» The Loan Process
» Understanding Different Types of Loans
» Loan FAQ
» Required Documents

The Loan Process

Prequalify/Interview
Whether you are looking to purchase or refinance, want a Good Faith Estimate, pre-qualification, or even a pre-approval, you never have to leave your home or office. Simply download the loan application, this will speed the mortgage approval process.

1. Download Uniform Residential Loan Application (Form 1003) and Notices OR you may request for us to fax or mail it to you.
2. I will contact you to verify receipt of your information, and to discuss your program and interest rate options.
3. I will send you a package containing all of the required loan documents, disclosures and a list of information required to complete the application. There are several programs that do not require all of the following documents to apply for a mortgage. Although, having the necessary documents available will speed the process.
4. Return the signed documents and information after you have reviewed them then we begin underwriting the loan application.

Order Documents
We will obtain the following:

• Credit report
• Appraisal on property
• Verifications of employment (if necessary)
• Mortgage or rent and funds to close
• Landlord ratings
• Preliminary title report

Loan Submission

• Loan package will be assembled and submitted to underwriter for approval

Documentation

• Supporting documents come in
• Lender checks for any problems
• Requests for additional items may be made

Loan Approval

• Parties are notified of approval

Documents are Drawn

• Loan documents are completed and sent to escrow
• Borrower(s) come in for final signatures

Funding

• Lender reviews the loan package
• Funds are transferred

Recording of Documents

• Title company records the note and deed of trust at the county recorder's office
• Escrow is now officially closed - Congratulations!

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Understanding Different Types of Loans

Though this article discusses some of the more common loan types, you should spend time talking with different lenders before deciding on the right loan for your situation.

Most loans fall into three major categories: fixed-rate, adjustable-rate, and hybrid loans that combine features of both.

Fixed-rate mortgages:
As the name implies, a fixed-rate mortgage carries the same interest rate for the life of the loan. Traditionally, fixed-rate mortgages have been the most popular choice among homeowners because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but recently more lenders have begun offering 20-year and 40-year loans.

Adjustable-rate mortgages (ARM):
Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and monthly payment can change during the life of the loan. This is because the interest rate for an ARM is tied to an index (such as Treasury Securities) that may rise or fall over time. In order to protect against dramatic increases in the rate, ARM loans usually have caps that limit the rate from rising above a certain amount between adjustments (i.e. no more than 2% a year), as well as a ceiling on how much the rate can go up during the life of the loan (i.e. no more than 6% higher than the starting rate). With these protections and low introductory rates, ARM loans have become the most widely accepted alternative to fixed-rate mortgages.

Hybrid loans:
Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically, a hybrid loan may start with a fixed-rate for a certain length of time, and then later convert to an adjustable-rate mortgage. Be sure to check with your lender and find out how much the rate may increase after the conversion, as some hybrid loans do not have interest rate caps for the first adjustment period. Other hybrid loans may start with a fixed interest rate for several years, and then later change to another (usually higher) fixed interest rate for the remainder of the loan term. Lenders frequently charge a lower introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage, which makes hybrid loans attractive to homeowners who desire the stability of a fixed-rate, but only plan to stay in their properties for a short time.

Balloon payments:
A balloon payment refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which allow homeowners to make payments based on a 30-year loan, even thought the entire balance of the loan may be due (the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be attractive to homeowners who do not plan to stay in their house for more than a few years.

Time as a factor in your loan choice:
As has been discussed, the length of time you plan to own a property may have a strong influence on the type of loan you choose. For example, if you plan to stay in a home for 10 years or longer, a traditional fixed-rate mortgage may be your best bet. But if you plan on owning a home for a very short period (5 years or less), then the low introductory rate of an adjustable-rate mortgage may make the most financial sense. In general, ARMs have the lowest introductory interest rates, followed by hybrid loans, and then traditional fixed-rate mortgages.

FHA and VA loans:
U.S. government loan programs such as those offered by the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans have lower qualifying ratios than conventional loans, and often require smaller or no down payments. Bear in mind, however, that FHA and VA loans are not issued by the government. The loans are made by private lenders but insured by the U.S. government in case the borrower defaults. Remember too, that while any U.S. citizen may apply for an FHA loan, VA loans are only available to veterans or their spouses and certain government employees.

Conventional loans:
A conventional loan is simply a loan offered by a traditional private lender. They may be fixed-rate, adjustable rate, hybrid, or other types. While conventional loans may be harder to qualify for than government-backed loans, they often require less paperwork and typically do not have a maximum allowable amount.

Excluding property taxes and insurance, a traditional fixed-rate mortgage payment consists of two parts: (1) interest on the loan, and (2) payment towards the principal (the unpaid balance of the loan).

Many people are surprised to learn that the amount you pay toward interest and principal varies dramatically over time. This is because mortgage loans work in such a way that the early payments are primarily interest, and the later payments are primarily towards principal.

In the beginning... you pay interest:
To help calculate monthly payments for loans based on different interest rates, lenders developed what are known as "amortization tables." These tables also make it fairly easy to calculate how much of each payment is interest, and how much goes toward the principal balance.

For example, if you calculate the principle and interest for the first monthly payment of a 30-year, $100,000 mortgage loan at 7.5% interest, according to the amortization tables, the monthly payment on this loan is fixed at $699.21.

The first step is to calculate the annual interest by multiplying $100,000 x .075 (7.5 %). This equals $7,500, which we then divide by 12 (for the number of months in a year), which equals $625.

If you subtract $625 from the monthly payment of $699.21, we see that $625 of the first payment is interest, and $74.21 of the first payment goes toward the principal . If we subtract $74.21 (the first principal payment) from the $100,000 of the loan, we come up with a new unpaid principal balance of $99,925.79. To determine the next month's principal and interest payment, we just repeat the steps above.

Thus, we now multiply the new principal balance (99,925.79) times the interest rate (7.5%) to get an annual interest payment of $7,494.43. Divided by 12, this equals $624.54. So during the second month's payment $624.54 is interest and $74.67 goes toward the principal.

Note: In Canada, payments are compounded semi-annually instead of monthly.

Equity:
As you can see from the above example, even though you pay a lot of interest up front, you're also slowly paying down the overall debt. This is known as building equity. Thus, even if you sell a house before the loan is paid in full, you only have to pay off the unpaid principal balance--the difference between the sales price and the unpaid principle is your equity. In order to build equity faster--as well as save money on interest payments--some homeowners choose loans with faster repayment schedules (such as a 15-year loan).

Time versus savings:
To help illustrate how this works, consider our previous example of a $100,000 loan at 7.5% interest. The monthly payment is approximately $700, which over 30 years adds up to $252,000. In other words, over the life of the loan you would pay $152,000 in interest.

With the aggressive repayment schedule of a 15-year loan, however, the monthly payment jumps to $927--for a total of $166,860 over the life of the loan. Obviously, the monthly payments are more than they would be for a 30-year mortgage, but over the life of the loan you would save more than $85,000 in interest.

Bear in mind that shorter term loans are not the right answer for everyone, so make sure to ask your lender or real estate agent about which loan makes the best sense for your situation.

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Loan FAQ

When should I refinance?
Some common reasons homeowners refinance include:

• Lower monthly mortgage payments
• Convert an adjustable rate mortgage (ARM) to a fixed-rate mortgage
• Raise funds for family expenses (i.e. college tuition)
• Pay off high-interest loans and credit cards
• Home improvements

The old rule of thumb is that you should refinance your home if interest rates fall more than 2%. That's because refinancing usually involves most of the same closing costs (loan origination fee, prepaid interest, etc.) as the original loan. For anything less than 2%, the savings on your monthly mortgage payment might not be significant enough to be worth your while.

Can I get a loan to buy a house if I have filed bankruptcy?
Yes, you can get a loan if you have filed bankruptcy. Lenders generally require that the bankruptcy be discharged for two years before a loan is made. Lenders will also require that the applicant has re-established credit with major vendors such as Visa, Mastercard, or an auto loan. Department store credit does help, but does not meet the requirement for reestablishing credit. How many years of credit do I need to have to get a home loan? Lenders will want to see an established track record of responsible credit history, usually two years is required.

Are closing costs tax deductible?
Some, but not all, of the fees paid to get a home loan are tax deductible. The points, prepaid interest and prepaid taxes are generally deductible.

I have many credit cards which have zero balances. Although I don't owe anything on these cards, can this be detrimental in getting a home loan?
Yes. Lenders use a credit scoring system that will consider the open credit that is available to you. The amount of open credit available can actually lower your credit score.

When is mortgage insurance required for a loan?
When the buyer puts down less than 20% for a down payment, the lender will require mortgage insurance. The insurance protects the lender in the case of default. Lenders view a lower than 20% down payment as a higher risk loan. Using an 80%-10%-10% strategy is one method of purchasing a home with less than 20% down without being subject to mortgage insurance. It's generally best to have a loan officer explain the different financing options to determine which program works best for you.

Is it a problem if my loan is sold to another lender?
No. Most lenders sell loans in the secondary mortgage market, thus the practice is quite common. You will be notified of the transfer by the existing lender and also by the new lender. Read all correspondence regarding the transfer carefully to avoid sending payments to a wrong address.

When would I use an ARM or Balloon mortgage over a fixed rate mortgage?
Adjustable rate mortgages and balloon mortgages are best used when you are looking to purchase a home and you anticipate moving or upgrading to a another or larger home in the future (such as first-time homebuyers and families that move often due to their employer). ARM and balloon mortgages with 5 or 7 year fixed terms may provide the stability of the fixed rate and provide lower monthly payment and reduced interest costs over their respective terms.

What is a No Income Verification mortgage?
The No Income Verification mortgage or NIV is generally used by people with good credit histories who do not wish to document their incomes. The income is "stated" but not verified, and this program is ideal for the self-employed borrower with complicated tax returns and financial statements.

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Required Documents

There are many programs that do not require all of the following documents to apply for a mortgage. Although, having the following documents available will speed the mortgage process. I will be able to tell you what documents are required at the time of your application.

Copies of items required for full document loans

1. Two years W-2's or 1099's if retired
2. Last two months bank statements - all accounts
3. Most recent statement for mutual funds, stocks, IRA's, or retirement accounts
4. Last two pay stubs for W-2 employees
5. Latest mortgage statement on 1st and 2nd (if refinance)
6. Copy of declaration page of Homeowners Insurance - usually the page with the agent's name and phone number (refinance only)
7. Copy of the purchase contract
8. Copy of a photo ID such as a Drivers License or Passport

Additional items required from self-employed

1. Business license copy
2. Current profit and loss statement
3. Last three bank statements on business accounts
4. 1099's if applicable
5. Two years tax returns

Copies of these items are needed if applicable

1. Divorce papers
2. Trust, if property held in trust
3. Bankruptcy papers and discharge
4. Note on 1st, if we are doing a 2nd
5. Copy of rental agreements, if you own rental property
6. Home Owners Association information

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