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Home Loan Process – Three Key Points: Lenders, Property, Financial Situation

Be confident when applying for a home loan.  Home mortgage approval usually hinges on three significant points.  These three points are the lender, the property, and the financial situation of the applicant.  Knowing what will be examined by loan officers can give you insight into the application process of a home mortgage.

Lender

There are two groups of lenders.  It can be beneficial to have an understanding of these two groups when applying for a home loan.  Both the conventional lender and the portfolio lender evaluate loan applications. 

A conventional lender provides loans with the intent of selling them at a later date.  These loans must meet certain risk standards that predict the likelihood of a loan being repaid.  Many times loans must meet the conservative policies of underwriters (the person evaluating loan applications).  The term “saleable loans” refers to loans that a conventional lender issues.  Fannie Mae and Freddie Mac are two major investors that buy saleable loans. 

Portfolio lenders provide loans with the intent of holding onto a majority of the loans.  Since portfolio lenders plan on keeping the loans, these lenders can be more flexible.  Underwriters evaluate loans individually and adhere to the standards that the portfolio lender has established.  Many times exceptions can be made, when deciding on whether a loan will be issued.  Portfolio lenders usually use more flexible income-to-debt ratios compared to conventional lenders.

Property

The second point is the property or collateral.  All loan applications require an appraisal of the property.  A property appraisal is done to protect both the buyer and the lender.  Since the property serves as collateral in trade for the money loaned, it is crucial that it is worth the purchase price.

A property appraiser inspects and compares the property to others in the neighborhood.  Once the inspection is complete the appraiser determines the property’s value.  If a home appraises for less than its price, the buyer will have to make a decision.  The lender may require the buyer to make a larger down payment.  A down payment is a specified percentage of a home’s value paid at closing.  Most often a down payment is 5%, 10%, 20% or 25% of the house price.  This additional money, combined with the down payment will increase the equity of the property.  Another option is to ask the seller to reduce the sales price to make up for the difference in the current sales price and the appraised price of the property. 

Financial Situation

The financial situation of the applicant (buyer) is probably the most important point in the loan application process.  When applying for a home mortgage, the history of finances of both the past and present are key indicators as to how a new obligation will be handled.  All lenders make a judgment when deciding to grant a loan.

Underwriters take into account three factors: down payment, ability to repay the loan, and credit-worthiness.  The down payment is evaluated by the underwriter.  This is done by a review of bank accounts.  Last-minute funds added to the account are also evaluated. 

The ability to repay the loan or capacity is documented by the underwriter through a comparison of current income and debts and future earning potential.  There needs to be enough money to support a mortgage house payment in addition to existing and future expenses.  Usually, the new monthly mortgage payment cannot be more than 28% of the buyer’s total monthly income and all of the buyer’s monthly debt cannot total more than 33% to 36% of the monthly income.  However, exceptions can be made if the buyer has a good credit history.  Most lenders ask buyers to provide a current pay stub and a W2 earnings form or if self-employed, two years of personal and business tax returns.  Creditworthiness is the third factor.  It is essential that buyers notify lenders of any changes during the loan process.  For example change of jobs, reduction in salary, change in marital status, large purchases (cars, boats, etc.).  These changes could cause delays in loan funding if they are not revealed in advance.

Underwriters look into debt repayment history by running a credit check.  Some buyers must provide a letter explaining why credit cards, car loans or taxes were late, in order to qualify for a mortgage.  If first time home buyers don’t have enough credit history, underwriters look for other payment histories such as utility bills.  There are several tools that help lenders decide whether or not to issue a loan.  These tools include automated credit or risk scores.  In some cases, these scores have taken the place of human decision making.  Thus, it is possible for one lender to decline a loan and another to accept.  Lenders can look at the same loan and view the same credit risk differently.  It is important to keep searching, even if you have been denied.  There might be another lender that could see things differently.

Tip:  It is often a good idea to review your credit report for accuracy and completeness before you apply for a home loan. 

When you have an understanding of the process of securing a home loan, you will be better prepared to provide your lender with the necessary information and documentation needed to acquire a mortgage.  Having knowledge of the steps needed to obtain home loan approval will allow you to ask the right questions.  Being an informed buyer will get you into the exact home for your goals.

Know Your Options When Financing or Refinancing

There are some basic terms that you need to know when it comes time to either finance (secure a loan) or refinance a property.  A fixed-rate mortgage (FRM) will provide steady monthly payments over the length of the mortgage/loan.  An adjustable-rate mortgage (ARM) has an initial fixed rate, which is lower than an FRM, but then is followed by adjustment intervals, based on the index.  Having knowledge of these two financing options will allow you to make the right decision. 

However, some buyers have found that a hybrid of the two mortgage rates is the best choice.  These buyers represent the average homebuyer in Arizona, who lives in their home for less than five years.  This option is a blend of the ARM and the FRM.  It is a 5/1 ARM, which is a fixed rate for five years and then turns into an adjustable-rate.  This hybrid works well for those, who want to live in the property for less than five years. 

Don’t be tricked.  There are financing options that offer low-interest rates with a “pay option ARM” which can result in owing more in the long run, after paying for the “low interest” period.  Make sure you look at all your choices before making a final decision.

Learn more about your options.  It is a simple and easy online service.  Find out what loan meets your needs and offers you the best possible terms.

Still Shop and Compare Home Mortgages With Credit Problems

Many individuals believe that once they have poor credit, they will never be able to negotiate a good financial transaction.  They also feel that the only way they will receive a home loan is if they pay high lending costs. 

Don’t assume that minor credit setbacks or a personal crisis, such as an illness or loss of income, will reduce your chances of a lender working with you.  There are home mortgages out there that can benefit you. 

In some cases, lenders may require you to explain your credit problems before they issue you a loan.  Find out how your past credit history affects the current quoted price of the loan and see what steps are needed to take to get a better price.  Take time to shop and compare.  Don’t let one lender’s denial determine you future.  Look around. 

Terms: Home Mortgages

Adjustable-rate loans – sometimes referred to as variable-rate loans, these loans offer a lower initial interest rate compared to fixed-rate loans, interest rates change over the life of the loan with established maximum and minimum rates, generally when interest rates fall then monthly payments will also be reduced.

Annual percentage rate (APR) – cost of credit shown as a yearly rate, the rate includes the interest rate, points, broker fees, and other charges paid by the borrower.

Conventional loan – mortgage loans other than those insured or guaranteed by a government agency.

Escrow – holding of money or documents by a neutral third party prior to closing.