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Overview of the Mortgage Process
Overview
After you have selected a company to be your
mortgage banking resource, it is now time to sit down with the
loan officer and begin the application process. Just as wise
stock market investors carefully research companies in which they
plan to buy stock, careful mortgage lenders investigate the
financial background of each loan applicant. In lending the
prospective borrower the money to buy the home, the lender
assumes a long term risk. The assumption is that the borrower is
going to eventually repay the loan, and in the meantime make the
loan payments on time.
After all the information is collected and eligibility's are established, the lender analyzes the risk of making the investment, and then decides whether or not to extend credit to the applicant.
There are no mandatory industry wide standards for underwriting; which is the entire process of preparing the conditions of the loan, determining the borrowers ability to repay, and deciding whether to give loan approval. However, most lenders follow standards set by the government and government related agencies, private mortgage investors, or institutional investors. Since lenders are in the business to loan money, it is their strong desire to approve as many qualified loans as possible.
Application
The important document that starts the whole
process is the loan application. It asks in-depth questions in
regard to your income, assets and liabilities, credit, legal
history, and information on the property that you wish to
purchase. The lender will verify the information that you provide
on the application, before making the final decision. In order to
expedite the process, your loan officer will tell you in advance
what information to bring with you to the loan application
meeting.
During the application meeting, you will be asked if you want to lock-in (guarantee) the current market interest rate, for the type of loan that you desire. If so, find out how long the rate is locked for, and get everything in writing to avoid future confusion.
Loan Processing
After the loan officer completes the
application, all information is then submitted to the lenders
processing department. The assigned processor is responsible for
sending out verification letters; ordering an appraisal, survey
and credit report; and for assembling the remaining information
that is necessary before the completed file can be forwarded to
the underwriting department. During the mortgage review process,
you will be directly communicating with the loan officer and
his/her processor.
Underwriting
All final decisions regarding files
are made in this department. If you are working with a mortgage
banker, they will a staff of their own underwriters. If you are
working with a mortgage broker, your file will normally be sent
to the underwriter at whichever investor your loan officer has
selected for your proposed loan. Keep in mind that underwriters
usually do not see your file until all the information has been
gathered by the processor and submitted in its final form.
Remember it is an underwriters job to analyze the risk and determine an applicants credit worthiness. They approve, deny, or approve with conditions your loan request.
Closing
If your loan is
approved by underwriting, the final step is the closing of the
loan. In Georgia, a closing attorney will prepare all of the
closing documents. They will also check the title of the
property, to make sure it is free to be sold. The following are
documents that will be signed at closing (Georgia):
| Settlement Statement: | Itemizes the closing
settlement charges for the buyer and seller |
| Truth-in-Lending: | Among other things,
this statement discloses the annual percentage rate (APR),
which reflects the true cost of your mortgage over the
life of the loan. This rate may be higher than your
actual interest rate, because it includes points, fees
and other costs of credit. |
| Note: | The mortgage note
represents your promise to pay the lender according to
the agreed upon terms. It also details the penalties that
will be assessed if you default or violate any of the
terms. |
| Security Deed: | Property is pledged
by the borrower to the lender, as security for repayment
of the loan. The pledge ends when the loan is paid off. |
| Warranty Deed: | The seller must
bring the document to the closing, properly signed and
notarized. It is the document that transfers ownership
from the seller to you. |
| Affidavits: | You will be asked to sign numerous affidavits. These may be required by state law, the lender, the attorney, and/or by investors who purchase mortgages. |
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What lenders look for when
evaluating an application
| Capacity: | Can you repay the debt? Lenders
ask for employment information (occupation, work history,
and income). They also want to know your expenses
(dependents, debts, and other obligations). |
| Credit History: | Will you repay the debt? Lenders
do a complete examination of your current and past credit
history (how much you owe, how often you borrow, whether
you pay your bills on time, and whether you live within
your means). They also look for signs of stability. |
| Capital: | Do you have enough cash for the
down payment, closing costs, pre-paid expenses, and a
reserve fund left over after closing. Where did this
money come from. Do you need a gift from a relative? |
| Collateral: | Will the lender be fully protected if you fail to repay the loan? Lenders want to make sure the property you are buying is sufficient to back up the loan (which is why an appraisal is done). |
Income Qualifying Ratio's
This section will briefly examine the
qualifying financial ratio's that a typical lender will use to
determine how much money a buyer can afford to borrow. These
ratio's are not cast in stone, however, they are very closely
adhered to by lending institutions. Most guidelines are set by
the secondary market, which is where most of the local lending
institutions sell their loans.
The percentages listed below are calculated on your gross monthly income:
| Maximum Monthly Housing: | 28% (29% for FHA) ----- Includes
principal, interest, property tax escrow, homeowners
insurance escrow, and condominium/association fees. |
| Maximum Monthly Housing & Debts: | 36% (41% for FHA/VA) ----- Includes items from above and all monthly debts. |
Congratulations on the purchase of your new home!
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