lender will give you a letter of commitment, stating how much money her bank is willing to loan you for a home purchase. With a pre-approval in hand you can start your shopping – real estate agents and sellers will take you much more seriously when they see you have your mortgage funding in place.

It is important to understand, however, that even a pre-approval is not a guarantee that you will be approved for a mortgage loan.  The funding will only be given when the property appraisal, title search, and other verifications check out on the home you have chosen to buy.  Neither is the pre-approval binding; you can still obtain a mortgage from a different lender. If you do stick with the same company that pre-approved you though, the application process will be much shorter once you find the right house.
What are the key factors for mortgage qualification?
When a lender makes a decision about a mortgage application, they consider two basic factors: 

1)    Your ability and
2)    Your willingness to repay the loan.

Your ability to repay the mortgage is determined by verifying your current employment and analyzing your total income.  Lenders 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 proposed monthly payment will be compared to your monthly income and debt.

Your willingness to repay is influenced by how you have paid previous loans and by examining how the property will be used.  Willingness can be gauged by your credit report and previous commitments to pay rent and/or utility bills.  There is also a greater tendency to stick with your payments if you live in a house as opposed to a rental property or vacation home.

It is important to remember that there are no set rules and each applicant is handled on a case-by-case basis.  Many applicants come up a little short in one area, but make up for it with other strong points. These compensating factors may include a large down payment, solid employment, extensive educational background or overall financial health.

What should I look for in shopping for a mortgage?
When you first begin shopping for a mortgage, the process seems relatively simple, just compare rates and pick the lowest one.  But, after several calls to lenders that may not ask all the qualifying questions, you begin to realize that comparing lenders may become a difficult task.  In addition, you may be speaking to loan officers that are not thoroughly trained, and therefore, provide inaccurate or incorrect information. 

Comparing what different mortgage brokers and lenders are charging you to get an interest rate is often the most difficult part of mortgage shopping.  First make sure that you are comparing the interest rates on the same day. Rates change when the bond market changes, which occurs daily, if not a couple of times a day.

One of the difficulties in shopping for a mortgage is that lenders seem to have their own way of expressing costs. Compare total costs to get the loan. Get to the bottom line, and look at the GRAND TOTAL SUM of ALL costs before you compare the interest rates.  It is best to fix all lenders at one rate and lock period to compare the total costs to attain this rate and lock period on this particular day.

Be sure you are making an apples-to-apples comparison by using same-day similar rates for identical types of mortgages. (For example, if you are shopping mortgage rates and have a quote for a 30-year fixed at 5.25%, only compare it to other same-day 30-year fixed quotes at 5.25%.) You will find that mortgage rates and closing costs can change significantly from one day to another.

To ensure the quotes are reliable, ask the lender(s) if they are willing to guarantee (lock) the terms and rates for the time necessary to close your loan. This is a wise approach to get reliable rate and price quotes.

It is crucial to compare the total of all points and lender fees for each mortgage (from section 800 to 813 on the Good Faith Estimate). The total of all these fees is the price of the mortgage. The lender with the lowest total cost has the best mortgage rate. Choose a lender that guarantees their closing costs before initiating your transaction.

Annual Percentage Rate (APR) is a number that is designed to represent the total cost of the loan expressed in terms of an interest rate. But it can also be misleading by failing to include some loan costs – so it is not ideal to use in a comparison. To get the most accurate view, compare current mortgage rates plus the total of all closing costs.

That being said, the best mortgage rate may not always be the best loan. There are very important considerations beyond rates and fees when shopping for a mortgage. Customer service, lender experience, and a company’s track record all contribute to your satisfaction in obtaining your loan. You want to work with a lender who knows what they are doing and can deliver on their promises. Always look for a company willing to put their promises in writing. Remember that price is what you pay, but value is what you get.

How do I decide which loan is best for me?
There isn’t a single or simple answer to this question.  The right type of mortgage for you depends on many different factors: (1) Your current financial picture, (2) How you expect your finances to change, and (3) How long you intend to keep your house. 

The best loan for you can either be the loan with the lowest total costs, least long-term monthly payment, the least initial monthly payment or the quickest equity build-up depending on your situation.

One key input is your estimate of how long that you will own the property.  If you know you will not own a property long, you will want to take advantage of the ARM’s.  If you have a career where you get transferred a lot, you should factor this into your estimate of how long you will own the property.  In addition, it probably won’t make sense for you to pay points if you won’t own the property very long.  On the other hand, if you plan on staying in a house for a while, a couple of factors should be considered.  For example, you should consider assuring yourself an interest rate you are comfortable with and you should consider paying points.

If your income will increase rapidly, you may want to consider an ARM product to qualify for a larger home at a lower monthly payment, realizing that your rate may adjust upward in the future. In this instance, will your income increase a rate that will comfortably be able to absorb the higher monthly payment if the ARM adjusts upward?

Lastly, your adversity to risk should be a factor. Risk takers would be better suited for ARM loans versus a risk adverse borrower.

What is the process for obtaining and closing a loan?
Completing your loan is a simple and straightforward process.  As with any other application process, there are various stages that your loan must move through before your loan can be funded.  For residential mortgages, there are 5 distinct stages in the loan process: 

Prequalification:
This is the process of identifying which loan best fits your individual needs and determining whether you qualify for this particular loan.  The lender gathers information about your income and debts and makes a financial determination about how much house you may be able to afford.  Your information will be reviewed by an Automated Underwriting System (AUS) that will provide the lender with the necessary documentation needed for your loan pre-approval.

Application
After you have identified the property that you are going to purchase or decided to refinance your existing mortgage, you will complete a standard mortgage application.  You will be asked to provide documentation to support your income, assets, and debts.  The lender will also review all of the various fees and down payment options that are available for your desired loan program.  Your loan officer will also deliver a Good Faith Estimate (GFE) and a Truth-In-Lending Disclosure (TIL) within three (3) days that itemize the rates and estimated costs for obtaining the loan.

Processing
After the lender has received a completed loan application and all of the necessary supporting documents, your loan file will move to loan processing.  The loan processor’s goal is to put together a complete application package that is ready to be reviewed by the lender’s underwriter.  To do this, the loan processor will review your credit report and supporting documentation to verify your employment, income, debts, and payment history.  If there are unacceptable late payments, collections, judgments, or any other discrepancies, the processor will request a written explanation from you.  The loan processor will also review the appraisal and survey and check for property issues that may affect your final loan approval.

Underwriting
Once a file leaves processing and moves to underwriting, the lender’s underwriter will review your file for completeness and determine whether your application package meets all of the lender’s investment criteria.  If the Underwriter has questions or needs additional information to make a decision on your loan file, the Underwriter will add “Conditions” to your file and contact you to supply additional information.  After all of the underwriting conditions have been met, the Underwriter can approve the loan.  At this time, the Underwriter will issue a conditional commitment to lend, order title insurance, and schedule a time to close the loan.

Closing
Closing refers to the event when your loan is “funded” by your Lender through a wire transfer to the closing agent, which is typically a title or escrow company.  The closing occurs only after all underwriting conditions are fulfilled and the lender issues a full loan approval.  The closing agent will disburse the funds to the Seller in exchange for the title transfer to your property as well as disburse funds for the payment of any fees, including origination, title, realtor fees, etc.  After closing, you are done and your mortgage loan is complete!

What documents will I need to provide to my loan originator?
In order for us to complete your application and start processing your loan, we will need a variety of documents from you.  We understand that gathering all of the required information may take some time, but the faster the information is gathered, the faster we can get your loan closed and funded! 

General Information

  1. Social Security numbers for both you and any co-borrowers.
  2. Driver’s License or other official State identification.
  3. Residence history for the past 2 years.  If you are renting, either 12 months canceled rent checks or the name and address of your current landlord.
  4. Fully-executed purchase agreement for your new home.
  5. Real estate agent contact information.

Asset Information

  1. Copies of checking and savings accounts statements for the past three months.
  2. Most recent statements for any other assets such as bonds, stocks, or money saved in retirement programs (i.e. 401k or 403b program).

Income Information

  1. Recent paycheck stubs covering the last month.
  2. W-2 withholding forms or income tax returns for the past two years.
  3. If Self Employed
    1. If employed in sales, paid by commission, or owns rental real estate:
    2. Last three (3) years signed personal tax returns – including all schedules .
  4. if self-employed through a corporation,
    1. Last three (3) years corporate returns
    2. Year-to-date profit and loss statement and balance sheet

Miscellaneous Information

  1. If divorced, please include a fully executed divorce decree.
  2. If your down payment is a gift, please include a gift letter with an explanation of the where the gift money came from.
  3. If you have had previous bankruptcy, please include a complete copy of the bankruptcy paperwork with discharge papers.