Mortgage Processing – Introduction
When you are arranging to buy a home but do not have the full purchase price available, you will need to arrange to fund the balance of the purchase price and for most buyers this means taking out a home loan. The process can be stressful and expensive so it is essential that you understand what is involved and are able to educate yourself on the varying requirements you will need to comply with.
There are many different mortgage lenders in the market and each lender will offer a range of mortgage products and programs. Most buyers use the services of a mortgage broker who is a qualified and regulated professional, experienced in the selection and arrangement of mortgages and the related products such as home and life insurance that typically are required. You can find a mortgage broker through your realtor or through your bank, and indeed many brokers extensively advertise their services. Make sure you are happy with the professional you choose to help you arrange the loan and that they answer your questions and concerns to your satisfaction.
Which mortgage lender and type of mortgage scheme most appropriate for you will be determined by your attitude to risk, your employment and the nature of your income and your personal situation such as the amount of deposit available as well as your other financial commitments. A mortgage broker will be able to discuss these matters with you and recommend a scheme that is suitable for you and will allow you to finance your new home.
This guide to mortgage processing will take you through the various requirements, forms and information that are likely to be asked for and how you can arrange your home financing. Understanding the process will help make your new home purchase that much smoother and simpler, reducing unnecessary costs, wasted time and greatly reducing the stress associated with one of the most important decisions of anyone’s life – buying a new home.
Mortgage Processing: The Basics
The process involved which secures a mortgage by a home buyer is called origination and involves the submission of a loan application together with other personal and financial information on the applicant. Many lenders offer “no-doc” or “low-doc” mortgages where the applicant needs not submit much of the information that is associated with a standard application.
Mortgages are sold on the open market to investors by the originating mortgage or home loan company that has initially lent the money. In order to satisfy potential investors, mortgage origination companies will lend according to guidelines that are established to ensure the mortgage book can be sold on to these investors.
An underwriter will review the application and information submitted in connection with the proposed loan. The underwriter is ultimately responsible for accepting or declining the application, and where an applicant does not meet underwriting rules but is not an outright decline, then they may impose conditions which attach to accepting the loan e.g., increased down payment or the making of essential repairs on the property.
In recent years, a process known as “automated underwriting” has been implemented by many lenders and this provides for faster decision making and less documentation to be required from the applicant and third parties. For borrowers who have a good credit record and are financial secure, automated underwriting may require no documentation or other verification whatsoever.
No matter what the mortgage processing method employed, there will be inevitable paperwork that will need to be completed in order to process a loan. The following is a list of documents and forms that are almost always required for a mortgage application:
Credit Report 1003 — Uniform Residential Loan Application 1004 — Uniform Residential Appraisal Report 1005 — Verification Of Employment (VOE) 1006 — Verification Of Deposit (VOD) 1007 — Single Family Comparable Rent Schedule 1008 — Transmittal Summary Copy of deed of current home Federal income tax records for last two years Verification of Mortgage (VOM) or Verification of Payment (VOP) Borrower's Authorization Purchase Sales Agreement 1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed
Mortgage Pre-Qualification, Pre-Approval and Loan Commitment
Before finding a home, it is important for potential buyers to evaluate whether they will be able to obtain the loan financing needed and also whether they will be able to meet their repayment obligations. There are three common terms that are used and a good deal of confusion can arise from them so let’s take a look at pre-approval, pre-qualification and loan commitments.
Pre-Qualification
Anyone can conduct a pre-approval, even the potential buyer themselves however it usually is carried out by a mortgage broker, lender or real estate agent involved. This process does not access or evaluate credit record information and really involves a basic income and expense analysis usually with the use of a debt-to-income ratio formula.
Pre-qualification will give you a general idea of affordability and the size of loan the applicant may be able to arrange but it will not specify an interest rate and it certainly does not provide any guarantee that a loan will in fact be issued.
Pre-qualification is therefore of limited use except for very general financial workings.
Pre-Approval
Pre-approval involves a lender looking at your finances and your credit record to determine if you will qualify for a loan and if so on what terms. Not only will you be able to see the range of interest rates and loan programs that a lender will consider you for, but obtaining a pre-approval letter for use when you are negotiating to buy a home will assist you in obtaining the seller’s agreement. Being pre-approved is no guarantee that you will actually get the loan but it does provide the seller with confidence that you are a serious buyer.
Loan Commitment
A loan commitment involves both the applicant and the home being bought. The lender will approve both, the applicant through the underwriting process involving credit checking and affordability and the home through an appraiser’s report on the value and condition of the property. The lender will in this case, issue the loan to allow closing on the deal.
Property Appraisals
There are two main things that need to be evaluated and assessed by a lender; the first is the applicant who is buying the property and they are subject to detailed assessment and credit checking to establish their bona fides. The second matter to be evaluated is the property that is being used as security for the loan being made, and usually (though not always) this will be the home that is being bought.
In order to assess whether a home or property is suitable security for the lender to issue a loan against, they will need to satisfy themselves of certain factors. The most obvious one is the valuation placed upon the property, and in this case an appraiser will attempt to value the property as if it was to be sold in both an open and competitive market and establish a sales price. This assessment may differ from the actual price being paid for the property and is used by the lender to ensure that the value of the property will cover the loan that they are advancing in event of foreclosure.
Price and value are not the only property features that need to be assessed. Marketability of the property is also an important issue as the lender will not wish to be holding the property for too long in the event of foreclosure. The appraisal will take into consideration any factors that are likely to affect marketability such as proposed road building or construction of a nuclear reactor in the back lot. Other factors such as the construction quality of the property will also be looked at and if defects are noted, the underwriter responsible for approving the loan may require further appraisal, corrective repair work be done as a loan condition or indeed, decline the issuance of the loan on the property.
The professionals who carry out appraisals are known as “appraisers” which is straightforward. They are licensed by individual states and depending on the lender and they may be independent or work on the lender’s staff. You will usually pay for the appraisal when you apply for the loan however, depending on the lender and loan program chosen you may not need to pay for these fees upfront or at all.
