The Mortgage Loan Package and Application

In working with a client, your role as a banker-broker is to help walk the individual through the mortgage lending process to ensure that they a) understand all that is required and b) feel confident in the decisions they make along the way.

A. Credit Application

As a banker-broker, the five primary factors used to qualify a client for a mortgage loan include:

a) Income.

b) Debts.

c) Employment history.

d) Credit history.

e) Value of desired property.

These five factors serve as the basis for determining the likelihood that an applicant will be approved for a mortgage and the rate at which the loan will be offered.

At multiple stages during the process, the potential borrower's application will undergo an initial evaluation, as well as, a re-evaluation.

In no small part, bankers-brokers will base the potential borrower's credit upon what is known as the FICO Score, an acronym for the Fair Isaac Credit Organization, which essentially is a consumer's credit score used to determine the likelihood by which they will pay their bills. It pares down a borrower's credit history into a single number.

B. Debt Ratio

When evaluating the applicant's credit, it is important that you, as the banker-broker, understand the concept of debt ratio. Essentially, debt ratio is the percentage of personal debt one has in contrast with their level of income. Within the ideal scenario, the rate will be less than one. Anytime the rate is less than one, the individual should have sufficient funds to pay both their debt while not foregoing making regular payments on utilities, food, savings, and entertainment.

Those with a ratio of higher than one tend to fall short when paying fixed debt payments let alone when also attempting to cover regularly occurring expenses, for instance, utilities.

Ideally, lenders seek out debt ratios of approximately 1:3. Because this figure signifies the individual has approximately 30% more money than is called for to cover debts, lenders view this to be a safe margin as the borrower is unlikely to dip into their mortgage money to pay bills.

C. Pre-Qualification

Within the mortgage industry, there are two preliminary stages of the qualification process, pre-qualification and pre-approval.

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While pre-qualification is an informal way for a borrower to get an estimate of the amount they may be able to borrow, it guarantees neither a loan nor a loan amount, or rate.

In order to pre-qualify an individual for a mortgage loan, the banker-broker will evaluate the individual based upon their income, debt, credit, employment, and asset information. Note: In some instances, the lender may request permission to run the applicant's credit history.

Under some circumstances, potential borrowers can get pre-qualified over the phone simply by speaking with a lender and relaying their income, long term debts ,and the amount that they are able to apply towards the down payment. Lenders have the ability to pre-qualify potential borrowers at a specific interest rate for a pre-determined term.

Note: The timeframes over which lenders have the ability to spread out payments includes: 30, 15 and 10 year terms.

Note: Online mortgage websites also offer pre-qualifying services conducted solely through the Internet.

With respect to pre-qualifications, simply because one has requested an estimate, one is not obligated to take out the loan. Rather, the information provided is viewed to be unverified and, thus, offers only a likelihood of being able to garner the funds being requested.

The overriding idea with pre-qualification is to provide the potential borrower with a sense of the amount to which they may have access (thus, how much house they may be able to purchase), the rate they will need to pay to borrow such funds; and the estimated time frame it will take to repay the loan.

D. Pre-Approval

In contrast with the pre-qualification step, which merely offers a possible lending scenario, pre-approval provides a funding guarantee.

Because a pre-approval is a lender's firm commitment to provide a specified dollar amount toward the purchase of property, the process of acquiring such steadfast certainty is significantly more labor intensive (although much more conclusive) than the pre-qualification step.

Within the pre-approval step, the lender wants legal paperwork pertaining to an individual's earnings, debts, and credit history, in short, a full overview of their financial history. All in all, a potential borrower will be expected to document their income, length of employment, and the source of the down payment.

As part of the pre-approval process, a lender will invariably order a credit report on the individual (from one of the top three credit agencies, Equifax, Experian, and/or Trans Union).

While some borrowers, shop first for a property then apply for pre-approval others opt to first attempt to get pre-approved for a home mortgage and then, based upon the amount a lender may be willing to pledge, shop for a property within the neighborhood of the specified dollar amount.

Upon locating a property of interest, pre-approval enables a potential home buyer to demonstrate their level of commitment to the seller. In dealing with a seller, pre-approval status gives buyers an edge over those who have not been pre-approved for a mortgage.

More than just certifying a buyer's intent to make a purchase, pre-approval conveys the buyer's commitment and wherewithal to go through with the sale and, thus, equips them with additional negotiating power.

With both pre-qualifications and pre-approvals, bankers-brokers can incorporate specific interest rates and terms (the amount of time over which the mortgage payments will be spread, for instance 10, 15 or 30 years) into the context of the agreement. Yet, whereas with pre-qualifications, the rates and terms are tentative, with pre-approvals they are finalized components of the mortgage loan.

E. Making an Offer

Once the borrower is pre-approved for a loan, they can go out house shopping with a very clear sense of the amount of funds at their disposal. Upon finding the house of their dreams, they can prepare to make the seller an offer. Typically, it is suggested that prior to making an offer, the buyer consult with someone knowledgeable in real estate about how much to offer.

Because many, many considerations abound, the state of the real estate market, location, condition and size of the house, length of time the house has been on the market, and a comfort level in terms of the amounts that the buyer is willing to borrow, and others. It is important for the borrower to be clear as to his intentions when putting forth the amount they are willing to pay for the property.

After making the offer, should the seller reject the offer, through a series of ongoing negotiations, the buyer can elect either to increase the offer or withdrawal from consideration.

Once an offer is accepted, to inform the lender of the property's value, the buyer (borrower) will need to have an appraisal conducted. In a formalized letter, the evaluator provides their findings to the prospective lender.

F. Establishing Mortgage and Down Payment Amounts

Upon learning the value of the property, it is your responsibility as the banker-broker to determine the actual mortgage principal amount (traditionally not more than 80% of the property value). A down payment is then required to cover the 20% gap between the value of the property and the amount of the mortgage loan.

Typically, the borrower needs to be able to come up with the down payment in cash prior to finalizing the mortgage loan.

It is important as a banker-broker to verify the source of the borrower's down payment. Meaning, beyond simply receiving the funds from the borrower, it is telling to learn the origination of the funds, such as a gift or from savings.

The reasoning is that if the borrower can document that the funds come from their personal savings, then it indicates their strength as a borrower. Plus, if they can verify that there are additional funds in the account (reserves), then it is a positive reflection on their ability to make future payments toward the mortgage loan.^[v]

G. Floating and Locked Interest Rates

When attempting to determine the associative interest rate on the loan, the banker-broker will base such figures upon a) whether the loan is a fixed rate or an adjustable rate mortgage and b) the current state of the financial market.

If the borrower has opted or a fixed rate mortgage then his rates will be what are known as fixed or locked-in whereas with an adjustable rate mortgage his rates will be floating.

Floating as akin to adjustable rate mortgages indicates that the corresponding interest rate is not locked, but rather its rate tends to fluctuate based upon the movements of the financial markets. Hence, when a borrower goes to take out a mortgage loan, in order to ascertain the respective charges, the banker-broker has the ability to lock-in the rate during the processing stage.

Essentially, the guarantee of a locked rate safeguards the borrower from rising interest rates during the period of time from which the borrower is approved for a mortgage loan and to the time when their loan becomes finalized.

Lock periods may extend anywhere from 10 days to six months. Applicants can often pay additional fees to retain the locked-in interest rate for slightly longer periods of time.

Note: The concept of locked-in rates is only applicable to the period during the processing of the mortgage loan. It does not continue once the loan has been made available to the borrower. A written agreement between the lender and borrower for a specified period of time in which the lender will hold a specific interest rate, origination, and/or discount point(s).