Everything You Need to Know About the Process
Home Financing Guide
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What is the difference between being pre-qualified, pre-approved and pre-underwritten?
A pre-qualification is a quick snapshot of information that we would collect, including your income, debts, assets, and length of employment. We would use this information to calculate a rough debt-to-income ratio, the amount of down payment available or the amount needed, and the likelihood that you could qualify for a particular loan. A pre-qualification should not be used to submit an offer as it’s not the same as being fully pre-approved.
Obtaining a pre−approval is a much more detailed process and carries more weight with a listing agent when trying to get an offer accepted. To get pre-approved, you would complete an application and we would order credit. In addition, you would supply copies of your income and asset documentation that would be used to determine your debt-to-income calculation. Your file would also be processed through an automated underwriting system which would confirm that you are pre-approved based on the guidelines for the chosen loan program.
A pre-underwritten file is the strongest type of approval. This means all the documentation you provided has been submitted to an underwriter for review before getting into escrow. They would provide full approval that will make your offer as strong as possible.
Are you obligated to pay any upfront fees to meet with a mortgage advisor or are you required to pay fees on a loan that is withdrawn or not approved?
There are no fees to meet with us and once you do, it does not mean that you are obligated to submit your loan with us. Your consultation is used to see if we could help you accomplish your short and long-term financial goals, discuss what your expectations are from our Team, and see what loan programs would be right for you. If a loan is already in process, but you withdraw the loan or it is not approved, you are not obligated to any lender fees since the loan did not close.
What documentation do you need to provide for your loan?
Certain loan programs require different documentation. The most common items are income documentation like Paystubs, W2’s, and tax returns, assets documentation like bank statements and retirement statements, and documentation on any other real estate you may own. An important thing to note here is the bank and investment statements always designate the total number of pages. For instance, your statement may say 1 of 3 pages. You will need to include all pages of your statement even if there’s nothing on the last page or an advertisement on the first page. Underwriters will always assume missing pages contain information relevant to approving your loan. The Fannie Mae and Freddie Mac guidelines still require all pages of statements to verify accounts. Getting partial statements is still the greatest reason we have to come back to our clients and ask for additional documents later. Additional items may be required once your file has been underwritten. Until we have received the additional information requested, we would not be able to submit your loan for final approval, which would cause a delay in the process that could cause you to lose your lock or allow rates to increase.
What are closing costs and what do they consist of?
Closing costs consist of three categories: non-recurring closing costs, recurring closing costs, and origination discount points.
The first category is non-recurring closing costs. This category includes the fees for escrow, title, underwriting, processing, appraisal, and some other small items. These are fees that are included in every loan that is obtained by a borrower and are only paid once at the close of escrow.
Recurring closing costs are fees that the borrower would pay regardless of whether they obtain a new loan. The difference is that the lender requires several of these to be paid a few months upfront to set up a reserve. Now they could include property taxes, mortgage insurance, hazard insurance, and interest that will be due on the new loan, up to your first payment date.
The third category is origination discount points, which we’ll cover in question 7. On a purchase, closing costs are included in the cash-to-close needed from the buyer at the time of closing. On a refinance, the closing costs can be paid out of pocket by the borrower at the time of close or added to the loan balance.
What is a Loan Estimate or LE and a closing disclosure or CD?
A Loan Estimate is given to the borrower at the beginning of the loan process. This is a form that breaks down the estimated closing costs showing each item that is usually included when obtaining a loan. Also included are the estimated interest rate, the points, and the monthly payment.
Before signing loan documents, you will receive updated closing numbers on a Closing Disclosure, or CD, that you must sign at least three days before you can sign. This will give you an updated figure for your total cash to close.
What are impounds or an escrow account and how are they structured?
An impound account or escrow account is the same thing. They each are a reserve account that is used to pay the borrower’s taxes and insurance. This is part of the recurring closing costs. Some mortgage lenders require impounds with certain programs, but for the most part, the borrower can choose whether or not to have impounds. When impound accounts are formed, a certain number of months’ taxes and insurance will be collected through escrow at the time of closing. This money is set aside in an account out of which the taxes and insurance are paid. The term escrow account is separate from the escrow company you will have as a third-party intermediary on your transaction.
What is an origination discount point and why would I want to pay this fee?
A point is 1% of the loan amount and can be part of the closing costs paid at the close of escrow. When the borrower pays points, it enables them to obtain a lower interest rate. The number of points paid can range from 0 and up, depending on the program that has been chosen and what interest rate the borrower would like. The number of points paid on the interest rate must make sense with the borrower’s short and long-term plans. If the borrower is only staying in a property for a short period, then they must decide whether or not paying points is going to be equal or exceed the amount of the short-term interest rate. In many cases, points are tax deductible when buying a primary residence. There are several other reasons why or why not a borrower would want to pay points and this can and should be discussed with us.
How is the appraisal scheduled and how much does it cost?
If your loan is for a purchase, we’ll order the appraisal based on the purchase contract once disclosures have been signed. If your loan is a refinance, the appraisal will be ordered right after the loan disclosures have been signed. The appraisal inspection will usually be scheduled within a few days of order, but the timing will depend on the appraiser’s workload. If you’re refinancing, the appraiser will contact you to set up the date and time of appraisal. If you are purchasing a home, then the appointment will be set with either the owner of the property or the listing agent. Either way, we will confirm with both the appraiser and you about the scheduled time. The cost of the appraisal depends upon the type and size of the property to be appraised and will be charged to a credit card at the time the appraisal is scheduled. We will inform you when the finished appraisal has been returned. This can also take up to one week.
What does it mean to lock an interest rate in on a loan?
A lock secures an interest rate for a predefined period. Locks can range between 15 days and 90 days or more with a 30-day lock being the most common. Once the mortgage advisor and borrower have decided the appropriate time to lock, the interest will be secured until that lock expires. On a purchase, a rate can be locked once you have an accepted offer. A loan does not have to be locked right away, meaning that the interest rate can either fluctuate up or down throughout the loan process until it is locked. Now, taking this approach does have certain benefits, but it can also have flaws, so make sure you discuss with us which would be appropriate for your situation.
What is the difference between the interest rate and the annual percentage rate, or APR?
Both the interest rate and APR are included in your disclosures, and quite often the APR is higher than the actual note rate or the actual quoted interest rate. The APR is determined by a formula the government set to help clients be able to compare loans and fees but can be very confusing and often manipulated. The APR includes in addition to interest, some of the additional costs of obtaining financing. These additional costs could include points, pre-paid interest, and some of your non-recurring closing costs such as escrow, underwriting, and processing fees.
What is the 3-day right of rescission?
A three-day right of rescission is a 72-hour period of time that takes place after the borrower has signed the loan documents. It only occurs when refinancing an owner-occupied property. This period is required by law so that the borrower may have time to reflect on the terms of the loan or reconsider their decision to update a loan. If the borrower decides not to continue with the loan, a form must be signed and returned to the lender before the end of those 72 hours. If this is done, the borrower is not obligated to pay any fees associated with the loan other than the appraisal, and the file will be closed out. If the borrower does not decide to implement this clause, they are now obligated to fulfill the terms of the new loan. Once the 72 hours have elapsed, a loan can be recorded and funded.
What is involved in the process of signing our loan documents?
Once your loan has been approved, and all the conditions have been met, we will contact you before closing to confirm the loan program, and the rate, and let you know the amount needed for closing. The cash to close will need to be a wire or cashier’s check. We will notify you once the loan documents are being prepared and will confirm an appointment to meet with a notary to sign the documents. Your Welcome Home Advisor will help you coordinate the signing. This can be done at our office, escrow, or your home. The signing usually takes 30 minutes to an hour.
What does it mean when a loan is funding?
The funding of a mortgage loan occurs after all pre-funding conditions have been met. These conditions include the signing of loan documents, submission and acceptance of any outstanding documents required by the underwriter, title report, and pre-funding employment verification. The funding of the loan should not be confused with the closing of the loan. The closing of a loan is considered to have occurred only after the title company confirms the recording of the deed and the deed of trust.