Lender Criteria and the Lending Process

In light of economic conditions, lenders consider borrower credit and property value. Property value is important because it factors into the loan-to-value ratio (LTVR) calculated by the lender. Let's say the buyer and seller agreed to a sales price of $90,000, but the property appraised at $100,000. What value would the lender use to calculate LTVR?

$90,000 Sale Price

Residential Loan Process When applying for a loan to purchase a property, consumers can expect to go through the following steps:

1. Loan Pre-qualitfication or Pre-approval 2. Loan Application 3. Loan Processing 4. Underwriting Analysis 5. Loan Approval/Disapproval

Loan Approval/Disapproval

A loan committee reviews the analysis and the recommendation from the underwriter to provide a final approval or disapproval. The approval may be conditional based on receipt of additional documentation from the consumer. If approved, the borrower will receive required disclosures and papers detailing the final terms of the loan. These must be approved and signed before closing and funding the loan. If denied, the lender must supply a written explanation outlining the reason the loan isn't approved.

Items that would prompt revision include:

An adjustable-rate loan changes to a fixed-rate loan (and vice versa). The amount of the down payment changes. The property appraisal necessitates additional funds. A credit score changes, resulting in changes to the interest rate, additional reserves being required, or an additional down payment being required. The lender is unable to verify certain income sources. The interest rate, or points required to maintain the interest rate, change.

After owning their home for five years, Charlie and Wendy have $125,000 in equity built up. How is equity calculated?

Appraised home value less the amount of any indebtedness against the home Home`s appraised value-loan debt=equity

Loan Pre-Qualification or Pre-Approval

Before prospective buyers go house hunting, they should first get an idea of how much house they can afford. There's no sense looking at $500,000 houses if they only qualify for $300,000, right? Buyers can take one of two approaches to do this: Loan Pre-qualification Loan Pre-approval

9/10 Loan 9:10 loan-to-value ratio

Down payment: 10% Loan: 90% $10,000 Down Payment $90,000 Loan $100,000 Total Value

50/50 Loan 1:2 Loan-to-value Ratio

Down payment: 50% Loan: 50%

Loan Origination Fee

Lenders often receive compensation by charging loan origination fees. If you heard that "ABC Bank charges a 1% loan origination fee," this would mean that ABC charged 1% of the loan upfront, which is paid by the borrower at closing. Loan origination fees are especially common with mortgage brokers. They may vary between 1% and 3%. Loan fees higher than 3% no longer qualify as qualified mortgages, so very few lenders would charge anything above 3%.

Loan-to-Value Ratio

Lenders use this to determine the loanable amount of a given property.

Example of Loan Origination Fee

Let's say that XYZ Lender charges a 2% loan origination fee. Kelly and Bob are buying a home that cost $250,000, and they are obtaining a 90% loan and paying the loan origination fee. Their loan origination fee could be calculated like this: $250,000-90%= $225,000 $225,000-2%= $4,500 Loan Origination Fee

LTVR

Loan to value ratio

Risks of Locking Rates

Lock-ins limit a borrower's ability to take advantage of falling interest rates. Lock-ins can have additional lender fees based on the length of the lock-in. The longer the time period, the higher the fees. Borrowers should factor in natural delays and select a lock-in period accordingly. Lock-ins are effective for a set period of time. If the lock expires before the loan closes, rates will be charged at the current market rate.

Benefits of Locking Rates

Lock-ins protect against rising interest rates and potentially higher payments. Lock-ins protect against a borrower initially qualifying for a loan and then being denied because higher interest rates caused higher payments, pushing the borrower over the debt limits. Lock-ins can be set up with a locked rate and locked points, locked rates and floating points, or floating rates and floating points, which gives the borrower the ability to take advantage of falling rates. Lock-in periods are usually 30-60 days, which gives the lender time to complete the loan processing. Some lenders offer longer lock-in periods, even up to 120 days.

Loan Application

Once an offer on a home is made and accepted, it's time for the buyer to work with the lender (or mortgage broker) to select a loan. The buyer completes an application and provides required supporting documentation to the lender.

Because all lenders are required to provide the exact same Loan Estimate form, borrowers are easily able to compare loan costs between different lenders.

Real estate professionals and borrowers should pay particular attention to negotiable items or those that borrowers can compare, such as origination fees and discount points, assumption and title insurance costs, as well as mortgage broker, application, notary, document preparation, and rate lock fees.

Which of these homeowners are upside down on their mortgage?

The Morrisons paid $280,000 for their home, using a loan of $250,000. They've paid $15,000 on their loan. The home currently appraises for $230,000.

Loan Estimate

The Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with a Loan Estimate of fees that will be due at closing. The Loan Estimate is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the loan for which they're applying. The Loan Estimate must be provided to consumers no later than three business days after they submit a loan application. If the borrowers don't inform the lender that they want to proceed with the loan, the estimate will expire after 10 business days. Savvy consumers will shop around and receive estimates from more than one lender in order to compare the offered terms. If any terms or conditions of the loan change prior to funding, a revised Loan Estimate must be provided to the consumer.

Loan Pre-approval

The buyer actually applies for a loan with a lender. The information about income, assets, debt, and money available for a down payment is accompanied by some supporting documentation. The buyer might also be required to pay an application fee at this point. The lender will verify the buyer-provided information, determine the buyer's ability to finance, and decide what that magic number might be. While there's no guarantee at this point that the buyer will receive final approval for the loan, a loan pre-approval is generally viewed more favorably than a pre-qualification because of the verification of buyer-provided information. It's a good way to show a seller that the buyer's offer is viable. However, until a property has been identified, or the buyer's financial condition is such that the lender can easily pre-approve a loan, pre-approval is rare.

Loan Pre-qualification

The buyer provides information to a lender about income, assets, debt, and how much money is available for a down payment. The lender uses these numbers to provide the buyer with a pre-qualification letter that estimates the amount for which the buyer might qualify but doesn't verify any of the information. This letter helps the buyer understand what price range to shop in, and there's usually no cost to the buyer.

Loan Processing

The loan processor verifies that the correct information and documentation have been received based on the loan requirements. This will typically include documents related to the buyer, such as bank statements, pay stubs, and W-2 forms, as well as information related to the property, such as the appraisal and title report. This part of the process may take from one to several weeks, but a lot depends on the lender, the loan, the buyer's financial circumstances, and the buyer's prompt attention to requests for additional documents.

Underwriting Analysis

When all of the required paperwork, referred to as the loan package, is complete and validated, the loan application goes to the underwriter for analysis. Here, the borrower's ability to repay the loan, the value of the property, the type of property, and the loan-to-value ratio are analyzed. The underwriter then makes a recommendation regarding whether the loan should be approved or denied. A typical timeframe for this part of the process is three to five days.

Each homeowner's equity will be

different, which is something you should be aware of when working with sellers. For instance, a homeowner who's taken out a second loan and then sells the home before the second loan is paid off may feel that the equity (difference between sales price and amount owed) is abysmal. But in this case, much of the equity had already been received.

A point

is a percentage of the loan amount that lenders charge to borrowers. Points include origination fees and discount points.

A lock-in, rate-lock, or rate commitment

is a tool by which a lender will commit to a specific rate and certain points and hold that commitment for a set period of time. If the loan closes before the lock expires, the borrower will get that rate on their loan. It doesn't matter if rates rise during that time; the borrower is protected.

Interest rates are based on

market factors at that given moment but are subject to change at any time

Inflation

means the government has to borrow to meet its current debt load, businesses have to borrow more, and buyers have to borrow more to pay their grocery bill and other expenses. Youll see higher rates and fewer buyers

Equity

the amount of value a homeowner has in a property after any debts(such as a loan) are taken into account. A homeowner may have a certain amount of equity in a property from the date of purchase, depending on the appraised property value and the down payment amount. Also, every time a homeowner makes a mortgage payment, that payment not only pays down the loan balance (or principal), it also increases the homeowner's equity. The principal amount in each payment promotes equity buildup.

Value

the lesser of either the appraised value or the sales price