Whether you decide to purchase a home or refinance the one you’re in now, the mortgage process generally follows the same flow for all lenders. Because the lending industry is regulated, many of the documents you’ll see and the questions you’ll be asked should be the same regardless of the lender. Everything, down to the loan application (what those in the industry call a 1003), has a specific format.
So, what are the steps in obtaining a mortgage? Over the next few months, I’ll be taking you on a behind-the-scenes tour of what happens with all the information you provide and how it’s all transformed into what looks like a huge stack of papers you’ll sign at closing.
The first step, from a loan officer’s standpoint, is for a borrower to complete an application. Some lenders may offer a pre-qualification for homebuyers based on stated information or a “soft” credit pull that doesn’t include a detailed breakdown of the borrower’s credit history. Completing an application provides you some specific protections in the form of disclosures that are legally required to be sent to you. NOTE – If you’re purchasing a home and don’t have a specific property in mind, the lender hasn’t officially received an application until you provide a property address. Personally, I don’t issue pre-qualifications. But, when I work with a buyer, I take a complete application (or use TBD as the address of none is available), run credit, and collect income and asset documentation upfront. That way, I know everything about the buyer and can issue a pre-approval knowing that they should be able to qualify for the loan once they have officially applied. Once they do find that perfect home, I have a lot of the documentation already prepared and must complete only minimal updates to get the loan into underwriting.
“The 4 Cs” is an informal term to describe what’s evaluated when issuing a pre-approval.
• CREDIT – and not just the credit scores (although important) but the overall credit profile. Are there late payments, especially on mortgages? Are there student loans in deferment? How many credit inquires are there? Are there any auto loans or leases? Was the borrower’s mortgage in forbearance? Any flags for the SSN vs. name? (Sometimes the borrower may mistype on the application.) Any accounts that may be paid off soon? Everything in your credit report is gone over with a fine-tooth comb.
• CAPACITY – also known as debt-to-income ratio. How much do the borrowers make and can it be verified? A diligent lender should collect sufficient pay stubs and W2s to make this determination unless it can be verified by alternate means (more on that in a later column).
• CAPITAL – do the borrowers have enough funds for the transaction. For a refinance, it could be little to nothing needed, especially if doing a cash-out refinance. For a purchase, the funds required will be more substantial especially for borrowers making large down payments. Are the funds to be used verifiable? Your loan officer should collect sufficient bank statements to make this determination. If you have cash stuffed under your mattress that you plan to use to purchase a home, you’ll be surprised to find that most lenders won’t allow you to use it without proper sourcing. Cash is NOT king in mortgage lending. What rules are seasoned assets (those that have remained in an account for 60+ days). Get that money into your account and let it sit. Lenders want explanations for any large deposits that aren’t from payroll and any large withdrawals that aren’t paid toward debts reflected on your credit report.
• COLLATERAL – For a mortgage, the collateral is probably the property you’re purchasing. You are granting the lender a security interest in exchange for them loaning you funds to purchase the property. The lender will want to make sure the value of the property supports the transaction, and this is generally done via an appraisal. An appraisal is where a third party inspects the property and issues a determination of value. Under certain situations, an appraisal may not be required, however the lender will still need to determine the value of the property using an alternative valuation method (property tax records, etc.).
Whether you are purchasing or refinancing, the 4-Cs will be evaluated by the loan officer and underwriters who review your file. An experienced loan officer will look at all these elements and determine if any supporting information may be needed. Do not be surprised if, after providing all the initial documents, you are asked to provide follow-up information. This is quite common and just part of the process that hopefully will culminate with you at the closing table buying (or refinancing) the home of your dreams!