“The loan is approved!” Words dear to the heart of a buyer. However, they can mean so many things. In order to understand lender language, it is important to understand the lending process.
A prospective buyer typically requires some sort of financing to purchase property. The mist often used institutions for lending are mortgage companies (commonly known as mortgage brokers) and a portfolio lender or bank.
A loan officer of a mortgage company takes the buyer’s loan application and “farms it out” to different mortgage bankers or loan institutions for review and hopefully approval. A bank is a direct lender and takes an application directly from the buyer.
A mortgage broker representing a buyer in locating the right loan can be advantageous because they have more options for obtaining loan approval when the buyer has shaky credit, poor income scores or little down payment. The advantage of using a bank directly is that the buyer is dealing directly with the lending institution.
During the escrow period, the buyer should refrain from charging anything on credit cards and taking out ew loans for large items such as cars or furniture. She/he should keep the money that will be used for the down payment in the bank so a bank record can be obtained for lender documentation purposes. The bank is sensitive to “paper trails”. That is, they want to know where the buyer’s money for the down payment is coming from. So it cannot be cash!
Pre-Qualification vs. Pre-Approval
When a buyer contacts a mortgage broker or a bank, the officer will interview over the phone regarding income and debts and will pull or order a credit report. Based upon this information, plus a written application, he/she may be able to offer the buyer a pre-qualification. This is not a loan commitment.
A pre-approval has progressed several steps further into the process. The officer requests comprehensive documentation from the buyer and submits it along with the buyer’s loan application, to the underwriting department (the people hired to look at all loan applications and approve or disapprove them). If the loan application is approved, it is always with conditions. There may be more conditions but never less than two, which always includes the review and approval of the appraisal and the preliminary title report.
The pre-qualification letter and pre-approval letter should contain the following information:
1. Loan amount
2. Sales price of the home
3. Credit report reviewed
4. Conditions required
Prior to Document & Prior to Funding Conditions
Let’s talk about prior to document conditions. This is a statement used by the underwriter of the lending institution to offer conditional approval. It means: “We are approving the loan and will prepare the documents to be delivered to title when the loan officer and buyer have completed and submitted the following conditions.
Prior to funding conditions means the lender or bank will fund the loan after another set of conditions have been completed, submitted or satisfied. Usually the prior to funding list is provided to the escrow officer along with the loan documents when they are delivered to title. Always ask the loan officer and escrow officer what these conditions are to help gauge how the loan is progressing and allow you to anticipate unforeseen delays. Prior to funding conditions should be minor conditions, nothing that takes considerable research or time to satisfy.
When an offer is accepted on a property, there is usually a timeframe specified for the loan to be approved, and the loan contingency to be removed by the buyer. It is critical that the loan officer is aware of this timeframe, so he/she knows how much time has been allotted to obtain approval. When the loan is approved, and the buyer must address the contingency in writing. One of the most common reasons escrows falter is because of the inability of the buyer to remove the financing contingency in a timely manner. If the officer is not aware that an offer has been accepted, the agent is too busy to fax the contract, and the buyer is too busy to provide the documentation needed for approval, this timeframe can pass quickly without an approval! Loan officers are frequently the last to know what’s going on, because the rest of the team members tend to forget to communicate. Lenders should be first to receive information or tools, so they can immediately begin processing the loan. As soon as the offer is accepted, contracts should be sent to the lender along with escrow information.
Credit is money paid from the seller to the buyer for different items, such as helping the buyer with closing costs, or perhaps in lieu of certain repairs. The lender officer needs to know about these credits as soon as possible. Some lenders limit the amount of credit allowed or don’t permit any credits at all. If the lender does not allow a credit to be paid to the buyer through escrow, there are other ways to accomplish this. For example, the seller can pay a tradesperson directly if the credit is for repairs.
Frequently, credits are added after the inspection contingency period. When this happens, you must inform the lending officer right away and ask:
1. Will the bank allow the credit?
2. If yes, does it need to be in the form of a non-recurring or recurring closing cost?
3. If yes, does the bank require an addendum indicating this?
A sample of an addendum for additional credit should read: “Seller to credit buyer $500 total at close for non-recurring closing costs”.
Non-recurring & Recurring Closing Costs
These items help explain where and how credits from the seller’s proceeds will be applied to the buyer’s transaction. Non-recurring costs include items in which the buyer is charged one time such as loan fees, title insurance, and escrow fees. Recurring fees are those that are charged repeatedly to the buyer, such as property taxes, mortgage payments and fire insurance premiums. Why does the bank care whether or not the credit is applied to recurring or non-recurring closing costs? Because these are the lender guidelines FNMAE and HUD have created.
Loan Lock & Doc Expiration Date
The buyer’s loan officer locks an interest rate commitment for the buyer. This is a commitment that the buyer and lender must abide by in a fluctuation and constantly changing financial market. The buyer typically pays for this lock through a fee or interest rate. Locks are usually good for 15,30,45, and 60 days. The longer the lock, the more expensive it is for the buyer to obtain. If the escrow fails to close within the lock timeframe, two things can happen. The loan locj expires and the buyer has to renegotiate a new interest rate and re-lock in. This can be detrimental to the transaction if the interest rates have gone up and the buyer can no longer afford the loan. Or the buyer can pay an additional fee to extend the lock until the escrow closes.
Loan documents are time sensitive. They are only valid for a couple weeks. If the escrow does not close on time, the lender’s commitment and documents can expire. New loan docs must then be prepared and delivered to title for the buyer’s signatures. This can cause disappointing delays in closing, and costly extensions of closing dates and moves.
A good lending officer will allow the team at least two weeks leeway after the anticipated close of escrow before the lock and docs expire. If you are aware of a delay in close, always contact the lending officer immediately and ask him/her when the lock and docs expire.
When the loan is approved, all prior to doc conditions should be approved and signed off on by the underwriter. This includes the preliminary title report and appraisal report. Removing the loan contingency means that the buyer ensures the seller that the lender has made a firm loan commitment and that loan documents will be prepared and delivered to title. What happens if the buyer removes the loan contingency, but the loan is not approved? He/she risks losing a deposit and/or increased deposit to the seller for failure to perform! To be absolutely certain that the loan is approved, the loan officer should receive the approval in writing from the back and issue an approval in writing to the agent.
Always remind the loan officer two days prior to the loan approval due date, and confirm that the appraisal report is complete, and that it came in at value of the purchase price. If it does not, then the buyer must decide whether to come up with the difference in price, renegotiate the purchase price down to the appraised value, or not remove contingencies and walk away.
Portfolio lenders manage their own loans. Instead of waiting to wire the money into escrow the day before close, the lender may include a check for the amount of the loan with the buyer’s closing papers. An advantage of this procedure is that you don’t worry about missed wires that can delay the closing. However, the lender may require the buyer to sign loan documents on one particular day very close to the closing date. This signing date may not be revealed until the last minute, because they will not send out the documents to title until 2 or 3 days prior to close!The buyer must be “on call” and available to sign the papers when needed.
Typically, the appraiser should contact the agent within 1 working day of the lender ordering the appraisal. The timeframe for the appraiser to complete the report and submit it to the lender should be no more than 2 days. Occasionally, the loan officer forgets to order the appraisal promptly or the appraiser forgets to call to schedule the appointment. Friendly reminders always help to keep the loan process moving smoothly.
When a buyer has excellent credit and is placing a large down payment on the property, the bank may order a drive-by appraisal. The appraiser conducts an exterior visual inspection without the formality of an interior inspection with measurements.
The appraisal inspection and report must be completed and submitted to underwriting prior to the loan contingency removal date. Sometimes the buyer’s agent or buyer asks the lender to delay ordering the appraisal until after the inspections have been completed. The reason for this is that the buyer is required to pay the appraisal fee. If the buyer is concerned about the inspections, this saves an additional expense if a decision is made to cancel the escrow. Just make sure to write your contract accordingly to allow time for the inspections and appraisal.
If the appraiser is having problems “comping out” the property, he/she should contact the agent promptly. IT is typically the listing agent’s responsibility to locate comps that will support the sales price. If you’re concerned about the property not appraising at full value, have the sellers prepare a list with costs of upgrades for the appraiser to consider.
The Loan Documents
The timing and delivery of loan docs is critical to the closing date. If loan docs are delivered too early to title and the closing date is delayed, the loan docs may expire. If delivered too late, it can delay closing as described below.
When the lending institution has committed to providing a loan to the buyers, the loan docs must be prepared and delivered to title for the buyer to sign. An important question to ask is “How much time is the lender requesting for underwriting approval of the signed loan docs and any prior to funding conditions?” Every bank varies, some only need 1 day, others need up to 72 hours after receipt of the documents. You may have a problem if the loan docs arrived at title 3 days prior to close and the signed docs were not returned back to the bank until 2 days prior to close! There is not much you can do to change this. You should prepare your client and the rest of the team for the worst-case scenario.
8 Steps to Getting Your Finances in Order
Develop a family budget. Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.
Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 percent and 28 percent of income, you need to get the rest of installment debt-car loans, student loans, revolving balances on credit cards-down to between 8 percent and 10 percent of your total income.
Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. You’ll probably see some great ways to save.
Increase your income. It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want.
Save for a downpayment. Although it’s possible to get a mortgage with only 5 percent down-or even less in some cases-you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving a 20 percent downpayment.
Create a house fund. Don’t just plan on saving whatever’s left toward a downpayment. Instead decide on a certain amount a month you want to save, then put it away as you pay your monthly bills.
Keep your job. While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you have to pay a higher interest rate.
Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills. Pay off the entire balance promptly.
8 Ways to Improve Your Credit
Credit scores, along with your overall income and debt, are a big factor in determining if you’ll qualify for a loan and what loan terms you’ll be able to qualify for.
Check for and correct errors in your credit report. Mistakes happen, and you could be paying for someone else’s poor financial management.
Pay down credit card bills. If possible, pay off the entire balance every month. However, transferring credit card debt from one card to another could lower your score.
Don’t charge your credit cards to the maximum limit.
Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less for problems after a year.
Don’t purchase big-ticket items for your new home on credit cards until after the loan is approved. The amounts will add to your debt.
Don’t open new credit card accounts before applying for a mortgage. Having too much available credit can lower your score.
Shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquiries from the same type of lender are counted as one inquiry if submitted over a short period of time.
Avoid finance companies. Even if you pay the loan on time, the interest is high and it will probably be considered a sign of poor credit management.
5 Factors That Decide Your Credit Score
Credit scores range between 200 and 800. Scores above 620 are considered desirable for obtaining a mortgage. These factors will affect your score.
Your payment history. Whether you paid credit card obligations on time.
How much you owe. Owing a great deal of money on numerous accounts can indicate that you are overextended.
The length of your credit history. In general, the longer the better.
How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay promptly.
The types of credit you use. Generally, it’s desirable to have more than one type of credit-installment loans, credit cards, and a mortgage, for example.
10 Things a Lender Needs From You
W-2 forms or business tax return forms if you’re self-employed for the last two or three years for every person signing the loan.
Copies of one or more months of pay stubs from every person signing the loan.
Copies of two to four months of bank or credit union statements for both checking and savings accounts.
Copies of personal tax forms for the last two to three years.
Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, e.g., a boat, RV, or stocks or bonds not held in a brokerage account.
Copies of your most recent 401(k) or other retirement account statement.
Documentation to verify additional income, such as child support, pension, etc.
Account numbers of all your credit cards and the amounts of any outstanding balances.
Lender, loan number, and amount owed on other installment loans-student loans, car loans, etc.
Addresses where you lived for the last five to seven years, with names of landlords, if appropriate.