Loan Process

The initial step in securing a loan involves finding out the amount you are eligible to borrow. Specifically for home purchases, it's wise to figure out your affordable price range prior to beginning your property search. By answering a few simple questions, we can calculate your buying power, based on standard lender guidelines.

You may also elect to get pre-approved for a loan. This process requires verification of your income, credit, assets and liabilities.  It is recommended that you get pre-approved before you start looking for your new house in order to: 

-Focus your search on properties that fall within your budget.

-Strengthen your position in negotiations with sellers, as they are aware that your financing is already secured.

-Expedite the closing process of your loan.

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Here are some other topics that play a role in determining how much you can borrow:

Loan-to-Value (LTV) Ratio

The LTV ratio is a measure of the loan amount compared to the value of the property you intend to purchase, expressed as a percentage. It's calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower, and then multiplying by 100 to get a percentage.

A lower LTV ratio is viewed favorably by lenders as it indicates a larger down payment and less risk. Typically, lenders prefer an LTV ratio of 80% or lower, meaning the borrower should make a down payment of at least 20% of the property's value. A higher LTV ratio might require private mortgage insurance (PMI) for conventional loans, adding to the monthly mortgage payment until the LTV ratio falls below 80%. Special loan programs, like FHA loans, might allow higher LTV ratios due to government backing.

Debt-to-Income (DTI) Ratios

The DTI ratio is a measure of your monthly debt payments compared to your gross monthly income, expressed as a percentage. It helps lenders evaluate your ability to manage monthly payments and repay debts.

-Front-End DTI: This ratio considers only your housing-related expenses (e.g., mortgage payment, property taxes, insurance) divided by your gross monthly income.

-Back-End DTI: This includes all debt obligations (housing expenses, car loans, credit card payments, etc.) divided by your gross monthly income.

Lenders typically look for a Back-End DTI ratio of 43% or lower, though some loan programs may allow higher ratios. A lower DTI ratio indicates a better balance between debt and income, suggesting that you are more likely to manage monthly mortgage payments effectively.

FICO™ Credit Score

Your FICO score is one of the first things lenders look at when determining whether to approve you for a mortgage. A higher score indicates you're a lower-risk borrower, which can make it easier to get approved. The interest rate offered on a mortgage often depends on your FICO score. Borrowers with higher scores typically qualify for lower interest rates, which can significantly reduce the amount of interest paid over the life of the loan. Beyond just affecting your interest rates, your FICO score can influence other loan terms, such as the amount of down payment required, the loan amount, and whether you'll need to pay for private mortgage insurance (PMI).

Down Payment

The down payment on a home mortgage is a crucial component of the home buying process, serving as the initial upfront portion of the purchase price that the buyer pays out of pocket, as opposed to financing through a mortgage. The size of the down payment can significantly impact the terms of the mortgage, including the interest rate, monthly payment amounts, and whether or not private mortgage insurance (PMI) is required.

Selecting the right loan program is a pivotal decision in the home mortgage process, as it directly impacts your financial situation both immediately and over the long term. With a variety of mortgage products available, choosing the one that best fits your financial goals, lifestyle, and risk tolerance is crucial. Here’s a guide to help you navigate the selection process:

1. Assess Your Financial Situation

Down Payment: Consider how much you can afford to put down. A larger down payment can reduce your monthly payments and eliminate the need for Private Mortgage Insurance (PMI), but not everyone has the resources to make a large upfront payment.Income

Stability: Evaluate your job security and income stability. If you expect your income to rise, you might be more comfortable with a loan that has lower initial payments but increases over time.

Credit score: Your credit score significantly affects your loan options and interest rates. A higher score can unlock lower rates and more favorable terms.

2. Understand Different Loan Types

Fixed-Rate Mortgages (FRMs): Offer a stable interest rate and monthly payment for the life of the loan. Ideal for those planning to stay in their home long-term.

Adjustable-Rate Mortgages (ARMs): Feature an interest rate that adjusts over time based on market conditions. They typically start with a lower rate than FRMs, making them attractive to those planning to sell or refinance within a few years.

Government-Insured Loans: Including FHA, VA, and USDA loans, these can be beneficial for those who qualify, offering perks like low to no down payments and easier qualification standards.

Jumbo Loans: Necessary for homes that exceed the conforming loan limits. They come with stricter qualification criteria but are essential for financing high-value properties.

3. Consider Loan Features

Interest Rate Type: Decide between a fixed interest rate, which offers predictability, and an adjustable rate, which might start lower but change over time.

Loan Term: Shorter terms (e.g., 15 years) typically have higher monthly payments but lower total interest costs compared to longer terms (e.g., 30 years).

Special Features: Some loans come with features like interest-only periods or the option to convert from an adjustable rate to a fixed rate.

4. Evaluate Your Future Plans

Homeownership Duration: If you plan to stay in your home for many years, a fixed-rate mortgage might be more suitable. If you plan to move or refinance in a few years, an ARM could be more cost-effective.

Income Expectations: If you anticipate higher earnings in the future, you might be more comfortable with a loan that has the potential for payment increases, like an ARM or a graduated payment mortgage.

Borrowers are required to pay for mortgage insurance, which protects the lender in case of default. This includes an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) that's typically divided into 12 monthly payments. MIP is required for all FHA loans, regardless of down payment size or loan term.

Fill out the mortgage application form, often referred to as a Uniform Residential Loan Application or a 1003 form. This form requires detailed information about your finances, employment, the property being purchased, and the type of mortgage you're applying for.

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Although lenders conform to standards set by government agencies, loan approval guidelines vary depending on the terms of each loan. In general, approval is based on two factors:

-Your ability and willingness to repay the loan

-The value of the property.

Once we receive your loan application we will start the loan approval process. Your loan processor will verify all of the information you have provided. If any issues or discrepancies are found, either your loan officer or processor will troubleshoot to straighten them out.  This information includes:

Income/Employment Check

Is your income sufficient to cover monthly payments?  Industry guidelines are used to evaluate your income and debts. 

Credit Check

What is your ability to repay debts?  Your credit report is reviewed to determine the type and terms of previous debts. Any lapses or delays in payment are considered and must be explained. 

Asset Evaluation

Do you have the funds necessary to make your down payment and pay any closing costs? 

Property Appraisal

Is there sufficient value in the property you have selected? The property is appraised to determine market value. Location and zoning play a part in the evaluation. 

Other Documentation

Additional documentation might be required before making a final determination regarding your loan approval.

In order to improve your chances of being approved for a loan:

1. Be thorough in filling out your loan application.

2. Respond promptly to requests for additional documentation. This is especially important if your rate is locked or if your loan is to close by a certain date.

3. Do not move money from or into your bank accounts without a paper trail. If you are receiving money from your friends, family or other relatives, you may need to prepare a gift letter.

4. Do not make any major purchases until your loan is closed.  Increasing debt at this point may have an adverse affect on your loan application.

5. Do not travel around your loan's closing date. If you plan to be out of town, consider signing a Power of Attorney.

Once your loan is approved, it is time to sign the final loan documents. Review the documents, ensuring the loan details such as interest rate and loan terms match what you were promised, prior to signing. Additionally, make sure your name and address on the loan documents are correct. Typically, you will sign the loan documents in the presence of a notary public.

Expect to pay any fees associated with obtaining your mortgage and transferring property ownership at your closing appointment. If required, bring a cashiers check for your closing costs and down payment. Normally personal checks are not acceptable.

Your loan will typically close once your loan documents are signed.