Getting Your Loan

One of the biggest hurdles most homebuyers face when looking for a new home is obtaining a loan.  Most of us were brought up to believe that you need 20% down, perfect credit, and years of consistent employment to qualify for a loan.  While these factors can make the loan process much easier, they are no longer mandatory requirements.  In fact, most people (especially first time buyers) put much less than 20% down on a home.  With the average price hovering around $300,000, coming up with $60,000 can be difficult for most people.

The good news is that obtaining a loan has gotten easier.  There are an abundance of new loan programs available today for all sorts of buyers with all sorts of different borrowing situations, i.e. self-employed, low or no downpayment, bad credit, bankruptcy, etc.

One of the things that many potential buyers misunderstand is that there are alternatives to the typical fully documented loan application.  For instance, there are loan programs for those who cannot document their income, but can provide 12 months of bank statements showing sufficient deposit amounts.  There are loan programs for those who have excellent credit and strong income, but little or no money for a downpayment, there are even loan programs for those who can’t document their income or show bank statements, but have excellent credit, plus many more.

Here’s a good rule of thumb to remember:  When a lender is evaluating your loan application, there are generally three factors that affect your ability to borrow: 

1.     Income

2.     Credit Score

3.     Downpayment

If at least two out of three are strong, then you will probably qualify for a good loan program.  Even if only one out of the factors is strong, you may still be able to qualify for a loan, however the interest rate would be higher since you would be considered a higher risk borrower.

Choosing a Mortgage Broker

I can’t stress enough how important it is to choose a lender that has been highly recommended to you by either your real estate agent or someone you know and trust.  One of the biggest mistakes home borrowers make is that they choose a lender solely based upon the lowest interest rate.  A low interest rate is important, but equally important is the mortgage broker you choose. 

Unfortunately, there are many unscrupulous mortgage brokers who will quote a low rate just to get you in the door and deliver a higher rate when you sign your loan documents, or add “junk fees” to your closing costs to make up for the below market rate they are giving you.  I am not a mortgage broker, but I do deal with many of them.  A bad mortgage broker can add to an already stressful situation and potentially cause you to lose your deposit money if you had to cancel the purchase of your home. 

The purpose of this manual is to familiarize you with the lending process and help you get a head start on the purchase of your home.  If after reading this, you decide that you would like to get pre-approved for a loan, or if you just have some questions you would like answered, please let me know and I will refer you to a mortgage broker that matches your specific situation.  And remember, I would never refer you to a “salesperson”.  The mortgage brokers I work with work the way I do, as a consultant.  You will never be pressured or “sold to” by anyone I would refer to you.

What to Expect . . .

A. The processing phase

Step 1: The loan file is opened.

• A loan application is completed.
• Basic file documentation is collected (pay-stubs, W-2’s, bank statements, etc.).
• A pre-qualifying credit report is ordered.
• Escrow is opened and a preliminary title report is ordered.

Step 2: The loan is pre-qualified.

• Basic documentation is reviewed and any necessary clarifications are made.
• The pre-qualifying credit report is reviewed with client.
• Loan scenarios are discussed and desired loan terms are determined (type of loan, loan amount, interest rate, length of loan)

Step 3: The loan file is completed.

• Any additional documentation required is collected.
• The appraisal is ordered and received.
• The final credit report is ordered and received.

B. The approval phase

Step 4: The loan file is submitted to lender for underwriting and approval.

Step 5: Lender’s approval conditions are satisfied.
(Lenders sometimes request additional documentation to further support the particulars of the file. This can be as simple as updating a pay-stub or getting additional information from the appraiser, or as detailed as providing the paperwork to show a transfer of funds which are being used for a down payment from one account to another.)

C. The closing phase

Step 6: Final loan terms are decided and the loan’s interest rate and term are locked in with the lender.

Step 7: Loan documents are ordered and delivered to escrow for signing.

Step 8: Loan documents are signed and returned to the lender for final review.

Step 9: Loan is funded by the lender, the deed of trust recorded at the county recorder’s office, and the funds are disbursed by the escrow company. (Note: There is a 3-day recession period for refinance loans. A refinance loan funds on the fourth business day following the date loan documents were signed. A recession period does not apply for purchases or for the refinance of a non-owner-occupied property.)

The Buyer’s Advantage:
Being "Pre-Approved" vs "Pre-Qualified"

Buying a home is the biggest investment most people will ever make. The traditional process is to look at homes (usually with a Realtor), find one you like, maybe calculate some rough numbers with the Realtor, make an offer and then apply for the financing with the loan agent that the Realtor uses. Sometimes, the Realtor will have you meet with the loan agent before you look at homes, to give you a pre-qualification letter.

So, what’s wrong with this process? It causes stress. A lot of it. From the minute you sign on the dotted line, the clock is ticking. You only have a short period of time to select a loan program, complete the loan application package, and obtain loan approval. Many real estate transactions fall out of escrow because the buyer (even with a pre-qualification) is unable to qualify for a large enough mortgage with acceptable terms, sending you back to begin the process all over again.

How do you avoid this stress? Get pre-approved for your loan before you begin to look at homes. And don’t confuse pre-qualification with pre-approval.

Pre-qualification is not a loan commitment from a lending institution. It’s a loan agent’s opinion that you’ll be able to obtain financing, and is usually based on a quick review of your credit report and your paystubs. These days, anyone can get a pre-qualification letter. Quite frankly, it’s not worth the paper it’s written on, unless the seller personally knows the loan agent involved, is 100% confident that the loan agent can obtain a loan commitment, and is willing to bet the sale of their home on it (very rare).

Pre-approval, on the other hand, is a written commitment by the lender (not the loan agent), that you may borrow a specific loan amount. To get a pre-approval, you actually apply for a loan. The loan agent puts together a "credit package" – a complete loan application, your credit report, complete income documentation, asset verification and any supporting documentation needed – which is then submitted to the lender. The lender actually "underwrites" your file and issues a credit approval, or pre-approval, subject to finding an acceptable property.

So, what are the advantages of being pre-approved, rather than just pre-qualified?

• Working with a loan agent first allows you to decide what type of loan product is best for you. When you already have an accepted offer, and the clock is ticking, you are in the position of taking whatever you can get, without being able to really investigate the loan products available and how they might help you meet your financial goals.
• Getting pre-approved for a loan lets you determine, in advance, how much money you qualify for, and in what price range you can purchase. As a result, you do not waste your time looking at homes that are out of your financial reach and worrying about whether you will be able to get a loan.
• Taking the time to be pre-approved also allows you to select a loan amount that is comfortable for you. Quite frankly, many buyers can qualify for mortgages that are more expensive than what they really want to pay. Buyers can find themselves being pressured to buy a more expensive house than they want simply because it works on paper. Spending the time to be pre-approved gives you the confidence that you are purchasing a home that you can own – not one that will own you.
• Having a pre-approval letter from a lender gives you an edge in a multiple-offer situation. Look at it from the seller’s viewpoint: They don’t want to keep their home off the market for 30 to 60 days, only to have the transaction fall through because the buyer couldn’t obtain financing. By that time, a "hot" housing market can cool considerably, leaving the seller to sell their home in a less-than-favorable market. With a pre-approval letter, your offer will carry considerably more weight than offers with only a pre-qualification letter or no letter at all. In fact, sellers have chosen to accept offers of lower dollar amounts from pre-approved buyers over higher offers from buyers who have not been pre-approved. With a pre-approval, they are more confident that the deal will go through.

Pre-approved buyers can close escrow more quickly. You have already submitted your "credit package" and had it approved. When a property is found, a "property package" is then assembled, consisting of the purchase contract, an appraisal, the preliminary title report and any required inspections. The property package is submitted to the lender, loan documents are drawn and signed, and the escrow is closed. This portion of the process can take as little as 10 days (depending on the market and the inspections required). With the traditional process of finding a home first and then obtaining the financing, it takes 30 to 60 days to close escrow.

There is one caution about using a pre-approval letter. If the letter states a maximum loan amount higher than the price the buyer is offering for a home, a savvy seller will counter-offer for the highest amount for which the borrower has been pre-approved. It is wise, therefore, to request a letter with a specific loan amount based on the price you are offering for the home to present with the offer. A good loan agent, one who cares about serving your needs, will not have a problem accommodating this request.

Credit Scores:
What They Are and Their Increasing Importance to Lenders

If you have been in the market for a mortgage loan recently, whether to purchase, refinance or obtain a home equity line, you have most likely heard a new term in the mortgage industry lingo: credit score. What is a credit score? And why is knowing about credit scoring important to you?

Q. What is a credit score?
A. A credit score is a number, ranging from the high 300’s to the mid-800’s, which is developed from information contained in your electronic credit files maintained by the three private credit repositories: Equifax, Trans Union, and Experian (formerly TRW). It is commonly referred to as a "FICO" score, because the scoring model widely used by lenders was developed by the Fair, Isaac & Co. Your credit score represents your credit risk – how likely you are to repay a loan.

Q. How is my credit score derived?
A. All of the information in your credit file is analyzed. Your score is then calculated, based on many factors, some of which are:

• your credit payment history (have you been late with payments? frequently? recently?); mortgage rates have a more serious affect on your score
• how you utilize your available credit (have you maxed out your credit cards?)
• the number of recent credit inquiries (are you incurring more debt?)
• the types of credit you use (do you have a lot of finance company accounts?)
• legal items filed against you (judgments, liens, bankruptcy, foreclosure)
• length of credit history

The scoring model considers each of these variables, weighs each factor according to a formula, and then ultimately yields a single composite score. According to Fair, Isaac & Co., the two most heavily weighted factors are past payment history and credit utilization. The factors of age, race, gender, religion, national origin, marital status, employment, income and where you live are not evaluated. Although Fair, Isaac & Co. provide data to support the validity of their scores, scoring models are proprietary and they do not publicly release information about exactly how the formulas work.

Q. Is credit scoring new?
A. Credit scoring has actually been around since the mid-1950’s, used for approving credit cards and auto loans. However, it is only in the past three years that credit scoring has been used by mortgage lenders, so most consumers are not aware of it.

Q. Why are mortgage lenders using credit scores?
A. Mortgage lenders believe that credit scoring accurately assesses credit risk and predicts loan performance: higher scores represent a greater likelihood of repayment and lower scores represent a greater risk of delinquency. This belief is substantiated by an analysis performed in 1996 by economists at the Federal Reserve Board of the correlation between credit scores and loan performance. Additionally, investors who purchase mortgage loans have also endorsed the use of credit scoring: they now price loans (determine the interest rate) based, in part, on credit scores. Since the three private credit repositories (Equifax, Trans Union and Experian) each have their own credit scoring model, and consequently give their own individual credit score to your credit file, lenders typically use the middle of the three scores when underwriting your loan.

Q. What is a "good" credit score?
A. Credit scores are broken down into three ranges: a score of 680 and above is considered a low-risk borrower; a score of 620-680 is considered medium-risk; and a score of less than 620 is considered high-risk. In the medium-risk range, other factors, such as loan-to-value and debt ratios, are taken seriously into consideration by the mortgage underwriter. So, if a person has a 625 credit score, but has low loan-to-value and debt ratios, he/she is looked at more favorably.

Q. Why should I care about having a high credit score?
A. The primary reason is that your credit score is a major factor in determining the interest rate you will pay for your loan. Borrowers with low credit scores (high-risk) are given higher interest rates than borrowers with high credit scores (low-risk). Almost every lender now uses credit scoring as a factor in pricing loans.

Q. How do I find out what my credit score is?
A. You can contact each of the three private credit repositories for a copy of your credit file, which includes their individual credit score: Equifax @ 800-685-1111; Trans Union @ 800-916-8800; Experian @ 800-682-7654. Or go to www.myfico.com.

Q. How can I improve my credit score?
A. First, and foremost, review your credit file from each of the three private credit repositories for accuracy, and begin immediately to correct errors. Then, according to Fair, Isaac & Co., the three key things to remember are to pay your bills on time, keep credit card balances low, and apply for new credit sparingly. All of these things will make you a good credit risk and produce a high credit score.

Q. Why is credit scoring so controversial?
A. One reason is that credit scores are calculated on the raw data found in your electronic credit file, which is not always accurate. And correcting inaccurate information can take a lot of time. The scores also do not take into consideration such variables as a recent illness, job loss or the like, which can temporarily affect credit. For these reasons, as well as several others, many feel that credit scoring should be approached cautiously and not be given too much weight in the final decision of whether to grant a mortgage loan. However, the use of credit scoring as an evaluative tool is increasing dramatically in the mortgage lending industry, so consumers need to be aware of it and how it is used.