WHAT'S THE BEST LOAN FOR ME?

Understanding the loan process and how to prepare for it

Buying a home can be one of the most stressful experiences of our lives, adding to this anxiety is waiting for the mortgage to be approved. Much of the homebuyers' uneasiness is due to the fact that they don't know what the process is and what to expect. You know credit checks and verifications of employment are taking place-but what makes the difference between getting or not getting that loan, and how long does it take? We've put together information to eliminate at least some of your anxiety by detailing the steps the lender takes in the loan decision-process called "underwriting".

Are You Worth the Risk?

How Mortgages Are Approved

Just as wise stock market investors carefully research the companies in which they plan to buy stock, careful mortgage lenders investigate the financial background of each loan applicant. The lender assumes a long-term risk when lending a prospective homebuyer money, the assumption is that the borrower will eventually repay the loan and in the short term can make the loan payments on time. Once all lenders analyze the risk of lending (making the investment) by reviewing all the information collected and establishing eligibility, the lender decides whether to extend the homebuyer credit. The lender then selects an appropriate interest rate and loan term. There are no established, industry-wide standards for underwriting, though most lenders follow standards set by government-related agencies, private mortgage insurers, private mortgage investors or institutional investors. Mortgage lenders want to approve loans, but to approve a loan that will become delinquent doesn't help anyone. It's up to the lender to establish that an applicant is qualified.

The Loan Interview

The process usually begins with an interview where the prospective borrowers and a representative of the lender sit down to discuss the potential loan. More often lenders are not requiring a face-to-face meeting and accept a completed application by mail or online. Many lenders today will qualify you for a loan before you begin to shop for a home. Knowing how much money you are qualified to borrow can save you time and prevent disappointment when you are looking at houses. You should be aware of the general interest rates and fees being charged in the area. Lenders will quote a rate and fee at the time the application is taken and then can offer to guarantee, or "lock" the rate quote for a specified length of time.

A rate lock protects you from rising interest rates while the loan is being processed, but it also requires you to close the loan at the rate even if rates decline prior to closing. Lock periods can run from 10 to 60 days, longer periods are available in some cases for an additional fee. The lock period should be long enough to get you through the estimated closing date, if your closing is at least 60 days away then a 30-day lock won't protect you.

Do You have Sufficient Income ?

Following the interview and/or loan application, the lender verifies your employment and financial information.

Income Requirements
A general rule is that you can qualify for a loan of up to twice the family's income (i.e. a family with income of $30,000 a year can usually qualify for a mortgage of up to $60,000). Often the amount you earn may not be as important as how you earn it. If bonuses and commissions make up a large percentage of your income (they can vary greatly from year to year), lenders can be reluctant to depend on them. The lender will probably want to verify your bonus and commission status for the past two or three years to get a better idea of the average you earn from those sources. There are similar problems when a large portion of your salary is based on overtime pay. The mortgage lender will ultimately make a decision as to how much to allow for these additional sources of income.If you are self-employed, you should plan on providing balance sheets, profit and loss statements and copies of your federal income tax returns for the past two or three years. Tax returns may also be required to verify other income claims, such income from securities.

Income/Expense Standards
Lenders use a set of general standards, or lender guidelines (income/expense ratios) to test the application for qualification. These standards are based on the lending industry's experience with what an average homeowner can spend on mortgage payments and also take care of other long-term financial obligations. Of course lenders do use their own discretion in making the final decision.

Debt
Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future. These expenses should not exceed 33% - 36% of the homeowner's gross monthly income. FHA-insured mortgage lenders define long-term debt as monthly expenses extending 12 months or more into the future, and look for these expenses plus housing expenses not to exceed 41% of the homeowner's gross monthly income.Is

How Good Is Your Credit?
Lenders will want to examine the risk of not getting the money back, before extending you credit. Lenders will look at four crucial aspects of your credit history when you apply for a mortgage:

History of past credit - What were the size and terms of past loans?
Type of Credit - Have you obtained real estate, auto, personal or other installment loans in the past?
Attitude toward credit - Are active accounts current , and is there any recent bankruptcy or judgment?
Lapses in employment or debt repayment - How many unexplained lapses are there, and for how long?

Also if you have been through bankruptcy or foreclosure proceedings within the past seven years, be prepared to give full details and provide copies of documents regarding them. You will also be asked to provide details if you pay alimony, child support or separate maintenance. These obligations are treated like debt payments by most lenders and will be part of the underwriting analysis.Armed with this information, lenders can develop a fair idea of how you will handle your responsibilities once you have signed the loan contract.

Consumer Safeguards

Credit Information Safeguards

1. Fair Credit Reporting Act, which was designed to ensure fair and accurate consumer credit reporting. The Fair Credit Reporting Act stipulates that lenders must certify the purpose for which the information is sought and use it for no other purpose. The Act also prohibits reports based on subjective information from neighbors and others concerning character, general reputation and other personal aspects. Certain other credit information, such as bankruptcy more than seven years before, is also prohibited unless the principal involved in the action was $50,000 or more.
2. Equal Credit Opportunity Act (ECOA), prohibits discrimination in lending based on race, religion, color, national origin, sex, marital status, age (provided the applicant may legally contract), and the fact that all or part of the applicant's income comes from a public assistance program. There are additional protections if you have a physical or mental disability. In addition, the ECOA requires that you be notified whether your application has been approved as requested, modified or rejected within 30 days of the completed application. Specific reasons for rejection must be given to you, in writing, at the time of rejection or upon your written request for the specific reasons.

Lenders have two extremely important limitations on credit information gathering: (see the Credit Information Safeguards box on the right.) Lender's are also prohibited by law from asking: Questions concerning the applicant's spouse - unless the spouse will be contractually liable, their income will be used to qualify, the applicants live in a community property state, or the applicant will use child support, alimony or separate maintenance payments from a spouse or former spouse to qualify.

Can You Make The Down Payment?

Lenders expect homebuyers to make the down payment of between 10 - 20% of the asking price for the house. FHA and VA loans require a smaller down payment (0 - 5%) and to pay their share of the closing costs (3 - 6% of the loan amount). A lender can make you a loan for as little as 5 percent down, however, you'll be required to carry private mortgage insurance (not on FHA or VA loans), which you will pay a premium for the first year and an additional monthly fee in subsequent years.

For the down payment and the closing costs, homebuyers may draw from: savings, stocks/bonds, Individual Retirement Accounts (IRAs), pension funds, real state holdings, life insurance policies, mutual funds or employee savings plans. Homebuyers may also use a gift, or money given by a parent or other relative that requires no repayment (you will need to provide your lender a letter signed by both the giver(s) and the receiver(s) to stating the gift).
If you are providing less than 5 percent of the sales price, the gift donor must be a relative and provide a letter stating their relationship to you, the amount of the gift and the fact that no repayment is expected. A gift may be up to $10,000 per year without either party being taxed. A married couple, could give a child or spouse as much as $40,000 tax-free for a down payment.

Is The House You Are Buying Worth The Price?

Mortgage lenders also examine the real estate being purchased to make sure the property is salable, in case of foreclosure. The property's acceptability is established by an independent appraisal.

The appraiser looks at what the home is worth today, as well as how the neighborhood's dynamics will affect the property value in the future. The three main points the appraiser checks are:

Physical security of the property - Age, structural soundness, landscaping, etc.
Location - The kind of neighborhood, surrounding houses, access to transportation, commercial development nearby, etc.
Local government's plans for the area - How zoning and taxes will affect the property in the years to come.

The appraiser does not create value, they interpret the market to arrive at a value estimate. Considerable research and collection of data must be accomplished before the appraiser can arrive at a final opinion of value. There are many types of value, such as Fair Market Value, Insurance Value, Tax Value and Value In Use, you'll need to define precisely the purpose of your appraisal.