A Guide to Understanding
the Mortgage Loan Process
THE LOAN PROCESS
Pre-Purchase Real estate agent and buyer begin the search for a home. Buyer chooses a lender and requests pre-approval of his/her/their loan.
DAYS 1-5 Application As Buyer, you become the Borrower and complete the loan application with the information including employment and income data from the past two years, financial information on assets and liabilities, and any other data that could affect the loan decision. We order a credit report, pre-underwrite the file, and issue a conditional approval on a loan program.
DAYS 3-6 Opening the File We order property appraisal, mail verification of employment, verification of deposits and follow-up to ensure timely replies.
DAYS 5-20 Processing We will review documents as they are received. These documents include credit reports, verifications of asset accounts, income and appraisal. Debt and payment histories are reviewed and verified. Payoff balances are determined.
DAYS 15-21 Underwriting Underwriter reviews the entire package. If there are questions, it is extremely important for the Borrower to respond immediately. Additional documentation may be required at this time.
DAYS 17-23 Pre-Closing When the loan is approved:
- Title Insurance is ordered
- Approval conditions are met
- Closing is scheduled
- Borrower orders homeowners insurance to cover replacement cost or the new loan amount
DAYS 24-35 Closing When the loan closes:
- Borrower obtains loan proceeds
- Borrower presents certified check for balance of down payment and/or closing costs
- Loan closes at title company
- Borrower moves into their new home
TRUTH-IN-LENDING TERMS
Annual Percentage Rate
The Annual Percentage Rate or "APR" is the cost of the loan in percentage terms, taking into account various loan charges, of which interest is only one such charge.
Other charges which are used in calculation of the Annual Percentage Rate are Private Mortgage Insurance or FHA Mortgage Insurance premiums (when applicable) and Prepaid Finance Charges (loan discount, origination fees, prepaid interest and other credit costs).
The APR is calculated by spreading out these charges over the life of the loan, which results in a rate higher than the interest rate shown on your Mortgage/Deed of Trust Note. If interest were the only Finance Charge, then the Note Rate and the Annual Percentage Rate would be the same.
Prepaid Finance Charges
Prepaid Finance Charges are certain charges made in connection with the loan and which must be paid upon the closing of the loan. These charges are defined by the Federal Reserve Board in Regulation Z and must be paid by the borrower. Examples of such charges are: Loan Origination Fee, Discount Point(s), Private Mortgage Insurance or FHA Mortgage Insurance and Tax Service Fee. Some loan charges are specifically excluded from the Prepaid Finance Charge, such as appraisal and credit report fees.
Prepaid Finance Charges are totaled and then subtracted from the Loan Amount (the face amount of the Deed of Trust/Mortgage Note). The net figure is the Amount Financed as explained below.
Finance Charge
The amount of interest, prepaid finance charge and certain insurance premiums (if any) which the borrower will be expected to pay over the life of the loan.
Amount Financed
The Amount Financed is the loan amount applied for less the Prepaid Finance Charges. Prepaid Finance Charges can be found on the initial Good Faith Estimate and eventually on the final Settlement Statement (HUD-1). For example, if the borrower’s note is for $100,000 and the Prepaid Finance Charges total $5,000, the Amount Financed would be $95,000. The Amount Financed is the figure on which the Annual Percentage Rate is based.
Total of Payments
This figure represents the total of all payments made toward principal, interest and mortgage insurance (if applicable) over the life of the loan.
Payment Schedule
The dollar figures in the Payment Schedule represent principal, interest, plus Private Mortgage Insurance (if applicable) over the life of the loan. These figures do not include tax and insurance escrows or any temporary buy-down payments contributed by the seller.
UNDERSTANDING LOAN PRODUCTS
Numerous types of loan products are available to borrowers today. They break down into two basic categories — fixed rate and adjustable rate mortgages.
Fixed Rate Mortgages
Fixed rate mortgages have been around the longest. People generally have more experience with this type of mortgage. Very simply stated, fixed rate mortgages have an interest rate and monthly payment that remain the same over the term of the loan, regardless if that term is for 10, 15, 25 or 30 years.
Adjustable Rate Mortgages
The second type is the adjustable rate mortgage (ARM). ARM loan programs have an interest rate that increases or decreases over the life of the loan based upon the interest rate environment. Since their introduction in response to unprecedented high interest rates of the early 80’s, ARM loans have developed into the most diverse group of mortgages ever created. The description provided in this handbook is a brief overview of the major components of an ARM loan program. For a detailed discussion of the program that will best meet your needs, please give me a call. It is my belief that for most homebuyers today, the right ARM loan is the best mortgage option.
ARM loans are typically named according to their adjustment interval. For example: a "3/1 ARM" is fixed for the first three years and then becomes a one-year ARM for the remainder of the 30 year term.
ARM loans with initial fixed periods are very popular because they have a lower initial interest rate than a 30-year fixed. This stability, coupled with the realization that the homeowner may not have the mortgage for longer than the short fixed period, has added to their popularity.
When considering which type of ARM to get, you need to be aware of the factors that affect this type of mortgage...as described below:
Index
The index is the financial instrument used as the foundation for determining future rates as adjustments are made. There are several indexes that are used in the mortgage industry — T-Bill, LIBOR, Prime Rate and Cost of Funds.
Margin
The margin is the preset rate added to the index to determine the fully adjusted rate. The fully adjusted rate is the actual interest rate charged until the next rate adjustment and will determine your mortgage payment. Margins vary and can be a key factor in selecting the right loan for you.
Caps
ARM loan programs have limits as to the amount they are allowed to adjust at each interval or change period. This is called a cap. Caps can be applied to the interest rate or the payments; this varies with the type of loan you choose.
WHAT'S CONSIDERED FOR LOAN APPROVAL
The Basics
An affordable mortgage loan is influenced by what you feel you can afford, but depends more on what the loan underwriter says you can afford. Before we will issue a commitment to lend large sums of money, we must be assured that you can afford to repay the loan and that the value of the property is sufficient collateral to guarantee repayment of the loan in case of default.
You may have already noticed there is much more to the loan process than selecting an interest rate. My sincere desire is to guide you through the process and relieve any anxiety you may be feeling. In order to be considered for a mortgage, we look at five distinct areas of your finances and the property.
Assets
We must first determine the amount of cash that you have available for a down payment and/or closing costs. There are guidelines that govern the allowable sources of funds for the down payment and/or closing costs and the documentation required to verify the source of these funds.
Income
We need to determine how much income is available to qualify for the loan, where it is coming from, and how long it is likely to continue. All income used to qualify for the mortgage loan must be verifiable. Your gross monthly income, coupled with your monthly debt obligations, is used to determine the ratios for approval of your loan. Length, type and stability of employment are also key factors we consider.
Credit
As lenders, we will look at your credit report and any other credit references to determine how much credit you have been extended, what types of credit are available to you, how timely the payments have been made and how much your total monthly obligations are.
Liabilities
It is necessary to make sure that your obligations do not exceed acceptable ratios for both the monthly housing payment and the total of all monthly debts. The ratios consist of a housing ratio and a total monthly debt ratio. The housing ratio is calculated by comparing the proposed principal, interest, taxes and insurance (PITI) payment on the loan for which you are applying to your gross monthly income. Similarly, the total monthly debt ratio is calculated by comparing the total of all your monthly obligations including PITI, credit card payments and installment loans with your gross monthly income.
Equity
The final piece to the mortgage puzzle is the difference between the loan amount and value of the property. A property appraisal is conducted to determine value. Appraisers are licensed by the state and base their determination of value on the prevailing market. The appraisal can often be a very difficult part of the process in that it may be difficult to find comparable home sales in your area which support the value you need to qualify for your desired loan. This can often be a frustrating part of the process in that this report is out of the control of both the borrower (you) and the lender (us).
THE APPRAISAL
The appraisal of the property being purchased is one of the most misunderstood facets of the buying process. Typical questions asked about the appraisal process are answered for you here below.
What is an Appraisal and Why do I need one?
Before we will make a loan on a property, an estimate of value is required. It is common for lenders to require that appraisals conform to the Uniform Standards of Professional Appraisal Practice. This is done so that consistent, detailed information is provided on all appraisals protecting both the lender’s investment and the buyer’s investment. The Appraisal provides an estimate of the value of the property. The information in the appraisal is necessary to evaluate whether or not the property is adequate security for the proposed loan. An appraisal is a report made by a qualified person setting forth an opinion or estimate of value. An independent appraiser inspects the property, neighborhood and at least three other properties of comparable size and style.
Who is the Appraiser?
Appraisers are licensed by the state in which they work. These individuals undergo an extensive 2-year "on the job" apprenticeship with an experienced appraiser. The final opinion of value is based primarily on the experience and logic of the particular appraiser who completes the report.
What does it cost?
The fee for a standard residential appraisal is generally a standard fee for a given geographic area and can range from $325 - $500. If the subject property is valued at $500,000 or above, the cost may be more. In some instances, we may require more than one appraisal. If a government mortgage (FHA or VA) is being used, the fee is regulated by the governing agencies and must conform to specific standards.
Can I get a copy of the appraisal?
You are entitled to a copy of the appraisal…after all, you paid for it! As a service to my clients, I will provide a copy of the appraisal after I receive it from the appraiser, or once your loan closes.
When will it be done?
Immediately after your loan application, we will order an appraisal of the property. It will generally be completed within seven to ten days. The appraisal is an important part of the loan package submitted to the underwriter.
How is value determined?
An appraisal is simply a supported estimate of value. There are three approaches to estimating market value of a property; the Cost Approach, the Income Approach and the Sales Comparison Approach, (a.k.a. Market Data Approach). The Cost Approach measures the value of a house from an estimate of what it would cost to reproduce it. The Income Approach relies on the analysis of income generated by the property to determine value. This approach is not used for assessing the value of a single family primary residence, but is required on income generating properties. The approach with the most importance to an underwriter is the Sales Comparison Approach. This approach identifies what similar properties have sold for in the same market place over the last two to eight months, and then adjusts the values of those comparable sales to make them "more like" the subject.
SURVEYS & INSPECTIONS
Surveys
If the purchaser is obtaining a loan and the property is not a condominium, a new survey is required. A condominium will require a specific condominium certification. A house location survey, without corner markers, is usually sufficient.
The closing agent will review the survey for anything that might affect the validity of the seller’s title. Items included on the survey are: location of fences, driveways, decks, outbuildings and any other improvements to the property to be sure that there are no encroachments onto neighboring property and vice versa.
Home Inspections (Purchases)
Most purchase contracts are contingent on a home inspection. A professional inspector hired by the buyer usually does this. The home inspector makes a detailed inspection of the home and prepares an evaluation that lists any defects found in the structure, utility systems and appliances. If problems are found, the buyer is not obligated to proceed with the purchase unless the seller agrees to correct the problems. Home inspections usually cost from $150 to $400 and are well worth the investment.
Termite Inspections (Purchases)
A termite inspection report shows that the property is free from termites and other wood destroying insects. These inspections usually cost around $50 - $100. A copy of a clean termite inspection report is required for FHA or VA loan program, but is not typically required for conventional loans. However, it is recommended for your protection.
Well & Septic (Purchases)
If the property you are buying uses a well and/or septic system, your contract will require certification that the water is potable and the septic system is functioning properly. These inspections are a requirement of the lender, as well as for your protection. The cost is about $50 - $100 for each report.
Walk Through Inspections (Purchases)
Your contract provides for a "walk through" just prior to closing to determine if the condition of the property is as it was when the contract was signed. Normally, both the listing and selling agents are present. The "walk through" should take about an hour. Any discrepancies will be identified and plans will be made to correct them prior to closing.
PROTECTING YOUR INVESTMENT. . .UNDERSTANDING YOUR INSURANCE OPTIONS
Insurance is a basic ingredient in most real estate transactions. From protecting lenders against a borrower’s default in mortgage payments to guarding the owner’s investment from loss due to accident, illness or death, the insurance industry can provide policies to cover all potential risks. In many instances, a buyer must provide the lender with several different types of insurance in order to meet loan commitment requirements. The following is a brief summary of the forms of insurance that may be required in residential real estate transactions.
Flood Insurance (may be required)
If a property is located in a designated flood zone, we will require you to secure a flood insurance policy. This type of coverage is not included as part of a homeowners policy.
Hazard Insurance (required)
Hazard Insurance is a type of casualty insurance that covers damage to or destruction of the improvements from specific hazards such as fire and wind. We require this type of coverage on all properties as a condition of loan approval. This policy must cover the loan amount or full replacement cost of anything damaged.
Homeowners Insurance (recommended, but not required)
In addition to protecting against damage to improvements, homeowner’s insurance protects against the loss or damage to personal property, injuries to occupants and guests, vandalism and living expenses in case the insured premises becomes untenable. Lenders generally require only a hazard insurance policy, but as a practical matter most buyers take a full homeowner’s protection package if they intend to live in the house.
Mortgage Disability Insurance (optional)
A Disability Insurance policy makes mortgage payments when the insured is unable to work due to illness or injury. This type of insurance is not required as a condition of loan approval. You may choose this insurance based on your own personal needs.
Mortgage Life Insurance (optional)
A Mortgage Life Insurance policy — generally a decreasing term policy —pays off the mortgage upon the death of the insured. Again, this type of insurance is not required, but may be obtained by you based on your own personal needs.
Private Mortgage Insurance (may be required)
Private Mortgage Insurance protects a lender against losses resulting from a borrower’s default. In case of default, if a foreclosure proceeding does not provide sufficient funds to satisfy all moneys due, then the mortgage insurance company makes up the deficit.
For conventional loans, Private Mortgage Insurance — often called PMI or MI — is required when a borrower finances more than 80% of the purchase price or appraised value. For loans insured by the Federal Housing Administration (FHA), this type of insurance is required regardless of the amount of down payment or loan to value.
TITLE & TITLE INSURANCE
The Title
Owning land is one of the most precious values of freedom enjoyed in this country. You can buy it, sell it, invest in it and trade it as you see fit. But any change in ownership, to be legal, requires a formal exchange of title (deed).
A deed is a written document that creates or transfers an interest in a property. When recorded, the deed puts the world on notice of the estate or ownership of an interest in property — it is not a complete history of the title to the property it conveys. To learn the history of a property and see how it may affect the current ownership, it is necessary to conduct a thorough examination of the title.
The process of examining the title or title search begins by locating the deed of the current owner, which may be you in the case of a refinance or home equity loan. The settlement/closing agent researches backward and forward in time through land records to determine what, if any, limitations there may be to the ownership, use and enjoyment of the property. Court dockets are reviewed to determine if any of the prior or current owners were involved in legal proceedings that could affect title to future owners. In addition, assessment records must be checked to determine the status of taxes and other municipal fees that can be levied against property. Those findings are then reviewed; and based on this final report, the settlement/closing agent prepares a title insurance binder which outlines the scope and limitations of the title insurance coverage. Findings from either the search of the court dockets or assessment records may indicate that other parties may have a legal interest in or a claim against the property. Examples of this would include a judgment against a previous owner that placed a lien on the property or a tax lien against a previous or current owner.
Title Insurance
One of the most frequently asked questions I hear at closing is, "What is title insurance?" This question arises because the buyer is required to pay for title insurance for the lender - which is mandatory and decides whether to purchase owner’s coverage — which is optional.
Unlike other kinds of insurance that protect against losses from future events, title insurance affords protection from past events that may or may not be part of the public record. No matter how extensive and exacting the title search may be, the possibility of "hidden risks" remains. Although rare, these hidden risks, if found after the loan has closed, could affect your ownership rights to the property. Some of these hidden risks are listed below:
- Forgeries
- Improperly Probated Wills
- Clerical Errors
- Confusion Due to Similar Names
- Fraud
- Unsatisfied Claims Not Shown on the Records
- Misinterpreted Wills and Trusts
- Deeds Executed Under Expired or False Power of Attorney
Because we understand the potential impact of the ‘hidden risks" of any real estate transactions, we require a title insurance policy to protect the amount of money we loan on your property. These "hidden risks" make the purchase of title insurance an inexpensive and prudent one-time investment.
SETTLEMENT & CLOSING
The settlement is the culmination of the purchase process. Shortly after finalizing the ales contract you will select a closing attorney or escrow company.
Closing Agent (Attorney, Title, or Escrow Company)
The closing agent is usually responsible for ordering the title examination and survey, providing the mortgage lender with a title insurance commitment, implementing steps to be sure the seller can convey marketable title, and scheduling the actual time and place for the closing. The closing agent will receive the loan documents from us and will finalize preparations for closing, following the loan instructions included with these documents.
The closing itself usually takes about an hour to an hour and one-half. During the closing, numerous documents are explained and signed, funds are received and disbursed and the keys (if applicable) are delivered. In many instances, buyers need to coordinate settlement to coincide with the arrival of their movers and cannot afford delays. Choosing a reputable, experienced closing agent is crucial to a smooth settlement. We will refer you to a closing agent with whom we work if you do not know one.
An experienced closing agent who will explain the various documents you will sign will conduct the closing. Most closing agents walk you through this at your own pace. If you are feeling rushed, just ask him or her to slow down.
Many of the forms signed at closing are required by law and are signed by everyone who obtains a mortgage loan. Most documents only require that you check the spelling of names and addresses and sign the form. By all means, know what you are signing. If you have any questions, ask!
The Settlement Statement
The Settlement Statement, often referred to as the "HUD-1", summarizes the financial aspects of the transaction. For this reason it is the document that warrants the closest scrutiny at closing. Basically, the HUD-1 translates the terms of your sales contract and/or mortgage commitment into numbers and acts as a balance sheet for an accounting between buyer, seller and or lender.
The closing agent and I will attempt to provide you a copy of the HUD-1 prior to closing for your review. At that time, we can go through the statement line by line. If this is not possible, the closing agent will explain the details to you and I will be available to help clear up anything they are not sure about.
The Note
This is a written promise from you, the borrower, to pay the lender a definite sum of money at an agreed interest rate over a stipulated period of time. You should check to make sure that all of the variables just mentioned are correct.
What to Bring?
You will need to bring a certified check or bank check in the stated
amount, made out to the closing agent. If you have received the complete
insurance policy from your agent, bring that to the closing also. A piece
of photo identification may be required along with any remaining conditions
required by our underwriter.
Realty Mortgage/DFWHomeLoan
1280 South Main Street Suite 102
Grapevine, TX 76051
817-410-1120 metro
Consultant@DFWHomeLoan.com