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

Mortgage Programs and Rates

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 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.

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 derogatoriness, 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 paystubs: 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, in addition to the above documents, to provide a copy of your first mortgage note and deed of trust. These items will normally be found in your mortgage closing documents.

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 “benchmark” 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 cashier’s 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.
• 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.
• Sign the loan documents.
• Bring identification and proof of insurance.