Freedom Financial

The Loan Process

Lender Activities / Responsibilities

Prequalification

Prequalification for a mortgage loan should be more than a procedure to determine how much loan a potential borrower can qualify for. Prequalification, when done correctly is a combination of:

Determining what the borrower would like to transaction to “look like” after the process is complete. This may not be how the transaction actually closes, but it should be the goal that the Loan Officer strives to achieve.
The Loan Officer will examine and evaluate the borrower’s:
Income – evaluating the amount and quality of the borrower’s income.
Debts – evaluating the amount of monthly payments as well as the quality of the borrower’s credit.
Credit Scores – must be evaluated to determine the availability of programs.
Assets – evaluating the amount, type and quality of assets available.
The Loan Officer should take into consideration factors other than those that are verifiable, such as: additional income that is not verifiable; additional debts that do not show on the credit report; additional obligations such as schooling expenses, parental support, etc.
The Loan Officer should also take into account the maximum payment a borrower believes that he/she can make comfortably. Many times a borrower can qualify for much more payment than they feel they can afford, and this “comfort zone” should be given great weight when advising a client.
The Loan Officer should give great weight to the length of time the borrower plans to stay in the property. Is the ownership of the property to be a short-term or a long-term event for the borrower?

The proper prequalification of a buyer/borrower for a mortgage loan will encompass all of the above factors.

The prequalification process starts with the evaluation of the borrower’s credit scores and quality of credit. Almost all loan programs today have as one of the primary qualifying criteria the range of the borrower’s credit scores. Many programs are only open to borrowers with the best of credit scores. The higher the borrower’s credit scores, the more loan programs the borrower will have as available choices.

The second aspect of the prequalification process is an evaluation of the borrower’s income. The evaluation of the borrower’s income takes into account the following:

What amount of the borrower’s income can be verified?
How stable is the borrower’s income? Can it be expected to continue for at least the next three years?
If the borrower’s income cannot be verified, what amount can be reasonably stated for the borrower’s occupation? Can the source of the borrower’s income be verified:
Self-employed borrower:
Letter from the borrower’s tax preparer stating that the borrower has been self-employed for at least the last two years and that the preparer has prepared tax returns reflecting that.
Copy of the last two years City Business Licenses
Copy of the last two years state-issued business licenses
Wage earner (W2) borrower:
Phone verification from the borrower’s employer and verification that the borrower’s employer exists.

When the first two pieces are known and analyzed, the types of loan programs available to the borrower can be narrowed. There are literally hundreds of loan programs available, with the two basic categories being fixed and/or adjustable.

Another important aspect of the transaction may be the amount of assets (cash) the borrower has available, and where the assets are located. Cash assets can consist of bank funds, cash on hand, gift funds, secured borrowings, and unsecured borrowings. All programs will allow bank funds as an acceptable form of asset; however, not all programs will allow the use of, or will restrict the use of, any of the other sources of assets.

Once all of the above items are determined, the Loan Officer will work within the guidelines of the various loan programs to determine the maximum amount of mortgage for which the borrower qualifies. Qualifying guidelines will take into account:

The borrower’s debt ratios [relationship of the borrower’s total debt payments (including the new loan payment) to the borrower’s gross income];
The borrower’s credit score;
The loan-to-value ratio (LTV);
If the borrower is applying for a refinance with cash-out, the amount of cash the borrower is receiving may be limited.

As you can tell, the prequalification process, when done correctly, can be an involved process and can also be a little time consuming. The prequalification process is the foundation on which the loan application is taken. The thoroughness of the application, which is based on the prequalification, will determine how smooth the transaction will go.

Credit Report

A credit report (with all three national bureaus) will be obtained (if not obtained during the prequalification process).

Loan Application

Taking the loan application is the process of formalizing the prequalification information. In this stage, all of the borrower’s information is committed to writing on a Loan Application form, also called a 1003 (ten-O-three in “loanspeak”).

The 1003 is divided into many sections. How much information is needed in each section is determined by the type of loan the borrower is applying for and, thus, the type of information required for the program. The sections of the 1003 are:

Type Of Mortgage And Terms Of Loan
Property Information And Purpose Of Loan
Borrower Information
Employment Information
Monthly Income And Combined Housing Expense Information
Assets And Liabilities
Details Of Transaction
Declarations
Acknowledgement And Agreement
Information For Government Monitoring Purposes
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Verification Of Information

The type of loan for which the borrower is applying will determine the type and depth of the verification of the borrower’s information. This part of the process is also called the “Processing” stage. The following are examples of verification items in a loan application:

Income – may be verified using paystubs, W2 forms, Federal income tax returns, bank statements, a direct written Verification of Employment form, etc.
Assets – may be verified using bank statements, brokerage account statements, retirement account statements, letters from banks, gift letters, a direct written Verification of Deposit form, etc.
Other – there are many other items that may need verification, such as rental history, loan history (not on a credit report), child support, alimony, etc.
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Underwriting

Underwriting a mortgage loan has undergone many changes in the past few years. The most recent change is the introduction of automated underwriting. Automated underwriting is the evaluation of the potential risk of a borrower’s default on a loan completed via computer modeling of the loans characteristics. In other words, the program evaluates the borrower’s income, credit, assets, etc. and compares the loan to the performance of other loans with like characteristics.
Of course, many lenders and loan programs still use the traditional underwriting process where a human actually evaluates the loan.
The process of underwriting is the evaluation of the various characteristics of the loan application to determine the likelihood of timely repayment of the mortgage.

Loan Closing

This is the final stage of the loan process. In this stage a final check of the legal items involved in the loan process (title, disclosures, etc.) is completed. The person responsible for the loan closing will complete a final review of the title report and review the loan file to be sure that all of the appropriate legal disclosures have been signed.

The culmination of the loan process is the preparing of the final loan documents (Note, Deed of Trust, final disclosures, etc.). The final loan documents are signed with a Notary Public. The final loan documents are reviewed by the loan Funder. The Funder arranges for the loan proceeds to be wired to the title insurance company, who then records the Deed of Trust, pays any existing liens and disburses the remaining funds to the escrow company for final accounting and disbursement.

Other Parties In The Transaction

Escrow

Escrow is a process as well as a company. An escrow company can be an independent company, or it can be a division of a real estate or loan company. In either event, the escrow company is responsible for being a “neutral” party between buyer, seller and lender (in a purchase transaction), or the borrower and lender (in a refinance transaction). The escrow company is responsible for taking instructions from the principals in the transaction as to how the transaction is to be closed. This entails gathering documents and funds from the buyer, seller and lender and recording documents and distributing funds when all conditions from the parties have been met.

The escrow is opened when instructed by the Realtors (in a purchase transaction) or by the lender (in a refinance transaction). The escrow company is responsible for obtaining payoff statements (“Demands”) on liens to be paid-off, obtaining homeowner’s insurance and any other relevant documents.

Title Insurance Company

Title insurance is a protection against undisclosed liens and encumbrances on the property for the buyer, seller and lender in the transaction. Title insurance for the buyer provides insurance against any undisclosed liens or encumbrances the seller may have on the property. Title insurance for the lender provides insurance against the same undisclosed liens and encumbrances as well as to insure that the lender is in the lien position (1st, 2nd, etc.) that the lender desires in the transaction.

The title insurance company is responsible for the payment of existing Deeds of Trust, delinquent or currently-owed property taxes, and any other lien which may be on the property and affect the ownership position or the lien position of the lender.

Title insurance is ordered by the escrow company or the lender when the escrow is opened.