The Not-So-Sexy Mortgage Application

 

It turns out there is nothing sexy about filling out the mortgage application. Why do I say that? Well, no matter how many times I wracked my brain to come up with a catchy or interesting way to start this conversation, you guessed it, I came up blank. I imagine it may have something to do with the fact that nobody likes filling out applications, especially long ones with lots and lots of blank spaces that need to filled in. Nevertheless, you can’t get approved for a mortgage without filling one out so let’s dive right on in and do a quick sketch of the things you need to know.  

Where do you go to fill out an application? Back in the pre-digital age you would fill out an actual physical paper mortgage application also known as the 1003 (pronounced ten-oh-three). Today the big push is to completely digitize the entire mortgage application process. What this means is that making a trip down to see your banker/loan officer in his/her office is no longer necessary. The entire application can be filled out online via your phone, tablet, or home computer. Your loan officer will most likely send you a link to the application via email or give you verbal instructions where to go on their website to get started. You will most likely be asked to create a username and password to a secure portal, so your personal information is protected. Before we get into the details of the mortgage application a quick note about the mortgage application (1003) is needed.

All applications are the same. The mortgage application you fill out to apply for a home loan is the same everywhere you go. This is because Fannie Mae and Freddie Mac have created a standardized form for industry. This makes the approval process more convenient for everyone. The use of the term “1003” is the name Fannie Mae originally came up with for their application. Freddie Mac calls their application Form 65. Because Fannie Mae came up with their application first the entire industry just refers to both applications as “the 1003”. This means when you call up a mortgage company to start the application process you can simply tell the loan officer that you are interested in applying for a mortgage and would like to fill out the 1003.

There are a lot of pages!  The application is quite lengthy, 9 pages to be precise, and has A LOT of spaces/boxes to fill in. You didn’t think the bank is going to just give you hundreds of thousands of dollars without making you jump through a few hoops, did you? Does that mean that everything must be filled out completely and perfectly to qualify? The good news is the answer is, no.

I could go into a very long explanation about what is on the 1003 and which items you are required to fill out and which ones you are not. It is enough to say that you should fill it out as completely as possible. Most online application pages will prompt you to fill out the areas that are required and will not let you continue to the next page/section until you have done so. If there is an area on the 1003 you don’t understand or are not sure how to fill it out just leave it blank and ask you loan officer about it later. As a rule, the more information you can give the loan officer the better, it also reduces the chances her/she will need to contact you later for additional required information. I promise you, if you miss something on the application that is needed your LO will contact you for the missing information. That does not mean you should just skim through application only filling out those areas you are required to move on to the next section, do your best to be thorough. Doing so will expedite the application process.

What information will the application ask for?

1. Personal Information – In addition to things like your current address (Last two years are required) and how long you have lived there you will be asked for your social security number and date of birth.
2. Employment Information – You will need to put in a 2-year work history and what your gross monthly income is.
3. Financial Information – this will include both your assets and liabilities.
4. Property You Own – If you own other property you will need to include the property(ies) details such as address(s) and whether or not there is a mortgage(s) attached to it.
5. Demographic Information – Race and Gender
6. Declarations – You will be asked for details about the property you plan to buy, the money you are using for a down payment to purchase the home, and additional information about your finances.
7. Military Service – If you are applying for a VA loan there is a section you will fill out related to your service in the military.
8. Signature – As you might expect, at the end of the application you will sign that the information you have provided is true. This of course means, don’t lie. Lying on the 1003 could mean jail time. Your loan officer is not going to take your word for it anyway and will be verifying the information you provide, so be as truthful as possible.

 And that is it, the mortgage application is filled out and you are ready to move to the next step, sending your loan officer proof of the information you provided on the application. Your loan officer will now start the pre-approval process by pulling your credit, examining your finances in greater detail, and comparing it all to the financial documents you provide.

If there are any questions you have that I did not answer regarding the 1003 please don’t hesitate to reach out. If you want to start the application process you can access the 1003 here, HanksHomeLoans.com.

Benjamin Hanks

NMLS# 1855439

Cell: 404-955-1253

Email: bhanks@mortgageright.com

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Demystifying The Mortgage Approval Process

 

Let's assume you have found the house of your dreams and have a signed purchase contract, what are the next steps in the home buying process? Can you close right away? How long will it take close on your home? Even if you are paying cash to buy the home there is still a lot of work that must be done before we can get you to the closing table – even more if you are getting a mortgage. Let’s take a closer look at each of the steps. Hopefully, this will demystify the process and help you help your lender streamline the path from contract signing to the closing table.

Loan approval steps:

1. Negotiate the Loan - Loan Officer
2. Process the Loan - Loan Processor
3. Home Inspection - Home Inspector
4. Home Appraisal - Appraiser
5. Loan Underwritten - Underwriter
6. Closing Documents Prepared - Closer
7. Closing Documents Signed - Settlement Agent. 

Negotiation - For the sake of the conversation we are going to assume you have already been pre-approved for a mortgage. If this is the case you will have already filled out the loan application, discussed interest rates, as well as different loan options with your loan officer. If you have not already decided which loan type (FHA, Conventional, VA, USDA,) is best for you and your situation you will now make that decision. Along with that decision your real estate agent will send a copy of the signed purchase contract to your loan officer. With the signed purchase contract in hand the loan officer will begin the process of getting full loan approval so you can close.

Before your loan can move to the next step you will need to sign your something called your Initial Disclosures. There are two reasons you need to sign these disclosures. The first reason is to verify that the information on the application and the terms of the loan as outlined in the disclosures are correct. The second reason is because it signals your intent to proceed with the loan.  Because we live in a digital age your lender will ask as well as prefer that you do this via email. It is important that you sign the disclosures right away so your lender can start processing your loan without delay. Once you have signed your disclosures your loan is ready for the next step, Processing.  

Loan Processing – This part of the process will be handled by your Loan Processor. This individual(s) is responsible for assembling your documentation and preparing it for underwriting. In addition to document preparation your processor will:

• Order a title search - usually takes 5-7 days
• Order your appraisal - usually takes 10 days but can take up to 14 days
• Get your homeowners insurance set up with the lender as the mortgagee
• Reach out to you regarding any recent inquiries on your credit report as well as all addresses that are showing as residences within the past 24 months. Your processor will request you sign a letter with the explanation you provide.

While your loan is being processed it is typical for you, the borrower, to pay for a home inspection.

Home Inspection – While not generally required to purchase a home getting a home inspection is a wise decision. The home inspector will do a thorough visual inspection of the home looking for any problems you need to be aware of before continuing with your purchase. Some common problems the inspector will look for are:

1. Damage from pests, such as termites
2. Water damage
3. Roof and chimney damage
4. Plumbing issues
5. Verify the septic system is healthy (assuming you are not on sewer)
6. Electrical Issues
7. Structural Issues
8. And others...

If the home inspection comes back showing the home needs thousands of dollars in repairs there is no sense ordering the appraisal if you decide not to buy the home. It is not recommended that you pay for an appraisal until the home passes inspection.

Home Appraisal – Assuming the home passes inspection the next step is to have the home appraised. The appraiser’s job is to determine the market value of the home by comparing the sales prices of similar homes in the neighborhood. The appraiser will measure the square footage and take pictures of the home inside and out. It is important that the home appraise for at least what the seller is asking or higher. If the home appraises for less than what the seller is asking your lender is not going to approve a loan amount higher than the homes fair market value. If the home appraises for less then what the seller is asking you can request a reevaluation from the appraiser, pay for another appraisal from a different appraisal management company, renegotiate with the seller, or come out of pocket for the difference between what the home appraised for and what the seller is asking.

Keep in mind that once the appraisal is ordered it usually takes 10 days to receive the appraisal report. If the market is hot is take up to 14 days to get the appraisal report back. If you are in a big rush you can pay for a rushed appraisal. Once the appraisal report is received it is time to send all of your documentation to underwriting.

Underwriting – The underwriter assigned to your loan is ultimately responsible for giving your loan a thumbs up or a thumbs down. The underwriter compares the documents in your file with loan guidelines to make sure they comply. They will check your credit scores to make sure they are in line for whatever loan program you chose. They will also make sure you can afford the house by checking your paystubs to make sure the amount on the application is consistent with what you earn. Unlike the loan officer and processor, you will probably never speak to the underwriter.

After reviewing your file, the underwriter will do one of two things. Either one, they will approve your loan, or two, they will approve the loan with conditions. When a loan is conditionally approved it means that once the conditions are met the loan will them move on to closing. Usually, the underwriting conditions include things like getting updated documentation such as pay stubs and banks statements. When you loan officer or processor reaches out to you to satisfy these conditions you will know you are getting close to closing.  

Closer – Once your loan is approved by underwriting it will go to someone in the lenders closing department who will prepare the final closing documents that will be sent to the settlement agent.

Closing Documents Signed – The title of the settlement agent varies depending on the state you are closing in. Some states require the closing agent to be an attorney while other states only require an escrow agent. In either case, the settlement agent receives very specific instructions from the lender explaining what they need to fund the loan. The settlement agent verifies the identity of all the parties signing and oversees the signing process. They are responsible for ensuring the sale of the home proceeds according to the laws in the state where the closing is taking place as well as with the lender’s requirements. Borrowers often get confused thinking the closing agent represents them when in fact the settlement agent represents the lender. Once all the closing documents are signed the settlement agent then disperses the funds according to the lender’s instructions.

At the end of the day how long does this process usually take? The answer will ultimately depend on the lender you choose. A reasonable time frame to budget for this process is 30 days, though 45 days is safer. That isn’t to say that it can’t be done faster - the mortgage company where I work routinely gets loans closed in 21 days, sometimes less! The reason I recommend budgeting for 30-45 days is to give yourself a cushion should you encounter problems along the way. Some examples of where this might happen is during the title search or when trying to close on a government backed loan like USDA. USDA loans must be underwritten twice – once by the lender and then again by USDA.

As you can see there is a lot of moving parts as well as actors involved in taking your home loan from start to final approval and closing. While most of the process is out of your control the part you can control is getting the documents your lender requests right away, scanning them clearly and completely, and formatting them into a PDF.

Hopefully, this article has illuminated how the home loan approval process works. Now that you understand the steps that must be taken my wish is that it will help facilitate a smooth and relatively easy home buying experience. If you have any further questions don’t hesitate to reach out.

Benjamin S Hanks

NMLS# 1855439

404-955-1253

bhanks@mortgageright.com

HanksHomeLoans.com

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Oconee Coffee Roasters - Madison, GA

Over the weekend I took my honey to a little town in Georgia called Madison. It was her last good weekend before her next round of chemotherapy so we wanted to get her out of the house before she was stuck indoors for another couple of weeks.

For those of you who are familiar with Civil War history, you might recall that Madison was one of the few towns General Sherman didn’t burn in his famous March to the Sea campaign. Consequently, the town is full of beautiful antebellum homes that are immaculately preserved. It turns out that early April was the perfect time to do a walking tour and take it all in. We even wandered through the cemetery with graves dating back to the early 1800s.

The highlight of the trip (for me at least) was stopping at the Oconee Coffee Roasters in downtown Madison. It turns out that this isn’t your run-of-the-mill small town coffee company. The folks who run the place not only roast their coffee beans on site but are fastidious in their attention to every detail of coffee preparation. They do not serve coffee from a pot or carafe but do a pour-over for every guest as well. The coffee is not measured by scoop but by weight, and of course, the temperature and quality of the water used is exact. As you might expect, the cup I was served was perfect. When the barista asked if I wanted cream and/or sugar my reply was, “After you have taken so much care to craft the perfect brew? Not a chance!”

If you ever find yourself heading to Madison, GA to take in the beautiful town and it’s Antebellum homes be sure to stop at the Oconee Coffee Roasters for the perfect cup. 

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Mortgage Pre-Qualification vs Pre-Approval

 

The first step in the home buying process is getting pre-approved by a lender for a mortgage loan. Getting pre-approved is not to be confused with getting pre-qualified. These two terms are often used interchangeably but actually have very different meanings. When you have been fully pre-approved for a mortgage your lender will issue you a pre-approval letter stating both how much you qualify to borrow as well as what type of loan program you qualify for. 

There are three reasons getting pre-approved is so important. The first is because most real estate agents will not start showing you houses until you have completed this step in the buying process. The second reason is because most home sellers will require a pre-approval letter from a lender before entertaining a purchase offer to buy their house. And third, not getting pre-approved can cost you a lot of money. Home buying is expensive.  It requires an earnest money deposit, paying for an appraisal and home inspection, and often other certifications such as providing a wood destroying insect report. The last thing you want to do is start spending money on what you hope will soon be your new home only to find out you do not qualify. 

Let’s take a closer look at both of these terms to better understand the differences. 

Someone who is pre-qualified for a mortgage to buy a home has spoken to a lender about their financial situation and what size of a loan they are interested in qualifying for. The lender will ask questions about their finances such as, how much money they earn monthly, what debts they have, how much they pay monthly toward their debts, what assets they have, how much of a down payment they plan to put down, and what their credit score is. Essentially, the lender is trying to get a comprehensive understanding of the potential borrower’s financial situation. Based on that conversation the lender will give them a rough approximation of whether they qualify or not as well as how much they may be able to borrow. The key takeaway here is that a pre-qualification is based on unverified information. 

To be fully pre-approved you will need to provide proof of all the information that was provided verbally to the lender for the pre-qualification. Below is a typical list of the documents your lender will request copies of for your pre-approval. 

1. Driver license

2. Social security card - for FHA, VA (DD214), and USDA

3. Last two years W2s or 1099s

4. Last two years of tax returns – all pages

5. Last 30 days pay stubs

6. Last 60 days bank statements – both checking and savings accounts

7. Last 60 days asset statements such as 401k, IRA, etc. 

8. Most recent years pension, social security, disability, statement letter(s)

9. Any other sources of income - child support received is one example. If child support is needed to qualify you will need to send a copy of your divorce decree as well as proof of child support payments being made.

If you are self employed a typical document list will include the following:

1. Two years of personal tax returns

2. Two years of business tax returns including schedules K-1, 1120, 1120S

3. Business license

4. Year-to-date profit and loss statement (P&L)

5. Balance sheet

6. Signed CPA letter stating you are still in business.

In addition to sending the lender your financial information you will need to fill out a mortgage application. Once the application is complete the lender will pull your credit to review your scores (There are usually three.), check your payment history, and determine your debt-to-income ratio (DTI). 

The lender will then typically run your application through an automated underwriting system (AUS) to get what is called an Approve Eligible. Once the system returns a thumbs up you can consider yourself fully pre-approved. 

There are two last bits of information I want to share with you regarding the pre-approval process. The first is to be upfront, thorough, and honest with your lender regarding your financial situation. Your lender will almost always find out in the end if you are concealing something. You do not want to make it all the way to the end of the buying process only to find out you cannot close on a home. 

Lastly, when your lender requests any documentation from you it is in your best interest to be sure the document is clearly scanned, converted to a PDF, and emailed or uploaded promptly. By taking the extra time in the beginning to carefully prepare and send your documents you will prevent a lot of headache later. As a loan officer I can tell you that an enormous amount of time is wasted trying to open documents that are not formatted correctly, decipher documents that are too blurry to read, or are cut off in the scanning process. Your loan officer will most likely request you rescan and resend the documents that are unreadable. This slows down the final approval process and creates frustration for both you and the lender. 

That’s it! Congratulations on your pre-approval! Happy house hunting! 

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Why You Should Plan In Advance To Buy A Home

Not planning ahead can be very expensive at best and prevent you from buying a home at worst. The process too many home buyers go through to make their first home purchase often looks like this. One day, either out of necessity or just the desire to own a home, Bob (the prospective home buyer) contacts a real estate agent to help him buy a house. Because a good agent won’t start showing houses to someone who isn’t pre-approved, they refer them to their preferred lender. The lender is either tasked with breaking the good news to the aspiring home buyer that luckily they do qualify, or because of a lack of planning, they are told they unfortunately do not qualify. In many cases the home buyer may qualify but have sticker shock when they realize how expensive home buying can be. New home buyers often have unrealistic expectations regarding the size/type of home they want to buy only to discover it is financially out of reach. A little advance preparation can take all the guesswork out of buying a home and put you in the best position to own the home of your dreams – all while ensuring it costs as little possible.   

Here are some of the specific benefits of preparing for your home purchase in advance.

• Lower monthly principal and interest payment. Generally speaking, the higher your credit score the lower your interest rate will be. The lower your interest rate the lower your monthly payment will bet. Seemingly small increases in your interest rate can compound over time and cost you a lot of money.

• Lower monthly mortgage insurance. By not overextending yourself with lines of credit (Don’t max out those credit cards!) you keep your debt-to-income ratio low. Your debt-to-income ratio is both a qualifying factor (If it is too high you will not qualify) and it is also one of the factors used to determine how expensive your monthly mortgage insurance payment will be. Keeping your DTI below 45% will significantly lower how much mortgage insurance you pay monthly. Another way to lower your monthly mortgage insurance premium is to bring a larger down payment to closing. More below…

• Eliminating monthly mortgage insurance. The higher down payment amount you can save the closer you are to the magic loan-to-value ratio of 80%. For most home buyers the ideal loan program is a Conventional mortgage (I’m setting aside the exemptions to this rule for another discussion). The reason it is ideal is that you are not required to pay mortgage insurance if you borrower no more than 80% of the home’s appraised value. Because mortgage insurance can cost hundreds of dollars per month you can see why having a 20% or higher down payment is optimal. 

• No delay buying a home. Because building credit takes time, years in fact, you want to have taken the necessary steps in advance so there is no delay when you decide to buy a home. Some of these steps should include having a minimum of three tradelines (Tradelines are lines of credit such as credit cards, automobile loans, etc) you can use to build a credit history. Remember to keep those credit card balances at 30% or below your available limit.

• Qualifying for the home you really want. A little advance preparation will put you in the best financial position possible so you can purchase the home you really want vs having to settle for one you can “afford”. 

So, what steps should a first-time home buyer take to put themselves in the best position possible to buy a house? The first thing you should do is contact a lender who is education focused. At this point you are not trying to close on a home but explore your options. The lender will explain the different loan programs available to you as well as provide some guidance on which one(s) might be best in your situation. The lender should pull your credit at this time and discuss potential actions you can take to improve your score. It is quite common to find mistakes on your credit report that you can take steps to remove. If your credit situation is in dire straits you might want to contact a credit repair company to assist in cleaning up your credit so you can qualify for a mortgage. 

Another piece of information the lender can provide you with is a rough idea of how much money you need to have on hand both for a down payment as well as to cover your closing costs. This information will give you a clear target to shoot for and will keep you from scrambling at the last minute for funds to close your loan. One other thing home buyers always ask me is what will my monthly payment be at… (fill in the blank) loan amount. Obviously, for budgeting reasons, knowing how much of a monthly payment you can afford is important to find out.

How far in advance should you start planning? The answer to this question will depend on each borrower’s unique financial situation. Because preparing in advance can include, but does not necessarily require, saving for a down payment and closing costs, this question is difficult to answer. Because building and repairing credit takes time a bare minimum of 12 months is recommended, though I would suggest two years if possible. Really, the longer you can begin planning and saving the better. No matter what your situation, what you do not want to do is wait and just hope you qualify. Act now, you might be surprised to find you are in a better position that you thought. 

I hope this brief article has been informative. Do not wait until the last minute to start planning your home purchase. If you want to start the process today feel free to give me a call at, 404-955-1253. You can email me at, bhanks@mortgageright.com. If you want to go ahead and start the application process you can follow my link, http://www.hankshomeloans.com, to fill out our online mortgage application. 

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