Tips for a Fast Home Loan Approval
As a potential home loan customer, everyone wants to search and find the best mortgage deal and the best mortgage rate that they can. It seems everyone in the market for a new home loan is looking for the best mortgage rate for the lowest costs on a loan they can have right away without delay. For some prospective borrowers that find a mortgage lender or mortgage broker that is well respected and skilled, it is likely they will not have any problems in your search.
Sometimes, however, choosing the best mortgage lender doesn’t always equal a deal that is done the most swiftly. Mortgage loans that are not completed in a timely manner may unfortunately result in higher costs. Delays may bring higher costs due to a purchase not closing on time, higher costs to pay for additional services to complete the home loan transaction or higher costs due to the expiration of a mortgage loan lock that results in a higher mortgage rate.
If your home loan is supposed to close within 30 days but it winds up taking longer you may have to pay a higher interest rate because of the delay or worse experience a lost opportunity because you didn’t get the funding in time.
It is important to be able to evaluate the services of your mortgage lender or broker so you know what the home loan approval process entails with that mortgage lender so the loan closes in a timely fashion without extra costs and headaches. The first task should be to have some knowledge about the mortgage loan process as a whole. Knowing the different steps in the mortgage process will help avoid delays and unnecessary halts in the loan process and closing.
The first part of this process is the mortgage loan application and the submission of supporting documents. If the mortgage application process is not done right, the mortgage loan approval process gets off to a rocky start that will often lead to problems and delays.
It is in your best interest to make sure that your mortgage lender or broker has all of your personal information that is needed, and that the information is accurate and correct. Often a delay can be because of simple errors that are easily avoided.
This errors may slip by because the borrower did have the accurate information to complete the loan application or supply the necessary supporting documents or the error may occur because the home loan borrower did not think it was necessary to fill in all the details on the mortgage loan application or the loan officer was more interested in getting the loan application into processing rather than making sure it was completed properly. Whatever the reason, a simple rule is that the more information there the easy the process becomes.
When you complete a mortgage loan application it is important to make sure you fill out the application completely. The mortgage loan application details, among other things, your income, assets, and a description of the home you plan to buy or refinance. The application and the supporting documents is the most important step in the home loan approval process. This is where the information is garnered to calculate income, credit and debts outstanding. A well documented application helps avoid errors and improves the speed at which the data can be verified.
The process of completing and submitting the home loan application requires documents such as W-2’s and tax returns for the last two years, pay stubs covering a 30 day period, bank statements for the last two months, the purchase contract or a mortgage statement of the mortgage loan is for a refinance. Recent credit card account statements may also be routinely required.
Here are Some Easy Steps to Submit a Complete Mortgage Loan Application:
Double check that there are no spaces or blanks left on your mortgage application before you sign.
Make sure that when you sign the agreed terms spelled out in writing are what you are expecting, and do not be afraid or be shy about asking questions before you sign.
Anything you do not understand, don’t hesitate to question your mortgage lender before you sign. If there is a delay it won’t be because you didn’t understand what the process was.
Make sure you keep copies of all the documents and important papers and have them handy to produce if required.
Make sure you have given the data requested. Stress this point with the mortgage lending institution. If you give them everything they requested, the ball is firmly in their court to close the loan.
Make sure you understand all of the mortgage loan features, what they mean, and what may be available for other home loan programs. This includes the bottom line for what you are responsible to pay. As simple as this sounds, it avoids confusion and unwanted surprises.
Before submitting a mortgage loan application, search and find the mortgage lender that will give you the best service, and offer the best quotes for a low mortgage rate on your home loan. Once you find your mortgage lender, do not hesitate to give them all the financial details they need. Give them details on assets, your income, your debt situation, and your job history. After giving your mortgage lender all the information you have to give, follow up with them frequently, and make yourself accessible should they have questions and don’t be intimidated, do your research and remember this is your request; you can control many aspects of the process.
Using a Mortgage Loan for Debt Consolidation
Cash out refinance transactions for debt consolidations is a popular mortgage transaction. Cash out refinances represents a large portion of mortgage refinance transactions each year. For consumers that own a home and have a fair amount of consumer debt, a cash out refinance for debt consolidation purposes is well worth considering.
Sometimes a person can get into debt problems without much effort at all. Perhaps you have even experienced credit problems and are showing various signs of damaged credit do the debt overload. If you are willing to be disciplined, in a serious fashion and you own a home, one way out may be a cash out refinance to consolidate these debts. This may help you solve your credit and debt situation despite some of the inherent risks involved with such a home loan.
It may be possible to refinance your mortgage that you currently have with a loan amount greater than the existing loan balance. This is called cash out refinance. The extra money obtained from the new refinance transaction can be used to pay off other bills and debts. A cash out refinance for debt consolidation loan gives the home loan borrower money to pay off their existing debt, resulting in just one monthly payment and quite possibly a lot less stress. With discipline, this home loan makes it much easier to manage your budget since you only have to worry about a single monthly mortgage payment schedule. This type of refinancing option means you will pay a longer term and subsequently more mortgage interest over the life of the debt.
When applying for refinance for debt consolidation, make sure you explain this to the mortgage lender and loan officer. During the qualifying process for a refinance, the debt ratios the mortgage lender will evaluate are as if the new mortgage loan is in place. When this mortgage loan is for cash back to pay off consumer debt the application will not consider the existing payments of the debt being paid off to calculate the debt ratios.
The three key factors in evaluating your loan request will be the debt ratios, the loan to value and your credit report. In order to make sure the debt ratios are not excessive, it is important that the mortgage loan application does reflect the debts to be paid off otherwise the home loan application could result in a loan denial for an excessive debt ratio.
When you consolidate various high interest rate debts into one mortgage loan the results can be very attractive and appealing. With a debt consolidation mortgage, you do not have to pay different interest rates to creditors, or pay your creditors at different times of the month. A debt consolidation mortgage refinance combines your debts into one loan payment a month, one that you should be more manageable.
Since mortgage loans are secured by real estate, the interest rate or mortgage rate is generally much lower than that of credit cards and personal loans. And in most cases, the interest paid on a mortgage is tax deductible. With discipline, you can now budget better to increase savings or prepay on the new refinanced mortgage and extinguish all of your debt early.
Be careful; do not use the freedom of lower monthly payments to avoid getting your financial house in order. Do not increase in your unsecured debt after you consolidated through a mortgage refinance. Pay strict attention to your financial outlays and use the home loan to improve your financial health.
Benefits of a cash out refinance for debt consolidation include:
The ability to take all different types of high interest loans and combine them into one lower interest mortgage when you enter into a refinance. This pays off the higher interest debts.
Improves your credit rating by reducing the amount of outstanding debts per account.
Most mortgage loans allow prepayment without penalty, allowing the borrower to have the option of not only consolidating many consumer debt payments into one but also to pay a higher monthly mortgage payment if they choose and reduce the total debt early.
By paying off debts that may have been outstanding, you stop and eliminate debt collection activities, foreclosure, bankruptcy, and other potential negative actions that affect your overall credit status.
The process to get a debt consolidation mortgage is fairly simple. Research and shop around for repayment plan that meets your budget and risk, and find the lowest mortgage rate and closing costs that you can. Be cautious before signing anything and make sure you understand all the repayment terms, mortgage rates, and costs of the refinance transaction. Use the mortgage calculators to evaluate the mortgage rates and mortgage payment options.
Using a cash out refinance mortgage for a debt consolidation can make sense, and help overcome severe debt problems, but it does result in higher interest and higher fees. It will take discipline to make sure the new payment amount is handled in a timely fashion. You will have a longer mortgage term and pay more over the length of the loan. It is often smart to restructure your debt this way, but this does result in a larger single debt amount. For this reason it’s smart to investigate shorter-term mortgage options to try and avoid paying a larger amount of money over time.
Home Loan Delinquency and Foreclosure Help
The mortgage foreclosure pandemic has not yet abated. While investors talk about a rebounding stock market 1000’s of new foreclosure filings continue to be processed.
For some home owners the foreclosure process can be a bitter end to poorly fitting monthly mortgage payment. In these cases, the mortgage amount and monthly commitment probably never matched the household income. Servicing the mortgage payment combined with the new homes expenses and recurring monthly living expenses was a budgeting nightmare the day the mortgage loan was signed. But for others, the late mortgage payments and impending foreclosure are not a product of risky lifestyle decisions and too much consumption but standard income stresses like the loss of a job, divorce and unexpected financial calamities.
The economic crisis has made it hard for a number of homeowners who were not having trouble in prior months finding it hard to now make ends meet. For some of these people who were finding it difficult to make their mortgage payments, they have been able to save their home from foreclosure. For those borrowers who do nothing, they could lose their home if they continue to ignore the problem and do nothing
If you are having trouble making your payments, sift through the mess to understand what the underlying financial problem is and seek help sooner rather than later. The longer a home loan borrower waits to call, the fewer options they will have.
One of the first steps to make in times of financial distress and when experiencing payments problems is to analyze your monthly expenses and income and to see where savings can be made. Dramatic savings made have to made, if necessary. As your try to fix the household budget leaks, make sure to understand then consequences of mortgage payment delinquency and the foreclosure process so you know what you are up against if you can not realign your budget.
Review the mortgage loan contract you signed when your mortgage lender loaned the money necessary to buy the house or more likely, the last home loan refinance transaction since that will be the mortgage that is secured against the house. The mortgage loan agreement will cover the terms under which you agreed that if you can’t repay the home loan, the mortgage lender can foreclose to take ownership of the house. If you do not pay your monthly mortgage payment, you are technically in default on your mortgage.
State laws vary, but generally, a mortgage loan that is as little as 90 days delinquent can be considered in foreclosure and the process of foreclosing on the home may begin. Your mortgage lender may send a notice indicating that they are starting foreclosure proceedings, but a homeowner should not wait fro this document to arrive. It is important to take steps to prevent a foreclosure as soon as you realize you are having trouble paying the monthly mortgage payment.
The good news is that there has been a tremendous amount of pressure applied to banks and mortgage lenders that originate and service mortgage loans to take prudent attempts to find solutions for homeowners having trouble making their mortgage payments. Contact your mortgage loan servicer (the company that collects your monthly mortgage payments) to discuss your options as early as you can. Many home loan servicers are expanding the options that have made available to their borrowers. It is certainly worth calling your mortgage loan servicer even if you had a request that was denied in the past. Mortgage loan servicers are getting a tremendous amount of calls from distressed borrowers. Be persistent and try to be patient but by all means find out what your home loan lender or servicer can do for you.
While you will want to discus any and all options the mortgage lender may have, one option that is being sponsored by the present administration is home loan modifications. Many home loan servicers implemented new loan modification programs in 2009 to assist homeowners experiencing financial difficulties by lowering their monthly mortgage payments. Plus, many home loan servicers are participating in the government’s Making Home Affordable Program as well as working with non-profit counseling agencies through HOPE NOW.
In a mortgage loan modification, the home loan servicer and the home loan borrower agree to permanently change one or more of the mortgage’s terms to make the monthly mortgage payments more manageable for you. The changes could include reducing the mortgage rate, extending the term of the loan, creating a forbearance on the past due interest or forgiving principal, or a combination of these factors.
With the government sponsored loan modification program in order to be eligible, the home must be the primary residence, the mortgage loan balance must be no more than $729,750 for a single-family home, the monthly mortgage payment (on a first mortgage) must be more than 31 percent of the borrower’s gross monthly income, and the homeowner must either be having trouble meeting mortgage payments or be at serious risk of falling behind. Don’t worry if you had a bankruptcy filing, this does not automatically disqualify a homeowner from participating in a loan modification program.
With this program, the participation of home mortgage lenders and home loan servicers is voluntary. However, the U.S. Treasury added incentives to mortgage loan servicers to modify loans to make them affordable. Part of the program includes the ability to reduce the mortgage rate to as low as 2 percent, and next, if needed, to extend the length of the loan to 40 years. If that isn’t enough to make the mortgage loan affordable, the home loan servicer may defer repayment on a portion of the mortgage loan, which may result in a large balloon payment that will be due at the end of the home loan term. Another option under the home loan modification program is be for the home loan servicer to forgive some of the loan principal, but technically there is no requirement for the home loan servicers to make the concession.
If the mortgage rate is modified under the program, the modified interest rate will remain in place for five years, and then it will increase gradually by up to one percent per year until it reaches a cap prescribed by the program.
The web site www.makinghomeaffordable.gov provides homeowners with detailed information about the programs. The Web site can help home loan borrowers determine if you may be eligible fro the program, but be aware that even with government pressure, only the home loan servicer of your loan can tell you if you qualify.
In general, you may qualify for a loan modification under the Making Home Affordable Modification Program (HAMP) if: your home is your primary residence; you owe less than $729,750 on your first mortgage; you received your mortgage before January 1, 2009; your monthly payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) is more than 31 percent of your current gross income; and you can’t afford your mortgage payment because of a financial hardship, like a job loss or medical bills.
If you meet these qualifications you must contact the mortgage loan servicer. Once you start communication with the mortgage loan servicer you will need to provide some documentation for the mortgage servicer or mortgage lender that may include: information about the monthly gross (before tax) income of your household, including recent pay stubs, your most recent income tax return, information about your savings and other assets, your monthly mortgage statement, information about any second mortgage or home equity line of credit on your home, account balances and minimum monthly payments due on your credit cards, account balances and monthly payments on your other debts such as student loans or car loans and a completed Hardship Affidavit describing the circumstances responsible for the decrease in your income or the increase in your expenses.
The government has also sponsored a program called the Home Affordable Refinance. This part of the program is intended to help homeowners who have been unable to refinance into mortgages with a lower mortgage rate because their homes have decreased in value.
In general, to qualify for a mortgage refinancing under this program, homeowners must have an existing mortgage owned or guaranteed by Fannie Mae or Freddie Mac (government-sponsored enterprises that help ensure funds are available for home buyers at affordable interest rates), be current on their mortgage, and have a first mortgage that does not exceed 105 percent of the property’s current market value.
The interest rate and any refinancing fees will be set by each mortgage lender. It will be necessary to call your mortgage lender or home loan servicer to find out if your loan is eligible. For those home loan borrowers who already know that their mortgage loan is held or guaranteed by Fannie Mae or Freddie Mac, these organizations can be contacted directly at 1-800-7FANNIE or 1-800-FREDDIE to see if you qualify for this program.
The bottom line is that homeowners who currently have a hard time making their monthly mortgage payments should contact their mortgage loan lender or mortgage loan servicer or a reputable counseling agency as soon as possible to discuss options. Home loan borrowers who are in distress should also be very careful in dealing with organizations that encourage borrowers to cease making payments or walk away from their home while also promising to repair their credit.
Here is a partial list of mortgage foreclosure prevention resources:
Government Mortgage Modification Programs:
Making Home Affordable
www.MakingHomeAffordable.gov
www.FinancialStability.gov
Hope for Homeowners (H4H)
http://portal.HUD.gov
(800) CALL-FHA or (800) 225-5342
Foreclosure Assistance and Counseling:
U.S. Department of Housing and Urban Development (HUD)
www.HUD.gov
www.HUD.gov/offices/hsg/sfh/hcc/fc
(800) 569-4287
Homeownership Preservation Foundation (HopeNOW)
www.995hope.org
(888) 995-HOPE or (888) 995-4673
NeighborWorks America
www.FindaForeclosureCounselor.org
www.NW.org/network/home.asp
FDIC Foreclosure Prevention Website
www.FDIC.gov/foreclosureprevention
(877) ASK-FDIC or (877) 275-3342
Home Mortgages and the 4 C’s of Lending
All you need to do to make sure you have a better success rate in getting your home loan application approved at the terms you want is education and preparation regarding the process the lenders go through to approve your request. When evaluating your request for a mortgage loan, a mortgage lender will assess the application you have filled out with the supporting documents you have submitted. This process is referred to as underwriting the home loan. During this stage, the mortgage lender investigates the integrity of the data and evaluates the risks in order to qualify the applicant.
The home loan application is a summary of your assets, credit and income position at this particular point in time. It does not measure your character nor does it measure potential future changes such as potential employment changes or debts that maybe incurred or satisfied.
In order to evaluate your present position the mortgage lender will review your financial position, take inventory of your assets, income and credit profile. This procedure is accomplished by verifying your employment, verifying the funds you have on deposit with financial institutions, verifying the equity in the home by appraising the property, reviewing your debts outstanding and analyzing your credit history. This process has become highly automated with computer modeling and approvals but the underlying process is basically the same.
These criteria that are evaluated were once referred to as being the four C’s of lending or collateral, capacity, credit, and character.
Collateral – Collateral is a measure of the value, condition and marketability of the property. The mortgage lender will order an appraisal to determine the market value of your home. From here the loan to value or equity position in the property is determined. Loan to value is the ratio of loan amount to the appraised value. If the borrower is agreeing to down payment of $10,000.00 on a $200,000.00 home, the loan to value will 95%. This formula works on the refinance as well. If a borrower wishes to refinance an amount of $100,000.00 on a $200,000.00 home, the loan to value will be 50%. Loan to value (LTV) and the appraisal are the biggest factors in measuring collateral. Lower loan to values leave more equity in the property and is inherently less risky for the mortgage lender since it not only cushions the mortgage lenders risk but leaves more at stake for the borrower.
Capacity – Capacity is short for capacity to pay. In regards to mortgage qualifications the capacity to pay is measured by housing and debt ratios. The mortgage lender will ascertain the borrower’s gross monthly income first. The new housing payment on the mortgage requested is calculated as well as a summary of all contractual debt payments. Capacity is then measure by dividing the monthly mortgage payment by the gross monthly income to obtain the housing ratio and then dividing all contractual debt payments by the gross monthly income to get the total debt ratio. For example, if the total obligations of the borrower were $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the housing ratio would be 25% ($1,000/$4,000 = 25%) and the debt ratio would be 35% ($1,400/$4,000 = 35%). Lower housing and debts imply greater capacity to pay a home loan back and hence lower risk.
Credit – Credit is evaluated by reviewing the credit report and the credit score. With the use of credit scoring, credit evaluation has become one of the simplest attributes of a loan request to measure. The credit is broken into three primary categories. Mortgage lenders will use credit scores, known as FICO scores, to determine the overall credit risk of the home loan borrower. From here a review of the public records such as, tax liens, bankruptcy filings, and judgments will be assessed. Finally, the individual accounts or trade lines in the credit report will be reviewed for delinquency, credit amounts, depth and length of time on accounts. Generally speaking, the higher the credit score the better the credit risk.
Character – Character is a qualitative measure of a borrower’s stability, integrity and honesty. Measuring character was mostly a measure of a borrower’s commitment to their credit and the new debt they intend to take on. Character may be classified as a measure of responsibilities with the loan commitment. Since mortgage lending and underwriting is almost entirely based on quantitative analysis, character is predominantly ignored. Since it is difficult to evaluate the risk and to even measure a borrowers character, in residential mortgage lending this gauge is rarely used.
Qualification for most mortgage loans and the mortgage rate a lender will charge depends on these three main factors. Understanding the basic guidelines and having knowledge of what a mortgage lender looks for in analyzing your loan request will make your mortgage application and homeownership experience and far smoother and less nerve racking experience.
Home Buying and the Final Walk Through
The final walk through inspection is something that is customary for the buyer to do before closing on a new home loan and buying a house. During the walk through inspection, the buyer wants to check that the property to see that it is the same condition as the time of the contract to purchase the home was signed. The buyer should also check to make sure the property is clean and it meets any requirements that may have been established in the purchase agreement.
The final walk through is in essence a final inspection of the property prior to taking possession of the property. This process is established to determine that the property is in the condition it was represented to be in the terms of the contract. If there are problems but they were not stipulated in the contract, then the seller is generally not obligated to remedy these issues. If there are issues that were called for in the contract that were not handled before the walk through then it may be wise to enlist the help of an attorney to negotiate the best settlement.
The biggest problem that arises in a final walk through and inspections is not an issue with the condition of the property as much as it is a question of how to handle the issues that arise. Generally, the final inspection is scheduled within day or two of the mortgage loan closing. Since delaying the home loan closing or settlement is often a difficult undertaking, negotiate problems that are not significantly costly becomes a difficult assessment.
If there are any issues that arise during the final walk through, regardless of the magnitude, these concerns should be discussed before the home loan closing and transfer of ownership. When there are issues that can not be easily settled before the home loan closing and property transfer the tough question arises as whether or not to delay the home loan closing.
When there are disputes about the property conditions that are not handled until the mortgage loan closing the closing can end up lasting for hours and be very unpleasant.
It may appear that the simplest option is to delay the closing until any issues such as repairs or cleaning and removal of personal property is completed. However, more often than not delaying the mortgage loan closing and property transfer is not possible. This may arise because the buyer’s mortgage rate is locked in and the loan lock may expire if the closing date is delayed. In this case, the buyer may be forced to accept a higher mortgage rate from the mortgage lender. Delays in the home loan closing may also result in a charge for a redraw fee from the mortgage lender to prepare a new set of mortgage loan documents.
A delay in the closing may also negatively impact the seller. If the seller may need the proceeds from the sale of his old home in order to purchase a new property with new home loan. In this case, the best thing for both parties is for everyone to meet either at the closing table or preferably before hand and come to a compromise.
Final walk troughs or final inspections are generally regarded as a protection to the buyer. However, delays in the closing with regards to the home loan are the primary responsibility of the buyer since it is the buyer’s mortgage being established. A dispute that can not be resolved may very well up costing the seller money in the end but initially it may cost the buyer different mortgage terms or closing costs.
The mortgage lender is working with the buyer not the seller and the mortgage lender is not involved in disputes unless it entails the value of the property therefore the mortgage lender will not get involved in a dispute and can only charge the buyer if there is a redraw fee or if the mortgage rate has to be relocked.
These disputes are not terribly frequent but they do occur. The best advice is to have an attorney review the purchase contract before it is accepted so you know what your protections are in advance. If a dispute over the condition of the property does arrive, once again it is sound advice to consult your attorney; after all, buying a house is a very large commitment that entails a considerable sum of money.
Understanding the Mortgage Loan Application Process
Once you are satisfied with the mortgage lender you have chosen to handle your home loan, the next step is to begin the application process. During the mortgage loan application process be prepared to hear various unfamiliar terms that are often only used in to the mortgage loan process. Terms you may encounter include; 1003, credit score, Fannie Mae, preapproval, prequalification, subprime, FICO score, Tri-merge, compensating factors and a host of others.
Don’t be intimidated, do your research and remember this is your home loan request; you can control many aspects of the process. Use this site to review the mortgage loan terms and loan types before you apply.
Mortgage loan applications are completed primarily in four different ways; over the phone, by mail, via the Internet or in person. Either method ends in the same result, with the submission of a completed mortgage loan application regarding the type of home loan which is a summary of the borrower’s qualifications for that home loan.
The choice of how to complete your home loan application for a mortgage is based on your preference. Almost all mortgage applications, with the exception of home equity loans, use the uniform residential loan application referred to the industry by its code number, 1003 ( pronounced: 10, 0h, 3 ).
Before you complete the mortgage loan application make sure you have studied the various home loan programs available and go one step to further and review the general underwriting conditions needed to qualify for that type of loan. Shopping and comparing home loan programs and mortgage rates should be completed well before the loan application is submitted.
The application that will need to be completed details, among other things, a borrowers income, assets, liabilities and a description of the property for the home loan. The home loan application is summary of the borrower’s asset, credit and income position at a particular point in time. It does not measure your character nor does it measure potential future changes, such as potential employment changes or debts that maybe incurred or satisfied at a later date.
After the mortgage loan application is completed, the underwriter and processor will check the borrower’s credit. Credit checks will serve the purposes of investigating the credit worthiness of the borrower as well as verifying the debts outstanding. The processors and underwriting department will also proceed to verify the borrower’s assets and employment to establish adequate funds to close on the house as well as sufficient debt ratios to qualify.
Be prepared to discuss any unusual circumstances that may put a hick up in the process, such as frequent job changes, erratic income, big deposit and withdrawals in your bank accounts or delinquent credit. Generally speaking, the more information you provide the faster and easier the home loan process will be. And once you know what the mortgage lender is looking for with the mortgage loan application, it is a good decision to get a leg up on the process.
In order to be a step ahead on the home loan application process, a prospective borrower should view their credit report in advance so they know what accounts are in the report, see any delinquent accounts that will need to be explained, the account balances reflected in the credit report as well as any accounts that do not show in the credit report. In addition, take the time to review your income and assets and utilize online mortgage calculators to help determine your debt ratios and loan to value. Try to be precise with regards to calculating gross monthly income and use current mortgage rates to avoid conflicts in the future. A good source for mortgage calculators is www.selectcalculators.com.
Along with filling out the home loan application, a number of supporting documents will be needed so the mortgage lender can process the loan request. The following is a list of commonly required documents and information needed at the time of the home loan application.
Borrowers names, addresses and social security number ( a drivers license and social security is the standard supporting document).
Description of the property to be purchased or refinanced.
Names and addresses of employers for the past two years.
One month worth of paycheck stubs.
Last two years w-2’s.
Last two months financial statements ( bank, investment account, 401k, etc..)
List of all financial accounts.
List of debts, names and account numbers.
Q. If I am concerned about getting approved for a mortgage loan, what should I do?
A. Of course, the first answer is to do your research. The number one way to help the mortgage loan approval process is to be prepared and understand how the mortgage loan process unfolds.
This may sound too simplified, but with the creation of credit scores and automated underwriting, the home loan approval process is based on the analysis of a series of numbers. Numbers such as, the amount of the down payment, the loan to value ratio, the borrower’s credit scores, debt to income ratios and more are all quantified and evaluated to come up with home loan approval or denial.
What is not included is subjective analysis. Number based assessments help to eliminate discrimination since color and race is not part of the input process. But, numbers can also hurt those borrowers that fell on tough times and are now putting their financial house in order. The mortgage loan approval and application is based on your debts, income, assets and credit at a point in time. Another words, you are approved or denied for a home loan based on your credit and income and other figures today, not where you will be tomorrow.
Mortgage lenders use an automated underwriting program, usually the one’s established by either FNMA of FHLMC, and input data about your current financial situation including your credit, income, debts and assets into these systems. Taking all the necessary information, the mortgage lender determines mortgage affordability. The key to any one individuals loan approval is be prepared and have the prettiest set of numbers for the mortgage lender to input in the automated underwriting system.
One of the most important numbers input or evaluated by the automated underwriting program is the borrower’s credit score. The credit score is one of the primary indicators of your ability to repay the mortgage loan, so it’s a good idea to know it before you apply with a mortgage lender. For the most part, if your score is above 760 you can expect to get the best mortgage rate a mortgage lender has to offer; if your score is below 660 you may have trouble getting approved until you improve your credit and credit score. You can obtain a free copy of your credit report annually at www.annualcreditreport.com.
Debt ratios are another key number quantified by the mortgage lender. Debt ratios are simply a measure of affordability. Debt ratios are measurements of affordability expressed as the percent of a borrowers income used to pay for debt. Mortgage lenders want to make sure a borrower’s monthly mortgage payment does not exceed 28 percent of their income before taxes. The mortgage lender will also look to see that total monthly debt payments including the mortgage payment, car payments and credit cards doesn’t exceed 36 percent of total gross monthly income. These two debt ratios are referred to as the front end and back end ratios in the mortgage industry.
Do the math calculations on your own with one of the mortgage calculators to see how your debt ratios stack up against these guidelines. The web site, www.selectcalculators.com is great site for mortgage calculators. If your proposed housing expenses or monthly mortgage payment is greater than 28% and total debt payments, car loan, student loans and other loans, is greater than 36 percent of your gross income, you may have trouble qualifying for new home loan. In tight situations, you may want to see is if there is a way to reduce some of those monthly debt payments before you apply for a home loan.
The down payment, assets and loan to value are all related measurements. The loan to value measure the loan amount in relation to the value of the home. An 80% loan to value mortgage equates to a home loan that 80% of the home’s value. For a purchase transaction, which would mean the borrower is putting 20% down or a 20% down payment.
The assets the mortgage lender is evaluating are the funds held by the borrower needed to cover that down payment, closing costs and reserves. The reserves are a measure of funds left over after paying for down payment and closing costs as a cushion or safety net. At least two months reserves will be mandatory. This is defined as two months worth of monthly mortgage payments. More reserves will make the home loan approval easier. Once again, the mortgage calculator and a look at your own finances can tell you where your loan to value will be as well as the number of months of monthly mortgage payments you have in reserve.
All of these numbers, debt ratios, credit scores and loan to value are evaluated by the mortgage lender via the automated underwriting program. The better any of the numbers are the easier the home loan approval process will be. Really high credit scores will be approved with less paperwork than lower scores. Larger down payments are processed faster. Low debt ratios will facilitate the approval process as well.
In a perfect world you want to save for a large down payment, improve your credit score and lower your debt-to-income ratio. But, in light of that, you may simply want to know where your weak spots are regarding these factors and see what you can do to improve on them before you apply for new mortgage loan. This is a good rule whether you are applying for a purchase or a mortgage refinance.
Q. What is Private Mortgage Insurance and why do I need It?
A. PMI is an acronym for private mortgage insurance also referred to as simply mortgage insurance. PMI is a type of insurance that covers the lender on the event you default on the loan. It is generally required on loans that have high LTV’s or low down payments. Mortgage lenders will normally require private mortgage insurance on home loans that have a loan to value greater than 80%. The loan to value or LTV is measured by taking the loan amount divided by the property value or for a purchase it can also be measured by taking 100% minus the percentage of the down payment. For example a home loan purchase with 10% down payment has a loan to value of 90% or a home loan that is for $75,000.00 on a home that is appraised at $100,000.00 has a 75% loan to value.
The private mortgage insurance covers the mortgage lender but will have top be paid by the home loan borrower as part of their monthly mortgage payment. Private mortgage insurance was established to help home buyers that had less than 20% for down payment. The insurance company absorbs a portion of mortgage lenders losses in the case of default and foreclosure for those home loans with private mortgage insurance that have less than 20% down. Without the added insurance, the mortgage lender would not make the home loan unless the down payment was at 20% or greater.
The private mortgage insurance cost is a reflection of the mortgage loan amount, the type of mortgage loan and the loan to value. The higher the loan amount is relative to the home’s value or the LTV, the greater the private mortgage insurance cost will be. This may seem fairly obvious, the less equity in the home the more the risk to the mortgage lender and therefore the higher the insurance costs.
Higher private mortgage insurance costs due to larger loan amounts is not necessarily a measure of risk but simply a higher cost since private mortgage insurance is priced as a percentage of the mortgage loan amount.
The mortgage loan type can change the private mortgage insurance costs since some home loans have a slightly higher risk of default. The best example for this is adjustable rate mortgages. A higher loan to value, low down payment, adjustable rate mortgage is more risky than a 30 year fixed rate mortgage loan and therefore has a higher private mortgage insurance cost.
Two avoid private mortgage insurance you have to have a 20% equity in the property. Either 20% or more for a down payment on a purchase or for a refinance, the loan to value can not exceed 80%. Stated another way, the new home loan can not exceed 80% of the property value for either an existing mortgage refinance or home purchase.
Some mortgage lenders allow customers to put down less than 20% to avoid PMI by taking two mortgage loans. This is accomplished by obtaining a first mortgage for 80% of the property’s value and a second mortgage loan for 10% of the property’s value. This is commonly referred to as 80-10-10 loan since the first mortgage is for 80% loan to value, the second represents 10% loan to value and the third 10 represents 10% down payment from the borrower. At one point mortgage lenders also allowed 80/20’s in which the borrower obtained two mortgage loans that together were 100% of the value of the home. The 80/20 is pretty much extinct and the 80-10-10 is very difficult to find.
Mortgage insurance is usually set up as addition to the monthly mortgage payment. A standard monthly mortgage payment includes principal and interest as well as taxes and insurance. The insurance usually refers to the homeowners insurance. A loan with private mortgage insurance will have added insurance charge for the private mortgage insurance costs. A change in private mortgage pricing in the past five years set up to alleviate the tax differences between the tax deductible costs of private mortgage insurance and the interest on second mortgages is something called lender paid PMI.
In these situations the mortgage lender covers the cost of the private mortgage insurance and there is no added costs at the home loan closing or added to the monthly mortgage payment. However, the mortgage lender absorbs this added cost by raising the mortgage rate on the home loan to compensate their costs for the private mortgage insurance. This increase in the mortgage rate to cover additional costs is the same technique used in no point / no closing costs mortgage loans in which the mortgage lender raises the mortgage rate to absorb the mortgage loans’ closing costs.
Q. Should I pay points to get a lower mortgage rate?
A. Paying points may or may not be your best option, depending on what your objective is. Mortgage points, whether they are called discount points or origination points, should make the interest rate on the home loan lower. Generally speaking, the more mortgage points that a loan has, the lower its interest rate should be. Alternatively, you can lower the points paid at closing by accepting a higher mortgage rate.
Most mortgage lenders usually will offer mortgage loans with points and without points. Even when a mortgage lender markets a mortgage rate with points, call the lender and see what the mortgage rate would be without points, sometimes mortgage lenders will not market all their mortgage rate and point options.
Now, some home loans have points attached or charged as a customary method of offering the home loan. FHA loan are the most common example. Most FHA mortgage rates are priced with one point origination fee. It doesn’t mean it is necessary, it’s just customary.
The amount of points you want to or ought to pay, should include evaluating how much cash you have available and the length of time you expect to hold the mortgage. Once you shop and compare mortgage rates and are confident you have the necessary funds to cover the costs of additional points to obtain a desirable and competitive mortgage rate you should compare mortgage rates with points and without. After comparing the mortgage rate difference and the cost differences, the only way that it will be cost effective to take the home loan with points is if you hold the loan long enough to recover the added costs of the points.
As an example, today Bank of America offers a 30 year fixed rate mortgage for a purchase in Illinois with a rate of 5.250% and 1.375 points. The bank also offers a no point option with a mortgage rate of 5.625%. The monthly mortgage payment with points for a $280,000.00 home loan will be $1,546.17. The home loan monthly mortgage payment with zero points is $1,611.84 or a difference of $65.67 per month. Since the cost difference between the two loans is the dollar value of 1.375 points or $3,850.00, the amount of time it takes to cover the costs of paying points will be 58.63 months. The additional points will take almost 5 years to recoup. In this case, it is hard to see the value in paying the points.
A final consideration is the future movement of interest rates. When mortgage rates head lower, refinancing activity increases. If in the above example, mortgage rates drop shortly after closing on the home loan it fairly easy to calculate the cost savings with a new mortgage loan at a lower rate. For instance, if mortgage rates fall to 5.125% on a no point loan, the monthly mortgage payment drops by $87.26. If the closing costs are approximately $2,205.00 (actual data extracted from Bank of America’s web site) the refinance will take 25 months to recoup.
The quandary arises when the loan originally accepted has points. Refinancing that loan means the value of the points are flushed away. The borrower will have paid the original closing costs and the points only to have an opportunity to refinance again without recovering the points already paid. Of course, this is only significant should mortgage rates drop low enough to make refinancing a worthwhile transaction. Guessing the direction of interest rate is certainly a task that is above my pay grade and most every mortgage client I have ever had.
Points paid on a home loan for a refinance can be deducted from your taxes as they are amortized or in increments, 1/30th a year for a 30-year mortgage, for example. Mortgage points paid for a home purchase are a tax deductible expense for that year. Consult a tax advisor for individual situations and details.
Q. What does it mean to float a rate?
A. Mortgage rates changes daily and in especially volatile markets they can change during the day. Floating or floating the rate is when you have put in a mortgage loan application for a home loan but the mortgage rate is not locked or set at a specific rate but rather floats and may vary with the daily market interest rate changes. While your mortgage rate floats, the interest rate on your home loan may go up and it may go down until the loan rate is locked. The mortgage rate must be locked prior to the closing date but it can float either by request of the loan applicant or because the applicant is ignorant about how mortgage loans and mortgage rates function. Of course, the mortgage payment will change as the mortgage rate changes.
The opposite dynamic of floating the rate is to lock the mortgage loan rate. When this happens the interest rate is fixed for that loan request for a predetermined period of time. The home loan should be settled or close during the time period covered by the loan lock or the loan lock is of no value. The loan lock can be performed at the time of the home loan application or anytime up to a few days prior to the home loan closing.
A mortgage applicant may float their loan because they believe mortgage rates are headed lower. This can be risky business, but many mortgage applicants have guessed wisely and made the assumption that mortgage rates will drop between the time they place the mortgage application and the time the loan closes and in fact the mortgage rates do fall and that new mortgage loan borrower has a lower rate.
Unfortunately, some mortgage lenders do not inform their customers about mortgage rate locks and the potential home loan borrower’s mortgage rate is floating because of this intentional lack of disclosure. When mortgage rates suddenly rise, that borrower is now going to find that their mortgage rate is higher or perhaps more loan fees how been added to the closing costs to cover the costs of obtaining the original quoted rate that is no longer available in the mortgage market.
When a potential mortgage applicant is shopping and comparing mortgage rates it is important to discuss the rate lock with the mortgage lender. Be sure to discuss how long the mortgage rate is good for. Mortgage loan locks and rate floating applies to both purchase transactions and refinances.
When you discuss the interest rate on a mortgage loan with a loan officer of a mortgage lender or bank, part of the discussion that is often left out is how long that mortgage rate is good for. Many mortgage loan officers quote mortgage rates that are short term rates. The rate difference between a long term commitment and a short term commitment may not be very much but there is a discernible difference.
Mortgage rates generally have commitment time periods of 15 days, 30 days, 45 days, 60 days and sometimes longer. If a mortgage applicant is applying for a home loan that is due to close in 40 days, a mortgage rate commitment for 15 days is essentially worthless. Loan officers sometimes quote that 15 day commitment rate because it is cheaper either with a lower mortgage rate or lower fees and this draws the customer in. Remember, the loan officer is a salesman first. Later the loan officer tells the applicant they are not locked, hopefully at the time the home loan application is filled out but often they do not tell them until the loan is ready to close. If rates fall the borrower may get a benefit and if they rise they are in for an unpleasant surprise.
Q. What are mortgage points?
A. Points are fees charged by the mortgage lender or mortgage originator. Each point represents 1% of the loan amount. The points are charged as either general costs to obtain the loan or points to reduce the interest rate. The first example is generally considered origination points or fees and the later are considered discount points. Discount points are paid for a lower mortgage rate and origination points are charged by the mortgage lender for providing the home loan or originating the loan.
Often these loose definitions are meaningless. The important measurement is the mortgage rate and the total costs including points, whether they are identified as origination points or discount points.
If a prospective home loan applicant reviews two different mortgage lenders for a $100,000.00 home loan and one mortgage lender offers a 30 year mortgage at 6.00% and no points but with $1,800.00 in closing costs and another mortgage lender offers a 30 year mortgage with a mortgage rate of 5.75% with 2 points and $1,000.00 in closing costs, the assessment on the pros and cons of points gets complicated. Technically, the first mortgage lender is offering a home loan with an annual percentage rate (APR) of 6.167% and $1,800.00 in costs and a monthly payment of $599.55. The second mortgage lender is offering a loan with an APR of 6.024% and $3,000.00 in total costs and a monthly payment of $583.57.
The first mortgage lender’s payment is $15.98 more per month but costs $1,200.00 less to obtain the loan. The first lenders option has a higher mortgage rate and APR but the $1,200.00 difference in higher costs from the second mortgage lender will take approximately 75 months to recoup based on the monthly mortgage payment difference of $15.98 per month. Unless you plan to stay in the house a long time and mortgage rates don’t fall during that time, the first option is generally the better mortgage loan.
Mortgage Lenders, Banker, Brokers, Oh My
Shopping for a home mortgage can be a daunting task. Not only do you have to shop the dizzying selection of mortgage loan products with varying mortgage rates and costs, but with the plethora of mortgage companies out there now you have to choose the type of mortgage lender too.
Choosing the mortgage lender by the type of organization should not be a challenge. Each lending institution will certainly have its strengths and weaknesses but the type of organization should not generally be a deciding factor for obtaining a home loan. Different mortgage lender will have differences in the variety the home loan offerings and mortgage rates between lenders and between regions where they operate but the differences in loan types is generally quite small.
There are exceptions to choosing a mortgage lender, for instance, if you are looking for a construction loan, not all lending institutions will be competitive for this type of home loan. Prospective home loan borrowers need to shop and compare loan products between mortgage lenders when the home loan request more specialized but this has little to do with the type of mortgage company itself.
The regional differences in products and the availability of home loan types and prices applies to brokers, bankers, credit unions, savings and loans and other licensed institutions that originate residential mortgages.
The term mortgage lender has usually been reserved for the financial institution that provides the actual funds at the home loan closing. However, since mortgages are frequently transferred, bought and sold in such a quick time frame, whether the institution that originates the loan is in fact the mortgage lender has become insignificant and most all mortgage originating companies are referred to as the mortgage lender.
There are hundreds of mortgage lenders and mortgage brokers available that will prequalify and preapprove a mortgage loan for almost any consumer looking to make a new home purchase or refinance an existing home loan. Major categories of mortgage lenders include:
Banks. A bank, commercial bank or savings and loan may have the largest financial backing and some of the strongest regulations in the mortgage lending marketplace. Banks and savings and loans which are also called thrift institutions were historically the largest traditional mortgage lenders of residential home mortgages. Mortgage brokers began taking a large share of mortgage origination’s starting in the 1980’s but the savings and loans and banks remain a major source of funding for home mortgage loans and for the time, appear to be perceived by consumers as being more reliable and responsible with mortgage lending.
Some banks will sell the home loans they originate shortly after funding the mortgage other banks don’t sell their home loans to other companies after closing. These banks collect the mortgage payments, manage the escrow accounts for taxes and insurance and maintain the relationship for the long term, but this process is becoming less frequent with home loans being bought and sold regularly and the servicing of the home loan either being retained by the bank or sold along with the loan. When home loan product began operating like a commodity and were bought and sold with regularity, the banks position in the mortgage lending market place diminished measurably however, the credit contraction has a brought a resurgence in mortgage origination’s being handled by banks.
Mortgage Bankers. Mortgage bankers often sell their mortgages to large mortgage servicers or to Fannie Mae and Freddie Mac, two major government-sponsored enterprises that specialize in buying residential mortgages from lenders. Mortgage bankers borrow money from banks or pools of investors, underwrite the loans, and sell them to investors for a profit. Mortgage bankers often receive a fee from these investors for servicing the mortgage if the mortgage banker retains the servicing for the home loan they originate. Mortgage servicing includes collecting monthly payments, sending out loan statements, and collecting on late payments.
Mortgage Brokers. A mortgage broker represents a wide assortment of products and can price home loans with great deal of flexibility since they often work with many mortgage lenders. Mortgage brokers do not make the mortgage loan but rather facilitate the process of obtaining a mortgage loan. The mortgage broker processes the mortgage loan request and may shop a home loan application among different mortgage lenders to find desirable home loan terms for the borrower. In exchange, the mortgage lender and/or the home loan borrower pays the broker a fee. This, however, does not necessarily mean that the consumer will get the best mortgage rate and home loan program or the loan officer’s best mortgage rate and loan program.
Credit Unions. Credit unions operate similar to banks but are owned by their members. Credit unions may offer very attractive home loan terms, particularly if they evaluate their entire banking relationship with you. Since they are nonprofit institutions, credit unions may offer attractive mortgage loan rates to their members. Like commercial mortgage lenders, credit unions sell their loans to Fannie Mae and Freddie Mac to maintain access to new sources of funds. The National Credit Union Administration (NCUA) regulates the credit union industry.
Mortgage bankers, credit unions, savings and loans and possibly more companies can offer home mortgages. With the rapid movement of mortgage money it may be a mistake to rely on one type of mortgage institution as being best as opposed to which mortgage company is chosen. Deciding which type of mortgage lender is best will rarely make any difference in the home loan process. Deciding on the mortgage lender or the originator is the important choice. The variability between mortgage companies in any one category of mortgage lender is so small as to make choosing a mortgage company by the type of organization a difficult task.
It is more important to choose a good loan officer and a reputable firm regardless of the organizational structure. Measuring a good mortgage lender or originating company may be a difficult task. During cautious times, more consumers rely on the regulation and size of the banking industry as the number choice for a mortgage loan. The structure of the mortgage lender is not what makes the home loan right but the ability to have ample resources to call upon and a known regulatory body in which to voice a complaint reassures many consumers that applying for a new home loan at a bank is the right choice. Many mortgage lenders have gone out of business, have been sold, or have stopped making certain kinds of loans, leaving their customers stranded and further reinforcing the apparent advantage held by banks.
Given this conclusion it is still essential to compare the mortgage lenders services and history since the services of that branch or that office is what makes the home loan right for any individual consumer.
Once it has been determined that a bank, mortgage lender or mortgage broker is offering the right home loan product at a favorable mortgage rate and overall cost, measuring quality can be difficult attribute to measure until the home loan process is complete. Quality can generally be regarded as prompt, efficient service from the mortgage rate quotes to question and answer sessions regarding the loan applicants’ needs to a trouble free home loan closing. Measuring the quality of those services in advance may be a challenge.
Along with shopping the source for the home loan, a potential home loan borrower will have to shop the total cost of the home loan including the mortgage rate, fees, points prepayment penalties the loan term and a host of other items.
A good starting point to choosing the right mortgage lender is to perform ample research on the home loan program and shop for the mortgage lender over the phone with sufficient knowledge on the types of home loans and how they are processed. Be sure to call more than one mortgage lender and use the online mortgage calculators to help compare mortgage rates and costs. Compare the services by measuring knowledge of the home loan programs, the questions they have for you and ask for references. Be an astute shopper and compare the mortgage loans, the mortgage rates, the closing costs and test the resources and knowledge of those mortgage lenders who are ultimately paid to help you obtain your mortgage loan.