The Loan Origination Process: Be Prepared
You will likely be asked to submit:
• 2 Years Tax Returns
• 2 Years W2 forms
• Bank Statements
Frequently Asked Questions
What fees will I have to pay?
Closing costs, prepaid fees (i.e. taxes and insurance) and title fees are all associated with most loan transactions. A good faith estimate is provided to you once you have executed a loan application, which lists all of your fees.
Do I have to put any money down when purchasing a home?
Usually a buyer must put 3-5% down when purchasing a home, but some lenders offer 100% financing programs. In general, these programs are offered to first-time homebuyers who have excellent credit.
How long will my refinance take? How soon can I close?
Generally, a refinance takes approximately 2-4 weeks from the time you sign your loan application to the time you close. Once we have received your application and any additional documentation (i.e. bank statements, paystubs, tax returns), your loan is submitted for approval. Once approval is received, your loan documents will be drawn and sent to the title company for you to sign. If you are refinancing your primary residence, keep in mind there is a three-day right of rescission before your loan can close.
What is the difference between a mortgage banker and a mortgage broker?
Mortgage bankers originate, and "fund," the mortgages that they sell, meaning they put up the money and handle the closing for the loans. Mortgage brokers are “middlemen” who shop different originators to find the deal that best suits their customers.
What documents do I have to provide?
The answer depends upon the loan program you seek, the quality of your credit and the size of the down payment you will be making. On a typical fully documented loan application (where an applicant is seeking to qualify based on an employee's salary), the lender will require: one or two current paystubs, W-2s for the prior two years and bank and investment account statements for the prior 1-2 months. If an applicant is self-employed (has a 25% or greater ownership in a business) then additional documentation could be required (i.e. 1040's, 1165's & 1120's,).
How much loan can I qualify for?
The amount of a loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe" amount for your mortgage payments. A fairly standard ratio is 33/38. This means, 33% of your gross monthly income for your house payment and 38% of your GMI for your house payment and other obligations (i.e., auto payments, student loans and credit cards). Certain mortgage plans sometimes use more liberal ratios.
What are points?
In the special vocabulary of mortgage lending, "points" are a type of fee that lenders charge (the full term to describe this fee is "discount points"). Simply put, a point is a unit of measure that means 1% of the loan amount. So, if you take out a $100,000 loan, one point equals $1,000.
Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced by about .25 of a percentage point for 1 discount point (1% of the loan amount).
TIP: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points. We will be happy to discuss the pros & cons with you to help you make your decision.
What is an origination fee?
A fee charged to the borrower by the same lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount. 1% origination fee = 1% of the loan amount.
What is PMI (private mortgage insurance)?
If you put less than 20% down on most loans, you'll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This charge adds approximately an extra half a percent onto the loan. If you have reached 20%, you can contact the lender to see about dropping PMI. In most cases, the lender will not consider dropping PMI until you have owned your home for 2 years. However, once you have reached 22% equity, the lender is required by law to drop PMI.
What is mortgage interest? What is a 1098 form?
Mortgage interest is calculated based on your interest rate on an annual basis. You will receive a 1098 mortgage interest statement in January each year, which totals the amount of interest you have paid on your loan for that year. Lenders are only required to report mortgage interest if you have paid $600 or more in interest. This means that in most cases, you will not receive a 1098 if you have paid less than $600. The good news is that mortgage interest is tax deductible.
What is the difference between locking and floating an interest rate?
Locking a rate means that you have agreed on an interest rate with your loan officer, at which time he/she will make a formal agreement with the broker or correspondent that your loan will be serviced by. Floating an interest rate is used when the market is volatile and your loan officer believes that the rates could improve. Basically, your loan will be registered in the system, but your rate has not been locked.
What is the difference between conforming and non-conforming loan amounts?
The term "conforming," as opposed to "non-conforming," is used to classify loans that fall within the guidelines as set forth by Fannie Mae and Freddie Mac. These are the two private, congressionally chartered companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country. These loans generally offer the most attractive rates.
Conforming loan amounts are $417,000 and below. Non-conforming loan amounts are above $417,000. These loans are usually called a "JUMBO" loan.
What are FICOs?
FICO stands for Fair, Isaac Corporation, which developed the formula for credit scoring. The term also applies to the credit score itself. A FICO score can range from 300 to 850. In general, the higher the score, the more credit-worthy a borrower is in the eyes of the lender. A score of at least 680 indicates the borrower is very creditworthy.
Should I choose a fixed or an adjustable rate mortgage?
You can choose a mortgage with an interest rate that is fixed for the entire term of the loan or one that changes throughout. A fixed-rate loan gives you the security of knowing that your interest rate will never change during the term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments. Adjustable rates typically start lower than fixed rates but depending on the market at the time of "Adjustment" could wind up higher than a fixed rate. So the question of whether to go with a fixed or an adjustable is a personal decision that you have to make based on your tolerance for risk.
What is APR (annual percentage rate)?
This is an interest rate index reflecting the cost of a mortgage as a yearly rate. It is not the rate your payments are based on but a combination of the interest rate, points and other lender fees. Because of this, the APR is almost always higher than your interest rate.
The APR is supposed to allow homebuyers to compare different types of mortgages based on the annual cost for each loan. However, because not all lenders include all their fees in the APR calculation like they are supposed to, the comparison of APR's is almost useless. It is far easier and more accurate to request a "Good Faith Estimate" from all lenders when you are shopping for a loan. A Good Faith Estimate will show all points, lender fees and the interest rate. Simply add up all the lender fees and count the total cost in dollars, not the APR.
Can I use a gift for a down payment?
Yes. Certain loans allow a relative or close friend to provide 100% of the down payment as a gift, but the lender will ask that a "Gift" letter be signed by the donor stating that the gift funds are not expected to be repaid. The donor will also have to show a bank statement or other paperwork proving the gift came from their account. Some loan products require a 20% down payment if the source of the down payment is exclusively from gift funds.
Can I borrow funds for a down payment?
Yes. It is possible to borrow against an asset that you currently own for the down payment. For example you can borrow against your 401(K), assuming that your company plan permits it, and you could also borrow against your current residence to purchase a new one (i.e. a bridge loan or an equity line). You may also borrow against your fully invested stock portfolio, avoiding the tax consequences of selling prematurely. Some loan programs allow you to borrower unsecured personal loans to help with the costs.
What is homeowner's/hazard insurance?
Homeowner's insurance protects both the owner as well as the lender against the occurrence of physical damage to the property (i.e. fire or burglary). Some perils are not generally covered by the standard homeowner's polices, for example floods and earthquakes.
What is flood insurance?
If your property is located in a flood zone, you may be required to obtain flood insurance. The appraiser will research the area and determine if the property is in a flood zone. Also, A flood certification is executed at closing, which will determine whether you will need flood insurance.
What is title insurance and why do I need it?
Before you purchase a property or close on a new loan, it's essential to know that the title to the property will be free and clear, free of prior defects and indebtedness. A homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a "marketable title". A title company researches the legal history of the property, which entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner's title and the insurer covers the cost of any legal challenges. All lenders require a title insurance policy before they will fund your loan.
What is a loan prepayment penalty?
A prepayment penalty on a loan allows the lender to charge a borrower additional interest, typically six months worth, when a loan is repaid during the penalty period, which is usually somewhere in the first three to five years of the loan. If a loan does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note or prepayment penalty rider to the note. The advantage of taking a loan with a prepayment penalty is that it could carry a lower rate of interest or you may be permitted to take a loan without paying for non-recurring closing costs.
Will I receive a copy of my appraisal once I close?
Yes, typically you are provided with a copy of your appraisal at the closing of your mortgage transaction.