Application

In order to begin the actual process, it is necessary to complete a loan application. The form is called a 1003 - Uniform Residential Loan Application. It can take anywhere from 30 minutes to an hour or more depending on the amount of information that you will be providing to the Loan Originator. (By that I mean- the more accounts you have, income sources, real estate holdings etc. the longer it may take to complete)

In today's age of technology, Loan Originator's have access to software that allow us to input your information into the system and pull credit as well as run Automated Underwriting all while taking a phone application. It is convenient and provides almost instant feedback to the customer if they are willing to spend the time with the LO.

The application doesn't lock you into any programs or interest rates, its purpose is to show intent on your part to complete the loan process with the LO and to provide the LO with the ability to make a sound credit decision on your behalf. Normally, a fee is associated with taking a pre-approval and/or application. The fee is to cover the costs of pulling credit, running AUS, etc. It in no way provides the LO with any income. If they are charging you more than $25-$50 and you haven't decided on a program or agreed to an appraisal then be careful (they may be taking you for a ride). However, once a loan program is agreed upon and the initial disclosures are signed the fee may be higher. Again it allows us to cover the costs of the appraisal, credit, AUS, and is credited back to the borrower at closing.

For example: If there is a solid deal in the works, then I may charge $350 to get the ball rolling. This is a good faith payment from you that you are willing to do the loan with me and that I can go ahead and order the appraisal. If you are specifically asking for a pre-qualification/pre-approval for the purchase of a new home then I will more than likely collect the $50 fee and when you are ready to go collect the remainder of the upfront fee for the application.

In a nutshell, you will be asked about income, debts, assets, credit history, schooling, dependents, social security number, address, job, race, nationality, real estate, and much more. This will provide a solid base and give the LO the chance to provide a sound credit decision with regards to your file. There are two fees, either pre-qualification/pre-approval or an application fee.

Once you are ready then the next step begins, deciding on the program and terms. Stay tuned for more information next week on programs and terms.

Have a safe and wonderful weekend.

Credit Matters

The recent changes in the market can be attributed to many different variables but none more noticeable than the Sub-Prime Mortgage problem that is affecting current loans and the ability of the home owners/investors to make payments. The sub-prime lending that was rampant about 2-3 years ago made it easier for those with deficient credit history and non-qualifying income to receive a loan. When most of these deals were put into place they came with the caveat that house prices would increase and thus make it possible to refinance into a better loan when a) their credit deficiencies were cleared or b) they could qualify for the loan. Clearly, this was not the case. As things began to turn in late 2006, homes were not moving as quickly as they were being built and the next wave of homebuyers balked at the home prices. Coupled together with rates adjusting on the ARM (adjustable rate mortgage) products and the home-owners inability to make payments and we now find ourselves in a huge market correction that has never before occurred.

What does that have to do with you and the rest of those anxious home buyers? It means that it is important to take the necessary steps to be educated about purchasing a home so that you don't "bite off more than you can chew" in the process. It may seem silly, but maybe the best plan is not to buy your dream house the first, second, or even third time around. It is hard to enjoy the house of your dreams when you are constantly worried if you can make your payment. Trust me, my dream homes is the home owned free and clear. A goal in life should be to find yourself living debt free but that is a subject for a different blog.

Back to credit...

A major component of the loan approval process hinges on your credit score. Underwriters accept what is known as a tri-merged credit report. This report calculates the credit score from each of the three credit reporting agencies (Equifax, Transunion, and Experian). Most investors and lenders will accept the middle score of the three (or your average credit score). There are times when there are large swings in your score, mainly due to the different credit companies reporting procedures, but often the scores are very similar.

Note: You are entitled to one free credit report per year by the Fair Credit Repoting Act. I have used http://www.annualcreditreport.com/. It is the only free site and authorized by the FTC for supplying the reports. It is a good tool to see what you financial debt obligations are and if you have paid them on time.

Your credit score can affect what products you have available to you and what interest rate you may receive. The catchy part is some investors (the ones who purchase the loans if the loan is brokered) don't penalize or better a person's interest rate if their score is above 680+. While others will have different breaks at 700+, 720+, etc. Typically, if your score is 720 or better then your credit will help you in the process. If your credit is <660,>

Make payments on time. There are three time frames to consider. 30+, 60+, and 90+. If you are over 30 days late in making your minimum payment on credit cards, car loans, mortgage payments, etc. then you are considered delinquent. These are all reported to the agencies and negatively impact your score. Over 60 days is worse and by 90+ you are in default (really bad for your credit)

Total balance on Credit Cards should not exceed 30-35% of the max credit allowed on the card. For example: On a $1000 credit limit, your total balance due at the end of the period (when the agencies are reported to) should not be over $300-$350. Your credit score is linked to the amount of credit used vs. the amount available.

Consider signing up with one of the agencies for periodic credit checks. For as little as $10/month you can sign up for a service through either Equifax, Experian, or Transunion where they monitor and give you updates on your credit status. This can help against fraud as well as keep an eye on any other adverse activity that may affect your credit report.

Lastly, understand that though you may be discouraged now about your credit situation, you can always improve it. Think of it like this, if you have adverse or deficient credit, it can mean to an underwriter that you were irresponsible with the credit given to you in the past. Credit isn't a free gift but it is an opportunity to prove that you are trustworthy in making payments and handling responsbility. If you haven't handled your past credit efficiently, it may be time to begin taking control of the situation and improving your credit.

(There are other situations that may impact your score: Bankruptcy, Divorce, Death, Injury...the comment above is not to make light of different situations that may be present that were out of the control of the person(s) involved - sometimes things happen in life that may knock us down, but knowing how to manage issues now may help in the future and allow us to stand a bit taller)

There are more things to consider with credit and various ways to make changes but these are the basics. If you are in significant debt, maybe focus on eliminating that debt first before moving up or into home ownership. If you have good credit and can afford the home, then get pre-qualified and start house hunting. It is a great time to buy if you are ready for the responsibility.

Loan Process

Before we get started this week, I am going to give you a few organization tips for you finances to help in the loan process.

Here are three key items to consider that will help you begin to organize your financial life so you can see what it will take to qualify for your next home purchase or refinance.

1. Income

• How are you paid? -- Salary (W-2 wage earner), Commissions, Bonuses, Independent Contractor (1099-R), Cash.
• What is your monthly income? -- Once you find out how much you make, there are two things to consider your Gross Income (before taxes) and Net Income (after taxes - what you actually take home)

2. Debt

Three main types of debt -- Mortgage, Installment, and Revolving.

• Mortgage - Amount you owe against a property...can be primary residence, second home, or investment property.
• Installment - Usually a loan in connection with a car and the amount due each month.
• Revolving - Debt associated with credit cards.

3. Assets

• How much do you have in your savings account?
• Do you have any other liquid assets? - Cash that you is easily accessible.

From there you can deduct a couple very important items for what you can qualify for in a purchase and what type of products may be available to you. To find out your Debt-to-Income ratio, first add up all your debt (mortgage, revolving, installment) and divide it by your gross income.

*For example - ($25 C/C, $325 I, $125 C/C, proposed mortgage $1375 / $5500 Income) = 33.6% DTI back end ratio.

There are two ratios - Front End and Back End. The front end ratio is your mortgage debt vs. income and the back end encompasses all debt (see example above) vs. income. Typical DTI ratios are 33%/45%. You can usually qualify for higher ratios, i.e. 43/55 but the higher the ratios the harder it may become to fit the loan.

Lastly, what amount do you have in reserves? In this market, you can expect to put at least 5% down on any purchase of a primary residence. Due to the distress market label (see article from Tuesday, February 26) even the flex products and "My Community" mortgages are requiring a cash contribution. On a $220K purchase price you can expect to need at least $11k in cash to bring into the deal.

Hopefully, this will get you started with finding out how to set your dreams for achieving that home purchase. It is always good to evaluate your current financial situation and discover what it will take to accomplish your goal of home ownership. Please email me or comment on this blog if you have any questions.