Home Loan Process

1. Pre-Qualification
2. The Application
3. Processing
4. Required Documents
5. Credit Reports
6. Appraisal Basics
7. Underwriting
8. Closing

Pre-Qualification vs. Pre-Approval

What is the difference between pre-qualification and pre-approval? In the world of real estate the terms "pre-qualification" and "pre-approval" are often used interchangeably. However, they have very different meanings.

What is a pre-qualification? A pre-qualification is an estimate of how much you can afford in a mortgage payment. It is based upon the information you provide along with, most often, a credit check. The information you provide won't be verified as part of the pre-qualification process.

What is a pre-approval? A pre-approval is a firmer commitment on behalf of the mortgage lender. The process for pre-approval includes a credit check and and income and asset verification. During a pre-approval the mortgage company does all the work of a full approval including running the loan through the automated underwriting system. The only itmes not completed are the appraisal and title search. For a complete pre-approval you will need to provide paystubs and W-2 forms (or tax returns if you are self-employed), plus statements from savings and investment accounts to verify your assets. If you've been pre-approved for a loan, you can shop for a house with more certainty and less anxiety because you won't be going through the whole process worrying about your mortgage approval.

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The Application

The application is the true 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 costs will be discussed and then verified by the Good Faith Estimate (GFE).

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Processing

Once the application has been submitted, the processing of the mortgage begins. The information on the application, such as bank deposits and payment histories, are verified. Any credit issues, such as late payments, collections and/or judgments will be reviewed. The processor a;so 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

Salaried borrowers:

• Current pay stubs
• Most recent monthly bank/asset statements
• Most recent W-2 Form(s)
• Copy of the purchase and sale agreement (if applicable)
• Photo Id(s)

For self employed borrowers, employed in sales, paid by commission, or owners of rental real estate:

• Signed personal Federal tax returns - including all schedules
• Most recent monthly bank/asset statements
• Most recent W-2 Form(s)
• Copy of the purchase and sale agreement (if applicable)
• Photo Id(s)

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.

Credit Reports

FICO® scores are the numerical summary of your credit rating.

• They range from 300-850, higher is better!
• Higher scores can mean lower interest rates.
• FICO® scores are calculated based on your rating in five general categories:
• Payment history - 35%
• Amounts owed - 30%
• Length of credit history - 15%
• New credit - 10%
• Types of credit used - 10%

 

Improving your FICO® credit score

It's important to note that raising your FICO credit score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.

Payment History Tips

• Pay your bills on time!
  Delinquent payments and collections can have a major negative impact on your FICO score. However, keep in mind that most bills will not be shown as 'late' on your credit report until they are over 30 days past due. If you are behind make sure to pay within the 30 day period.
• If you have missed payments, get current and stay current.
  The longer you pay your bills on time, the better your credit score.
• Be aware that paying off a collection account will not remove it from your credit report.
  It will stay on your report for seven years. Also, if you are applying for a loan soon, it may be best to wait to pay off an old collection account (as updating an old derogatory account, even by paying it off, can hurt your score in the short run).
• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
  This won't improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

Amounts Owed Tips

• Keep balances low and credit limits high on credit cards and other revolving debts.
  High outstanding debt can adversely affect a credit score. Ideally, you want your credit balances to be 1/3 or less of your high limit. If your balances are over 50% of your credit limit your score will certainly suffer.
• Don't close unused credit cards as a short-term strategy to raise your score.

Length of Credit History Tips

• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.
  New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

• Do your rate shopping for a given loan within a focused period of time.
  FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you are shopping for a large ticket item like a home mortgage multiple credit inquires within a 2-4 week period will be counted as only one inquiry. Don't be fooled by uniformed (or intentionally misleading) lenders that tell you not to allow others lenders to pull your credit because it will 'hurt your score.'
• Re-establish your credit history if you have had problems.
  Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
• Note that it's OK to request and check your own credit report.
  This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

• Have credit cards - but manage them responsibly.  In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be viewed as a higher risk than someone who has managed credit cards responsibly.

• Note that closing an account doesn't make it go away.
  A closed account will still show up on your credit report, and may be considered by the score.

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Appraisal Basics

The appraiser researches 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.

There are three common approaches to arriving at an 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. The comparison approach is most often used in conventional mortgage lending.

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Underwriting

Once the processor has put together a complete package, the file is sent to the underwriter. 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 department. The closing department notifies the closing attorney of the approval and verifies all closing expenses. 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 (made payable to you to be signed over at the closing). Personal checks are normally not accepted over certain limits (usually $1000).
• 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.
• Be sure to bring identification.

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