Mortgages:
For most people, a mortgage is the largest and often the most important financial transaction of their life. With that in mind, it makes sense that people should understand the basics of mortgages. This section will provide the reader with the basics of a mortgage transaction. The sequence of events in a mortgage transaction—purchase or refinance---goes like this:
- Application: a loan officer takes personal information such as social security number, dates of birth, employment and income information, and asset information and organizes it into Form 1003, a standard loan application form.
- Credit: a loan officer pulls a credit report on all borrowers. The credit report is typically a Tri-Merge, which is a credit report merging information from all three major credit bureaus—Transunion, Experian and Equifax.
- DIR(Debt to Income Ratio): The loan officer then integrates the credit report(liabilities) into the loan application, estimates an interest rate and term for the new loan and calculates the DIR, based on the total monthly obligations from the credit report plus the new loan payment including property tax and insurance as a percentage of the applicant’s total monthly income before tax. Typically, lenders want to see the DIR no higher than 45%, though this will vary.
- Pre-approval: Once the loan application is complete, the loan officer will submit it for automated underwriting and get an approval based on the information on the loan application.
- Initial Disclosures: By law, a mortgage company must either have the applicants sign the initial disclosures or turn down the loan within 72 hours of the first credit pull. The initial disclosures are a rough draft of the loan, disclosing rate, term and payments.
- Appraisal: If the loan application receives an approval, then the loan officer will order an appraisal of the property. The Appraiser will do an in-person, interior and exterior inspection of the property, take pictures, and will locate at least 3 comparable properties that have sold recently as close to the subject property as possible. The Appraiser will then generate a standard appraisal report that establishes the market value of the property.
- Title Work: While the appraisal is being done, the loan officer will have a local title company check the title to the property to verify ownership and to verify if there are any loans already secured by the property.
- Income/Asset Verification: While the appraisal and title work is being done, the loan officer will collect income and asset verification from the borrower. Income verification typically means copies of the most recent two paystubs and copies of the last 2 W2s. If the borrowers are self employed, the loan officer will need the last two years of tax returns, all schedules and forms. Asset verification means copies of all recent bank statements and retirement statements.
- Insurance: If the transaction is a purchase, the borrower will need to secure an insurance policy on the property covering it for at least the amount of the loan and listing the mortgage company as a loss payee.
- Final Approval: Once the appraisal and title work are done and once the loan officer has collected all of the income and asset verification, the entire package is submitted to an underwriter for final approval. This process usually takes at least 3 days, but can take much longer depending.
- Clear to Close: Once the underwriter has reviewed the loan package and has determined that there are no additional documents required, the loan will be cleared to close and the documents will be transmitted—emailed to the local closing company to be signed.
- Closing: Once the final loan documents are printed and ready at the title company, they are signed by the borrowers---in the case of a purchase, the deed and settlement statement are signed by the Sellers as well—and then sent back to the loan company for funding review.
- Funding: Once the loan company has received and reviewed the signed documents for accuracy, they will send a funding wire to the title company to fund the loan. The title company takes the funds and disburses according to the figures on the final settlement statement---appraiser’s fee, closing fee, loan company fee, funds to pay off debt in a refinance, or funds to pay the sellers their equity in a purchase.
