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Understanding What Goes Into The Approval Of A Mortgage Loan

There are different aspects of a borrower's financial profile that typically make a high quality mortgage loan.

These elements represent a degree of risk to the lender. The mortgage underwriter is the person who reviews the loan package. This person has the authority to approve or decline the application. The underwriter judges the risks in the application and determines that all elements will balance out.

Higher risk factors in the loan application will always result in a higher cost to the borrower, whether that is a higher rate or additional discount points paid at closing.

The following are all questions that must be addressed in the home loan application process:

What does the Borrower do for a living? The borrower's occupation lets the lender know what kind of documentation they will need collect for the loan package. The length of time that a borrower maintains a job is important, it shows stability. The possibility of future advancement and income in the chosen field is also considered.

Is the borrower on salary, hourly, or self-employed? Income and risk is determined by how a person is paid. A self-employed person is usually considered a higher risk.

What are the ratios on the loan being applied for? In the past year, lenders have tightened up on the percentage of a borrower's income that may be spent on the house payment and any other long-term debt.

The loan program and the loan profile will make a big difference to the lender in what ratios are acceptable. The "ratios" for income and liabilities are very important in a loan decision. The standard FNMA ratios are 27/36, and in California, 33/38. This means that the borrower may spend 33% of his gross income on the housing expense and 38% of his total gross income on housing and any long-term debt payments.

This is a guideline and many times, an individual loan file will have these ratios stretched if there are "compensating factors." An example of a "compensating factor" is a pattern of regularly saving money. Compensating factors balance out the file. A borrower with a heavy debt load and a large savings account will usually balance out in the underwriting.

Is this an owner-occupied or an investment property? It is much easier to purchase a home that you will live in than to buy an investment property. Investment properties will usually require a larger down payment and assets. It is far easier to let a house go back to the lender if you do not live in it and rent it out. An investor will allow a property to go back to the lender in foreclosure if the investment becomes unprofitable.

An owner-occupied property is an easier loan to qualify for than an investment property. Homeowners will work very hard to keep a house where they have an emotional attachment to the property. It is much more personal because they have invested their time and money to personalize it for their family's needs.

What type of loan product are we considering? Is this a fixed rate mortgage or an adjustable rate mortgage? A fixed rate is considered more conservative, but a long-term fixed rate ARM can be viewed the same way and actually save you quite a bit of money. If you are not planning to stay in the house for 30 years, a 7/1 ARM or a 10/1 ARM could save you thousands of dollars over the life of the loan. Be sure to check out the pricing for both scenarios.

To put this in perspective, think of it this way; if you were going to join a gym, you might consider paying by the visit instead of a monthly plan as it could save you a lot of money and guilt if you didn't get to a work-out three times a week.

The same is true with interest rates on a loan. Determine if you will save a significant amount of money by buying the shorter term for the fixed rate. Your loan officer will calculate this for you.

What loan to value? What is the loan amount? Anyone who can put 20% down from money that they saved, or will receive when they sell their current home, will be the strongest borrower. The down payment directly influences the price range of the property being sought.

There are 3% down-payment loans from FHA and many other types of loan products for First Time Homebuyers. Downey Savings will make repairs to select properties in order to meet certain FHA guidelines.

In the first half of 2008, 70% of home buyers used FHA financing on properties purchased with a sales price of $700,000 or less. We recognize that accepting offers from buyers using FHA is a win-win for the buyer and for the lender.

If your loan amount will be larger than $697,500, you will need a larger down payment than 3%. Downey Savings has a large array of Jumbo loan programs from which to choose. Your loan officer can help you decide what program meets your needs.

What is the condition of the Borrower's credit profile? The credit scores are a very important part of determining what a borrower will pay for their loan.

This year all lenders began to price loans according to the credit scores. The lowest, middle score of all borrowers will determine the rate and points on the loan. More than ever before, a 40-point increase in your credit scores can mean the difference between paying one origination point on your loan or zero points. One "point" on a $100,000 loan is $1,000.

The required, minimum credit score will vary greatly on different loan programs. It also plays a part in how much down payment is required and what the sales price might be. Low credit scores can keep you from purchasing a property that you could easily afford otherwise.

It is reported that between 72% and 90% of all credit reports contain errors. Of those reports, 25% will contain errors that will get a borrower declined for an extension of credit. It is recommended that you check your credit report about six months before you plan to purchase a home. You will be able to preview the information and dispute any incorrect information. This will allow your credit scores will then be presented at their best.

What assets does the borrower have and where did they come from? The proceeds from a sale of their current home and a new loan with 20% down will make a lender more comfortable with a slightly higher ratio.

Many loan programs allow the borrower to receive a gift from a family member to help with the purchase. A good real estate agent can also negotiate that the seller of the property will pay some, and sometimes all, of the buyer closing costs.

Having a large 401k will make a great loan even better. Showing the ability to save money and to handle investments is a sign of responsible handling of money and looking forward to the future.

The lender will also want to see that you have not used every single dime you have to get into the house. Having additional funds for an emergency is essential for a solid loan approval at the best rates.

The property itself will need to qualify for the loan. The property will be judged on condition, location, and any features that add or subtract from the value.

Any problems with the condition of the property that might keep the new owner from living there must be addressed prior to closing. A heavy-duty fixer-upper may require investor financing. Yes, there are still buyers who are flipping some of the great bargains that banks have available.

With most sale and refinance transactions, an appraisal is typically ordered. An appraiser is a licensed and insured, real estate professional who provides their educated opinion as to the value of the subject property. They will base that opinion on the most current properties that have recently sold. The appraiser will match properties that are comparable to the subject property. Their job is to confirm that there is sufficient value to support the sales price.

An appraisal also assures the borrower that they are not over-paying for the property.

The title to the property must qualify for the loan. One of the largest costs when you buy or refinance real estate is the title insurance premium. It is one cost that you will not ever want to do without because there are so many ways that title can become "clouded".
A cloud on the title can be as easy to repair such as a typo in the Grant Deed or a difficult repair due to a tax lien or judgment on the property.

Any lender wanting to put a first trust deed or mortgage on a piece of real estate will want to have title insurance on the property at the time of sale. Title insurance keeps the lender first in line if any other liens are subsequently added.

Most of the time, the only thing needed to clean title for the new loan is simply clarifying your correct name and its' spelling, that any current loans on the property be re-paid at closing, and that there are not any additional liens on the property.

A few things might keep a borrower from obtaining clear title to the property. A tax lien could be one of them. Since a tax lien trumps any new mortgage, the tax lien would need to be cleared prior to placing a new mortgage on the property.

All buyers want to know that the property's title is clear of any clouds when it closes escrow. No one wants to pay $500,000 for a house and find that it has $499,000 worth of tax liens against it.

A title search, prior to closing, would discover this problem and would require that the lien be satisfied prior to closing.

If the tax lien were not discovered, the buyer of the property would be insured against any loss due to the lien. The payment of the lien would be the responsibility of the title company and not you, the insured.

In a purchase transaction in Southern California, the seller customarily pays the lion's share of the title policy for the new buyer's benefit. The new buyer pays a smaller premium for the benefit of the lender.

In closing: There are many great values REO properties. Contact us and let us help you find the one that is best for you.