In every real estate transaction, whether it be buying or investing, someone has to consider financing to purchase property. None of us are strangers to the term mortgages or home loans but what many don’t realize is the complexity of the financing world. Since the real estate collapse of 2007 and the fiscal cliff debate, real estate financing has become tighter and more demanding on the borrower. However, time and time again I hear frustrations from borrowers who think obtaining a home mortgage should be a casual walk in the park.
Borrowers, sometimes but not always, feel the requests made by the lending institution or personal mortgage banker are absurd or just plain “bullshit”. While I don’t always agree with the requests made upon the borrower, it is important to understand the investor’s point of view. But before we can get to the investor’s point of view it is essential to run through the lending process.
6 Steps to the Home Loan Process
1. Select a Mortgage Banker: Mortgage bankers can be either a bank in which a person banks, a private mortgage banker, or hard money lender.
2. The Prequalification Process: The most understood part but more on that later. The process by which someone makes an initial application to qualify for a home loan and should not be confused with “making formal loan application”.
3. The Appraisal Process: The formal valuation by a certified appraiser on the subject (the property in which the borrower intends on purchasing) property.
4. Loan Application: The process by which the borrower applies for a home loan.
5. Underwriting: The process where an “underwriter” reviews the borrower’s loan application and financial documents for approval and the loan documents match up to investor guidelines.
6. Cleared for Funding: Where all loan conditions have been met, the lender wires funds to escrow for distribution to the seller, and the borrower receives a mortgage for the purchase of their property.
This all seems pretty easy and straight forward but the difficulties arise when the borrower is not straight forward about their finances; has collections or unresolved debts and disputes, and personal circumstances that effect their financial buying power.
Step 5 is where most real estate purchases get held up and the reasoning usually boils down to Processors (who work closely with Underwriters) and Underwriters needing further clarification or updated information. Why? Because the loan may have to meet an additional investor’s criteria in order to fund. This is also the step in which the borrower can experience the highest level of frustration and consider processing and underwriting requests a load of horse hockey. So here are some items to consider when proceeding through the financing section of home buying.
15 Things to Consider When Applying for a Loan
1.It will not be as easy as the internet says.
2. The loan amount may not be what is expected.
3. Borrowers may not agree with the lender.
4. A person may feel the lender and agent only care about making money.
5. People may not understand the lending guideline changes.
6. Credit scores are more important than how much money a person makes.
7. A borrower’s credit will be pulled at the beginning and the time of closing to verify any new debts.
8. Having money in the bank is important and living paycheck to paycheck is bad.
9. Processors and Underwriters look very closely into one’s finances and question EVERYTHING.
10. Processors and Underwriters will ask for the most recent pay stub and bank statements prior to closing.
11. If there are special income circumstances those will be highly scrutinized.
12. Large deposits, investment portfolios, and any deposit over 10% of income will need to be documented.
13. All W-2s, tax returns, and previous living addresses for the last 2 years will be documented.
14. If a borrower questions the reasoning for requested items just ask “why” and don’t wig out.
15. Be timely with providing documentation because it can delay a on time closing.
These items ensure, to the lender and their investor(s), that the loan being granted is sound and their is little risk of the borrower defaulting. As we all well know there have been so many foreclosures over the past 6 years. Investors are not in the business of owning real estate, they are in the business of lending money to people who want to own real estate.
If you have more questions about qualifying for a home loan please contact us and we’ll put you in touch with a qualified lender.