The Lending Process

There are many people and moving parts involved in each mortgage transaction.  Mortgage transactions usually include appraisers, lenders, underwriters, escrow people, title people, and realtors.  To help you better understand the steps required to build your home loan, we have broken it down into 8 milestones.

PREQUALIFICATION

You can ‘pre-qualify’ for a loan before formally applying for a loan. The lender gathers information from you about your income and debts and makes a preliminary financial determination about how much house you may be able to afford. Usually, a prequalification letter is issued showing the amount for which the lender has pre-qualified you.

Please understand that the lender will take the information that you give about your income, assets and debts in order to pre-qualify you. The pre-qualification is only as good as the information that you give, and is subject to the lender’s verification of that information during the formal application process.

It's a good idea to know how expensive a home you can afford before you start shopping for one, and a pre-qualification from a lender can help. If you can provide a pre-qualification letter, sales agents and sellers will know that you are an able buyer and may take your offer more seriously. A pre-qualification letter may sway a home seller to negotiate with you as opposed to another buyer who is not pre-qualified. If you are refinancing the loan on your existing home, then the prequalification process should help you decide whether refinancing is a good idea for you.

SELECTING A MORTGAGE PROGRAM

The selection of a mortgage program can be rather complicated, and we highly recommend that a mortgage professional help you with the decision process. There are a countless number of loan products available in the marketplace today, and the guidelines for these products change continually. A mortgage professional that stays current on these programs can play a valuable role in analyzing your options.

Here are a few items you need to consider before selecting a program:

• How long do you plan to own the home?
• What is your financial outlook for the near-term and long-term?
• Do you have future financial obligations (such as college, retirement, elderly care) that might limit your future ability to meet debt obligations?
• How comfortable are you with a payment amount that changes over time?
• Will you consider a balloon payment?
• What is your liquid asset position? Are you willing to make a larger down payment?
  Are you self-employed?
• How is your credit history?
• Are you a first-time homebuyer?
• Will you have adequate funds available after debt payments for retirement funding and other needs?

As stated earlier, there are a number of mortgage products available. The most common types are the fixed-rate programs where the monthly interest and principal payments are fixed for the life of the loan. Other programs, referred to as ‘adjustable-rate’ loans, allow for the interest rate to change at specified intervals. The interest rate on adjustable-rate loans can go up or down depending on changes to the index interest rate on which the loan’s interest rate is based. Some adjustable-rate loans allow for a fixed period, such as one, three or five years, before the interest rate becomes adjustable. After that fixed period, the interest rate will change each year thereafter.

APPLICATION

Application is actually the beginning of the formal loan process and usually occurs after you have found a property you want to buy or have determined that you wish to refinance the loan on your existing home. With the help of your DAVEFINANCIAL loan officer, you complete a mortgage application for a particular loan program and supply all of the required documentation for processing. Your DAVEFINANCIAL loan officer will discuss various fees, rate-lock and down payment options with you at this time.  You may or may not lock the interest rate on your loan at this time.

The key form that you must complete is the loan application form itself (known as a ‘1003,’ from the Fannie Mae form number). The application identifies the property being financed, the borrowers, their employment information, their assets and liabilities, and other pertinent information that will support the decision on whether the borrower is financially able to maintain the payments. The property being financed is also being evaluated to see if it is adequate security for the loan. Clearly, it is vital that the loan application be complete and accurate. The next stages of the loan may go more quickly if there are no discrepancies or issues in the application.

All lenders rely on credit information from national credit repositories obtained by ordering and reviewing a credit report for all the borrowers on the application. Lenders will compare the debt information on the application to the credit report and investigate and document discrepancies that are in the loan file.

Based on the information in the application, credit history (from the credit report) and other factors, your DAVEFINANCIAL loan officer will evaluate all the available loan programs to determine the best product fit for you. It is important to be working with a professional originator who understands your needs but at the same time knows the loan program guidelines and underwriting requirements to find the right program. This is why DAVEFINANCIAL recommends that you work with one of our trained professional loan officers before you make financing decisions. 

PROCESSING YOUR LOAN APPLICATION

The lender's loan processor reviews the credit reports and documentation that you supplied as part of your loan application to verify your income, assets, employment, debts, and payment histories. The processor will contact your employer and bank directly to verify your relationship with them. If the credit report indicates unacceptable late payments, collections or judgments or other credit history issues, then the processor will request a written explanation from you. If there are incorrect entries on your credit report, the loan processor will work with you to get them removed.

The processor will also order and review a title company commitment to issue a title policy on the property insuring your ownership and the lender’s lien, a property survey in some cases, a tax certificate to be sure that the property taxes are current, and a flood certificate to ascertain whether the property is in a federal flood zone. If the property is in a flood zone, then the lender may still be able to make the loan as long as you obtain flood insurance on the property (see the explanation of flood insurance below).

The processor will also order and review the property appraisal. The appraised value of the property is essential, since the property serves as the sole security for the loan. The appraised value, as part of the loan-to-value (LTV) calculation, will also determine how large a loan the lender can make based on that security. The loan product for which the borrower applied will have specific guidelines for a maximum LTV ratio. The appraised value from the appraisal and the maximum LTV ratio from the guidelines will yield the maximum amount that the lender can lend to stay within the loan product guidelines. Maximum LTV guidelines vary widely among loan products. For example, most conventional loans allow maximum LTV ratios of seventy-five to eighty percent of appraised value, although they may be higher for loans with private mortgage insurance (PMI). In addition, depending on the type of loan program, maximum loan amounts may also be limited by local, state or federal law.

UNDERWRITING YOUR LOAN APPLICATION

Once DAVEFINANCIAL has received all the information that we need through processing your loan application, we submit your entire loan package to the bank that offers the best rate for your unique profile.  The bank will begin to ‘underwrite’ your application, which means that they will compare your loan application and credit report against their loan guidelines.  The bank will review the property appraisal to be sure that it indicates a value sufficient to justify the loan amount.  The bank will also compare asset account statements against the loan application.  Finally, income information and job stability will be verified.   

DECISION

Finally, the bank will render an underwriting decision.  We at DAVEFINANCIAL will do everything we can to make sure the bank has everything they need to issue the final approval.  Sometimes, additional information or action from you is required (sometimes called ‘closing conditions’) before the loan can be either approved, cleared for final loan documents, or cleared to close.  Typical closing conditions are additional paycheck stubs or proof of hazard insurance on your home.

LOAN CLOSING

Once you have helped us clear up any conditions to your loan, a closing date will be scheduled with a title and escrow company or closing attorney, whichever is the common practice in your area.  At closing you will sign a set of loan documents.  Any funds due to close will be paid at this time.   If your loan has ‘impounds’, you will fund the impound account at this time.  Your impound account will be maintained by the lender to pay the property taxes and hazard insurance premiums on your home as they come due.

LOAN SERVICING (ADMINISTRATION)

After closing a loan, a lender typically becomes the loan servicer.  Loan servicing includes receipt and tracking of monthly mortgage payments, related accounting to the investor and handling of customer inquiries. In addition, the loan servicer must ensure that all taxes and insurance premiums are disbursed from the escrow account to the proper taxing authorities and insurance carriers. The loan servicer must also complete and deliver to the borrower an annual escrow analysis to demonstrate that adequate funds are available to meet the projected tax assessments and insurance premiums. In the event of delinquencies, bankruptcies or foreclosures, the loan servicer represents the investor and handles all the legal notices, filings and other necessary actions to protect the investor’s interests.

As always, DaveFinancial will be available anytime after your closing for any questions you might have. By putting you first and offering astute financial advice, we at DaveFinancial appreciate the opportunity to be your “Lender for Life!”