Tips for a Smooth Process to Getting your Loan!

PRIOR TO APPLICATION Maybe you won’t be in the market for a few months, or even a year….but there are steps that you can take right now.

Credit Credit Credit

Credit is the crucial starting point of any financial success. It is no different when applying for a mortgage. Not only does your credit have to be outstanding, but now credit risk scoring dictates the loan program, interest rate, loan to value, and the amount of the closing costs associated with the transaction.

  • Order a free credit report or better yet get a credit report with three credit scores. A tri-merged credit report is what is required for all mortgage transactions. With three different credit bureaus reporting your personal credit history, you get a more complete picture from three different sources instead of one. Mortgage companies use the middle of the three credit scores for qualifying for mortgages. Creditors sometimes report only to one bureau.
  • See what is on your credit. Maybe there has been something that you don’t know about or even forgot about. Poor credit does not go away. Collections get passed around from company to company so they can always collect. If something did go into collection but you paid it off, it shows up as a paid collection but it is still a negative mark (but not as bad as not paying it off) on your credit. As time passes your score will get better, but a negative mark is there for seven years. If you don’t pay the collection then it gets sold to another company, so the collection does not disappear or just go away.
  • Sometimes you can clear poor credit easily by working with the vender and the three reporting agencies. Sometimes you must work with a company that specializes in repairing credit. Either way it is good to start early.
  • Do not close accounts especially if they have a balance. This can seriously reduce your credit scores. This is for any account. If the account shows closed and there is a balance, then the bureaus consider that the vender closed it for a reason, usually poor payment or going over your limit.
  • Also do not have your credit run numerous times. Each inquiry will cause your credit score to go down. One example is shopping for appliances or even home owner insurance.
  • Always pay your bills on time.
  • And most of all, NEVER (never, never) let anyone else use your credit.
  • Currently all loan programs require full documentation to qualify. Most programs have other strict guidelines that must be followed.

Do not quit your job... unless you have another one that you will start immediately.

  • You must be employed continuously for at least two years in the same line (preferably with the same company). You income must be supported by two years W2’s and current pay stubs with year to date earnings.
  • Your employment will be independently verified before funding. For refinances this could be as late as one week after closing. All refinances have a 3 day right of rescission. This means that after closing you have 3 full days in which to change your mind. Also the lender can re-verify your employment after you close. Therefore the employment could be verified on the day of funding.

If you are self employed... the same principals apply.

  • You must be self-employed for two years in the same field at the same location with the same company. Usually the underwriters required 2 years of tax returns supporting your self employment and your income. Also verbal and written verifications may be required. The types of verification vary with each situation.

Debt to income

Debt to income ratios are typically 33/38. 33% of your gross income is for the principal, interest, taxes, insurances and private mortgage insurance if required. 38% of your gross income is for total debt (mortgage payment plus car payment, plus credit cards, etc). There are compensating factors that are considered by underwriters. Some examples are substantial amounts of liquid assets, credit scoring, etc. Some no cash out refinances automated systems will go as high as 58% for total debt.

What steps can be taken right now?

  • Pay off all the little bills possible. Sometimes you can get a consolidation loan and pay off several smaller accounts and reduce your debt to income ratio. By doing this you will have a lower payment and only one debt account, which is easier to monitor than several small accounts. It is also too easy to miss a payment when you have numerous payments to keep an eye on.
  • Budget your bills with aggressive payments to reduce debt.
  • Refrain from buying big ticket items, such as cars, furniture, appliances, or/and lease payments, that create new debt. Not only does it affect your credit scoring, but it may prevent you from actually getting a mortgage….. “bye bye” dream home or even your dreams.
  • However do not close accounts even if the account is a zero balance, as this will also reduce your credit scores.

Do not overdraft your bank account….

  • This could result in an actual denial of your application. Most lenders need to verify funds for a variety of reasons……..funds to close, liquid reserves required for the loan program, source and seasoning of funds…just name a few. Overdrafts represent poor payment habits to the lender.

Keep as much liquidity as possible…

  • As mentioned before loan programs require seasoned funds for liquid reserves and funds to close. Also larger liquid reserves may be a positive compensating factor that will off set another requirement.

Know the facts about your closing costs…

  • Closing costs are not just your down payment. There are many other charges associated with your loan. Some examples are lender fees, title fees, prepaid interest and escrow set ups to service your loan.
  • And don’t forget the liquid reserves (2-6 months of total monthly mortgage payment (PITI/PMI)) to qualify for the loan.
  • Effective January 1, 2010, the Good Faith Estimate was standardized. The Federal Government (HUD) wanted more transparency that would allow the consumer to shop with several different companies and be able to actually compare total costs. The fees on the new form are lumped together purely for comparison shopping. A link is provided so you can obtain detailed information.
  • www.hud.gov
  • RESPA (Real Estate Settlement Procedures Act) Home page
  • Good Faith Estimate Form (GFE)
  • HUD's 2010 Settlement Cost Booklet
  • pdf document | word document
  • Settlement Statement (HUD-1)
  • However, most brokers (lenders) will give you the actual itemized costs.

  • Following are some examples of closing costs:

    • Loan origination: This is a fee paid to the lender or a broker for originating the loan. (GFE #1)
    • Loan discount: This is a fee paid to the lender to buy down the interest rate. (GFE #2)
    • Underwriting fee: This is a fee paid to the lender for underwriting the loan file. (GFE #1)
    • Tax service fee: This is a fee paid to a third party company to monitor the property taxes to be paid and paid on the property. (GFE #3)
    • Flood Certification: This is a fee paid to a third party company to verify the flood zone on the property. (Property that is in a certain flood zones may require flood insurance.) This would be an additional monthly insurance payment fee. (GFE #3)
    • Mers: a small fee paid to a third party for accuracy for servicing the loan. www.mersinc.org (GFE #1)
    • Broker Processing Fee: This is a fee that the broker charges to process the loan. (GFE #1)
    • Broker Application: This is a fee for applying for the loan. Greene & Greene Mortgage Co. Inc. does not ever charge this fee. (GFE #1)
    • Broker Courier: This is a fee charged to cover courier fee associated with the transaction. (GFE #1)
    • Yield Spread Premium: This is cost of originating the loan for the lender (investor). It is paid to the Broker by the lender (investor) purely to originate the loan. This fee is not charge to the borrower, but will show up on the Settlement Statement (HUD 1). (GFE #1)
    • Adjusted Origination Charges: This represents all charges in GFE #1 less any credits to the borrower. Example: Yield Spread Premium
    • Interest: All mortgages begin on the first of the month and from then on the interest is paid in the arrears. For example, if you close on the 15th of November you will have 16 days of prepaid interest to balance your transaction to the first of December. Because your interest will now be paid in the arrears, your first payment will be due January 1st. (Another thing to know is your mortgage is due on the first of the month, late on the second day and can incur a late fee at some point thereafter….usually 14-15 days into the month. Mortgages continually paid after the first of the month are internally rated lower than those that are paid on the first of the month or prior.) Mortgages paid 30 days after the due date are reported to all reporting bureaus. This will seriously adversely affect your credit. (GFE #10)
    • Escrows: All fees that are paid with the mortgage payment and can include any and all of the following fees: (GFE #9)
      • Insurance: All mortgages require home owner’s insurance. Upon purchase one year’s premium is required and paid at closing. (GFE #11) To service the loan additional monthly premiums are collected and placed in the loan escrow account to pay the insurance premium when it is due the following year. (GFE #9)
      • Property taxes: Upon closing additional monthly taxes are collected and placed in the loan escrow account to pay the taxes when they are due. (GFE #9)
      • Flood insurance: Insurance required if a property lies in certain flood zones. Upon purchase a full year premium is paid. (GFE #11) Additional monthly premiums are collected and placed in the loan escrow account to pay the flood insurance premium when it is due. (GFE #9)
      • PMI: Private Mortgage Insurance is charged when the transaction is above 80% loan to value. This insurance protects the lender in case of default and only covers the portion over 80% loan to value. The fee is usually charged monthly and is collected with your mortgage payment. (GFE #3)
      • HOA Dues: A fee charged if the property is in a subdivision that has a Home Owner’s Association. Some fees are charged monthly and other are charged yearly. Sometimes they are escrowed but most of the time they are not. They are calculated in the monthly debt for qualification purposes.
    • Title fees: These are fees charged by a title or escrow company to close the transaction. In this situation the title company acts a third party and takes instructions from the lender, real estate companies, and all other parties that are part of the transaction.
      • Settlement (Closing) Fee: A fee charged by the title company to close the transaction. This is only fee in New Mexico that is negotiable, all other fees are not. All other fees are regulated by the NM Insurance Commissioner. (GFE #4)
      • Title Insurance: This is a fee paid to a title insurance underwriter to insure the title for a certain amount, usually the amount of the purchase price. It protects the property owner, the lender or both against any defects in the title.
        • Owner’s policy insures the property owner and the borrower. (GFE #5)
        • Lender’s policy insures the lender for the amount of the loan. (GFE #4)
      • Title Binder: This is a small fee paid to the title insurance company to research the title. (GFE #4)
      • Title Endorsements: There are many endorsements, but the two most common are mechanics and material men’s and environmental endorsements. (GFE #4)
        • Mechanics and material men are added as protection against any liens that may not have been recorded as liens of record. These are usually related to work completed or ordered on the property. Examples are plumbing or like work, appraisals, and/or surveys.
      • Environmental (ALTA) endorsement: This has to do with environmental issues that could affect the title. This is a very serious issue as anything (and every thing) environmental can follow the title. Most issues have to do with commercial property and usually very little to do with residential property. (GFE #4)
      • Document Fee: This is a fee that is charged to receive lender documents, download them, etc, and prepare them for signatures at closing. (GFE #4)
      • Courier Fee: A fee charged to overnight documents and/or payoff to third parties. (GFE #4)
      • Recording Fee: A fee paid to the recorder’s office for recording and returning documents to the title company. (On the 2010 GFE it is referred to as a Government Recording Charge). (GFE #7)
      • Survey: New Mexico is a survey state. Title insurance companies require survey protection for the policies. Most lenders require survey protection as well. Bottom line the consumer or the seller is responsible for this fee. (GFE #6)
      • Inspection fees: These are fees that are paid to third parties as a requirement for the transaction. These fees can be pest inspections, home warranty inspections, appraisal inspections, environmental inspections and many other types of inspections. (GFE #8)
      • Mortgage loan transactions usually include appraisal inspections. (GFE #3)