• There really is no mystery to how mortgages are done. Your prospective lender has to go through a number of steps to make sure that your loan qualifies for funding. We will in this section, discuss the three parts of getting your loan approved for funding and either buying or refinancing your home.

  • The Three C's: Credit, Capacity (Income/Employment), Collateral (Property/House)

    Every loan that is done now in days, MUST in some form or fashion meet the underwriting guidelines set forth by the lender in regards to the "Three C's" mentioned above. Credit: This is obvious. This is the credit worthiness of the borrower(s). Capacity: This is the borrower(s) ability to repay the loan. Collateral: This is the residence that the borrower is getting the loan on AND the down payment that the borrower is providing to purchase the property.

    Credit

    Every lender has certain minimum credit standards that a borrower must meet in order to qualify for a loan program. A lender may have multiple loan programs that require different credit requirements to qualify for the loan. Usually, but not always, a lender will obtain a credit report of the borrower(s) from the three major credit bureaus: Experian, Transunion and Equifax. These are put into a combined credit report called a merged credit report. There may be discrepancies between the reports and these are usually resolved by the company that collected the three reports.

    When the three reports are collected a credit score is usually generated for each borrower unless the borrower has limited credit history and a score cannot be obtained. This score is determined by a number of factors, including, but not limited to: Payment history, debt to credit ratio, number of inquiries in the last 30 to 60 days, collection accounts, etc. A minimum score, usually determined by the lowest middle score, has to be met in order for the borrower to qualify for the loan. Your loan officer may be able to help you to raise your score to qualify by removing erroneous or old information from one or more of the reports.

    The credit report however is not the only part of the credit leg of the approval process. The borrower must also prove that he/she has had a good prior mortgage/rent history if that is not showing on the report. The lender may obtain a verfication of rent from the borrower's landlord or management company.  

    Capacity

    A borrower has to prove that he/she can repay the loan in a timely fashion without much stress on the family budget. The borrower must show that his/her employment or other source of income is not diminishing and is stable. Usually a two year history of regular employment in the same field is required for most loans. A borrower usually does this by providing W-2's for the last two years and paystubs for the last 30 days. If the borrower is self-employed a two year history of the business tax returns along with other documentation would be necessary to show that the business is an ongoing enterprise and there is enough income to service the loan, plus any expenses the business may incur.

    Collateral

    The lender has to know what kind of real estate the loan is being made on. There are several reports that are generated by the lender to determine if the lender is willing to make the loan on the property. The first, and most important, is the appraisal. This report is done by a certified and licensed professional who is chosen by an appraisal management company hired by the lender who has verified the appraiser's qualifications and maintains the report. This report determines the value of the property usually using two methods: replacement cost and the sales comparasion method, with the sales comparasion method being given the most weight. The appraiser also takes pictures of the property, inside and out, and notes any deficiencies in the property itself which may hamper the resale of the property. The appraiser may also note serveral things about the market, such as: Is it dominated by foreclosures/short sales? Is it slow moving? Is it appreciating/depreciating? All of this is wrapped up into a document that is about 30 pages in length and is delivered to both you and the lender.

    The lender will also obtain a title report on the property. This shows the lender who currently owns the property and in what form or fashion.  The report also contains a history of the ownership and transactions on it such as loans, liens, easements, etc. This helps the lender determine that they are making the loan on the right property as it also contains a legal description of the property, not the property address of the residence. The report is issued in conjunction with the issuance of title insurance when the transaction closes, Title insurance will insure both the lender and the borrower against any liens and easements that were not disclosed prior to closing the transaction. It does not insure against any liens that may occur after the transaction closes, such as tax liens, etc.

    A lender also obtains a flood certification on the property to determine if the property is located in a flood zone and if it is they may require the issuance of flood insurance on the property.