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Real Estate Agent |
RAINER 25,040 |
| Alan Geary | ||
| location_on Thousand Oaks, CA | ||
| web Alan Geary's (alange) Blog | ||
This section will give you a good Idea of the mortgage loan process and the time frame involved. The knowledge will help you feel more comfortable with your lender as you go through the loan process and will also help you spot any red flags along the way if they should appear.
The type of loan you are applying for will determine the length of time required for the loan process in completing your loan. Different loan types require different documentation.
As an example, If you have good credit and lots of equity in your home and you are applying for a 2nd mortgage the lender may not require an appraisal. If you are getting a Line of credit on your equity, that documentation can be completed with some lenders in a matter of days. If you qualify for automated processing (DU, or Loan Prospector) it is sometimes possible to close in less than 14 days.
Your loan officer should walk you through the process up front so you will know what to expect. Typically, most loans take 3 to 4 weeks to close.
Here is the mortgage loan process:
Mortgage Application
The mortgage application process is where you fill out the application, sign various forms that authorize the lender to process your loan, and deliver your documentation requirements. (Bank statements, pay stubs, W2s, etc...) Obviously if you are doing this through the mail it can take a week or more but if you go into the office it usually only takes an hour or so. You should understand that the next process cannot begin until these documents are completed and or received.
Mortgage Processing
When all of your documentation is received it then goes to a processor who verifies and validates all of the information to be true and correct. Verification requests may be sent to your employers, mortgage holder/landlord and lending institutions. This is done by fax when possible. It is usually during this time frame that the appraisal and the title policy are ordered.
When all the information is collected the processor then verifies that basic lender loan requirements have been met. The file is then packaged in a manner the lender specifies. The completed package (including the appraisal and title report) is then sent to the underwriting department either in house or to a lender-specified location.
The processing of your loan usually takes about one to two weeks but it can often be delayed when third parties do not respond to the validation requests or appraisals are delayed. If your loan qualifies for DU (Desk top Underwriting) or Loan Prospector, these are computer automated systems, the documentation requirements are often cut in half and the process can be completed in three to five days depending on the volume of loans the processor has.
Mortgage Underwriting
The underwriter reviews your loan package to make sure it conforms to all the guidelines required for that loan product. They also review the appraisal and title report and may do additional validation of employment, mortgage payments, and credit. And, anything else they feel is necessary to document your loan. They have ultimate power and decision authority over the approval of your loan. The time required to do this is driven by the volume in the market. If the market is flooded I have seen it take two weeks but under normal conditions it only takes three to five days.
Automated Mortgage Underwriting
Most lenders today use Automated Underwriting (by computer). The advantage is less documentation and it speeds up the process. The computer actually makes the approval decision and the underwriter only reviews the supporting documentation and the appraisal. However, if any documentation is missing, inaccurate, or does not agree with the 1003 (application), the loan will be kicked out of this system until documentation requirements are met or the loan is turned down or resubmitted. This can cause delays but they are usually resolved quickly. Automated Underwriting can be completed in just a matter of hours. But, ..If the market is flooded expect it to take longer.
Conditions To Close
When the underwriter is done reviewing your loan she will send "conditions to close" to your loan officer. These are normally just requirements for further documentation to support your file. When these needs have been satisfied the underwriter will give a final approval and "clear to close".
Clear To Close
When the loan officer gets the clear to close he then schedules and coordinates with all the parties the time and location to sign the final documents to close the loan. This normally only takes an hour to schedule.
Draw Documents
When everything is scheduled the lender then draws the document package and sends it to the closing company. This can be done by overnight delivery, fax, or electronically. It can take one to two days. You meet, sign the papers, and pick up the keys.
Basic VA Loan Uses Include:
To purchase or construct a residence to be owned and occupied by the veteran as a home. To refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate. To repair, alter, or improve a residence owned by the veteran and occupied as a home. To simultaneously purchase and improve a home. To purchase a farm residence to owned and occupied by the veteran as a home. To purchase a one-family residential unit in a condominium housing development approved by VA.VA Loans cannot be used for Land Loans or Investment Properties.
Eligibility
If you were honorably discharged with at least two years service or you are still on active duty, you are eligible for a VA Loan. Reservists also qualify with six years of service or 90 days or more deployed to a combat zone. Spouses of deceased veterans can also qualify.
Income
The following are primarily what a VA-Approved Underwriter will look at when it comes to your income, based on the ability to verify and identify income available to cover:
The Mortgage Payment Debts and Obligations Family Living Expenses Any other Shelter-related expensesThe VA also wants to make sure that the verified income is:
Stable and Reliable Anticipated to continue during the foreseeable future Sufficient in amountThe VA requires a 12-month working history, proving that you've been at the same job for at least 12 months, however most VA Lenders require at least a 24-month working history in the same field. Changing employers in that timeframe are acceptable; however you may be required to include a letter of explanation for the change. Second or part-time jobs can also be included towards your income; however the VA does require a 24-month history of working a second or part-time job.
Finally, there are credit requirements. The VA is more relaxed with its credit requirements; however that does not mean VA gives loans to anybody. The VA does look at the last 12 months of your credit history to ensure timely payments and few to no late payments. There is no minimum credit score requirement, however most VA Lenders have a minimum score requirement.
Regarding Bankruptcies, the VA requires a borrower be 24 months removed from a discharged Ch. 7 Bankruptcy and 12 months removed from a discharged Ch. 13. A foreclosure on a borrower's credit history does not disqualify that veteran from a VA Loan, however in most cases the foreclosure needs to be 24-36 months removed before most VA Lenders will accept a new VA Loan application. If the foreclosure was on a VA Loan, the borrower has lost his or her VA Home Loan Entitlement
Title: a legal document
Eligibility
If you were honorably discharged with at least two years service or you are still on active duty, you are eligible for a VA Loan. Reservists also qualify with six years of service or 90 days or more deployed to a combat zone. Spouses of deceased veterans can also qualify.
Income
The following are primarily what a VA-Approved Underwriter will look at when it comes to your income, based on the ability to verify and identify income available to cover:
The Mortgage Payment Debts and Obligations Family Living Expenses Any other Shelter-related expensesThe VA also wants to make sure that the verified income is:
Stable and Reliable Anticipated to continue during the foreseeable future Sufficient in amountThe VA requires a 12-month working history, proving that you've been at the same job for at least 12 months, however most VA Lenders require at least a 24-month working history in the same field. Changing employers in that timeframe are acceptable; however you may be required to include a letter of explanation for the change. Second or part-time jobs can also be included towards your income; however the VA does require a 24-month history of working a second or part-time job.
Finally, there are credit requirements. The VA is more relaxed with its credit requirements; however that does not mean VA gives loans to anybody. The VA does look at the last 12 months of your credit history to ensure timely payments and few to no late payments. There is no minimum credit score requirement, however most VA Lenders have a minimum score requirement.
Regarding Bankruptcies, the VA requires a borrower be 24 months removed from a discharged Ch. 7 Bankruptcy and 12 months removed from a discharged Ch. 13. A foreclosure on a borrower's credit history does not disqualify that veteran from a VA Loan, however in most cases the foreclosure needs to be 24-36 months removed before most VA Lenders will accept a new VA Loan application. If the foreclosure was on a VA Loan, the borrower has lost his or her VA Home Loan Entitlement
Title: a legal document establishing the right of ownership and is recorded to make it part of the public record. Also known as a Deed.
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien.
Understanding mortgage underwriting guidelines will help you understand your loan options when purchasing or refinacing a home. Now that you have found your dream house, you are going to need to apply for a mortgage loan. Your realtor will either recommend a banking institution or you may already have one in mind. You will be dealing with a loan officer who will be compiling all the data on you to see if you qualify for a loan to pay for this house. All lending institutions have different Underwriting Guildelines set in place when reviewing a borrower's financial history to determine the likelihood of receiving on-time payments. The primary items reviewed are:
Income Debt Credit History Savings Debt vs Income RatioIncome
Income is one of the most important variables a lender will examine because it is used to repay the loan. Income is reviewed for the type of work, length of employment, educational training required, and opportunity for advancement. An underwriter will look at the source of income and the likelihood of its continuance to arrive at a gross monthly figure.
Salary and Hourly Wages - Calculated on a gross monthly basis, prior to income tax deductions. Part-time and Second Job Income - Not usually considered unless it is in place for 12 to 24 straight months. Lenders view part-time income as a strong compensating factor. Commission, Bonus and Overtime Income - Can only be used if received for two previous years. Further, an employer must verify that it is likely to continue. A 24-month average figure is used. Retirement and Social Security Income - Must continue for at least three years into the future to be considered. If it is tax free, it can be grossed up to an equivalent gross monthly figure. Multiply the net amount by 1.20%. Alimony and Child Support Income - Must be received for the 12 previous months and continue for the next 36 months. Lenders will require a divorce decree and a court printout to verify on-time payments. Notes Receivable, Interest, Dividend and Trust Income - Proof of receiving funds for 12 previous months is required. Documentation showing income due for 3 more years is also necessary. Rental Income - Cannot come from a Primary Residence roommate. The only acceptable source is from an investment property. A lender will use 75% of the monthly rent and subtract ownership expenses. The Schedule E of a tax return is used to verify the figures. If a home rented recently, a copy of a current month-to-month lease is acceptable. Automobile Allowance and Expense Account Reimbursements - Verified with 2 years tax returns and reduced by actual expenses listed on the income tax return Schedule C. Education Expense Reimbursements - Not considered income. Only viewed as slight compensating factor. Self Employment Income - Lenders are very careful in reviewing self-employed borrowers. Two years minimum ownership is necessary because two years is considered a representative sample. Lenders use a 2-year average monthly income figure from the Adjusted Gross Income on the tax returns. A lender may also add back additional income for depreciation and one-time capital expenses. Self-employed borrowers often have difficulty qualifying for a mortgage due to large expense write offs. A good solution to this challenge used to be the No Income Verification Loan, but there are very few of these available any more given the tightened lending standards in the current economy. NIV loan programs can be studied in the Mortgage Program section of the library.
Debt
An applicant's liabilities are reviewed for cash flow. Lenders need to make sure there is enough income for the proposed mortgage payment, after other revolving and installment debts are paid.
All loans, leases, and credit cards are factored into the debt calculation. Utilities, insurance, food, clothing, schooling, etc. are not. If a loan has less than 10 months remaining, a lender will usually disregard it. The minimum monthly payment listed on a credit card bill is the figure used, not the payment made. An applicant who co-borrowed for a friend or relative is accountable for the payment. If the applicant can show 12 months of on-time cancelled checks from the co-borrowee, the debt will not count. Loans can be paid off to qualify for a mortgage, but credit cards sometimes cannot (varies by lender). The reasoning is that if the credit card is paid off, the credit line still exists and the borrower can run up debt after the loan is closed. A borrower with fewer liabilities is thought to demonstrate superior cash management skills.Credit History
Most lenders require a residential merged credit report (RMCR) from the 3 main credit bureaus: Trans Union, Equifax, and Experian. They will order one report which is a blending of all three credit bureaus and is easier to read than the individual reports. This "blended" credit report also searches public records for liens, judgments, bankruptcies and foreclosures. See our credit report index.
Credit report in hand, an underwriter studies the applicant's credit to determine the likelihood of receiving an on-time mortgage payment. Many studies have shown that past performance is a reflection of future expectations. Hence, most lenders now use a national credit scoring system, typically the FICO score, to evaluate credit risk. If you're worried about credit scoring see our articles on it.
The mortgage lending process, once very forgiving, has tightened lending standards considerably. A person with excellent credit, good stability, and sufficient documentable income to make the payments comfortably will usually qualify for an "A" paper loan. "A Paper", or conforming loans, make up the majority of loans in the U.S. and are loans that must conform to the guidelines set by Fannie Mae or Freddie Mac in order to be saleable by the lender. Such loans must meet established and strict requirements regarding maximum loan amount, downpayment amount, borrower income and credit requirements and suitable properties. Loans that do not meet the credit and/or income requirements of conforming "A-paper" loans are known as non-conforming loans and are often referred to as "B", "C" and "D" paper loans depending on the borrower's credit history and financial capacity.
Here are some rules of thumb most lenders follow:
12 plus months positive credit will usually equal an A paper loan program, depending on the overall credit. FHA loans usually follow this guideline more often than conventional loans. Unpaid collections, judgments and charge offs must be paid prior to closing an A paper loan. The only exception is if the debt was due to the death of a primary wage earner, or the bill was a medical expense. If a borrower has negotiated an acceptable payment plan, and has made on time payments for 6 to 12 months, a lender may not require a debt to be paid off prior to closing. Credit items usually are reported for 7 years. Bankruptcies expire after 10 years. Foreclosure - 5 years from the completion date. From the fifth to seventh year following the foreclosure completion date, the purchase of a principal residence is permitted with a minimum 10% down and 680 FICO score. The purchase of a second or investment property is not permitted for 7 years. Limited cash out refinances are permitted for all occupancy types. Pre-foreclosure (Short Sale) - 2 years from the completion date (no exceptions or extenuating circumstances). Deed-in-Lieu of Foreclosure - 4 year period from the date the deed-in-lieu is executed. From the fifth to the seventh year following the execution date the borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited cash out and cash out refinance transactions secured by a principal residence, second home or investment property are permitted pursuant to the eligibility requirements in effect at that time. Chapter 7 Bankruptcy - A borrower is eligible for an A paper loan program 4 years after discharge or dismissal, provided they have reestablished credit and have maintained perfect credit after the bankruptcy. Chapter 13 Bankruptcy - 2 years from the discharge date or 4 years from the dismissal date. Multiple Bankruptcies- 5 years from the most recent dismissal or discharge date for borrowers with more than one filing in the past 7 years. The good credit of a co-borrower does not offset the bad credit of a borrower. Credit scores usually range from 400 to 800. Changes to lending standards are occurring on a daily basis as a result of tightening lending standards, and can vary from lender-to-lender-- so this information should be considered simply a guideline. For conforming loans, most lenders will lend down to a FICO of 620, with additional rate hits for the lower-end credit scores and loan-to-values. When you are borrowing more than 80%, they typically will not lend if you have a FICO below 680. The FHA/VA program just changed their minimum required FICO to 620, unless you are qualifying a borrower with non-traditional credit. The few non-conforming loan programs that are still available typically require 30% down payment with a minimum FICO of 700 for self-employed and 650 for W-2 employees, and the loan-to-value will change with the loan amount. A credit score below 600 may require an Alternative Credit mortgage program. Misinformation on a credit report can be repaired! For more information see our credit repair section. The FTC states, "Credit repair companies take your money and vanish." Anything a credit repair company does for a fee, a consumer can do for free. Be wary of these guys! If a borrower falls behind on a payment, the creditor should be contacted as quickly as possible. Most creditors will work with a borrower who makes an initial good faith effort to communicate with them.Savings
Lenders evaluate savings for three reasons.
The more money a borrower has after closing, the greater the probability of on-time payments. Most loan programs require a minimum borrower contribution. Lenders want to know that people have invested their own into the house, making it less likely that they will walk away from their life's savings. They analyze savings documents to insure the applicant did not borrow the funds or receive a gift.Lenders look at the following types of accounts and assets for down payment funds:
Checking and Savings - 90 days seasoning in a bank account is required for these funds. Gifts and Grants - After a borrower's minimum contribution, a gifts or grant is permitted. Sale of Assets - Personal property can be sold for the required contribution. The property should be appraised and a bill of sale is required. Also, a copy of the received check and a deposit slip are needed. Secured Loans - A loan secured by property is also an acceptable source of closing funds. IRA, 401K, Keogh & SEP - Any amount that can be accessed is an acceptable source of funds. Sweat Equity and Cash On Hand - Generally not acceptable. FHA programs allow it in special circumstances. Sale Of Previous Home - Must close prior to new home for the funds to be used. A lender will ask for a listing contract, sales contract, or HUD 1 closing statement.
Debt vs Income Ratio
The percentage of one's debt to income is one of the most important factors when underwriting a loan. Lenders have determined that a house payment should not exceed approximately 30% of Gross Monthly Income. Gross Monthly Income is income before taxes are taken out. Furthermore, a house payment plus minimum monthly revolving and installment debt should be less than 40% of Gross Monthly Income (this figure varies from 35%-41% contingent on the source of financing).
Understanding mortgage underwriting guidelines will help you understand your loan options when purchasing or refinacing a home. Now that you have found your dream house, you are going to need to apply