Which lender should I choose?

Shopping for a mortgage lender can be a confusing, nerve racking, and difficult process.  Basing your decision on fees or interest rate will often times cost you at the closing table resulting in additional dollars, lost time, or the loss of a home you had your heart set on.

Be wary as you step into the shell game of interest rate quotes.  Some lenders will quote a lower than market rate in an effort to obtain a loan application from you.  These loan officers know that once you submit a loan application and the paper work it will be more difficult to switch mid stream.  Look for honesty and transparency when it comes to deciding on a loan officer.

Mortgage interest rates are like stocks.  Both are volatile and subject to change at any moment.  Additionally there is a difference between a quote and a rate lock.  A quote is typically provided while shopping for a lender and good for that moment in time.  Locking in the rate happens after loan application.  Three things are needed to accurately quote and lock an interest rate.

1. Complete loan application - Your interest rate is determined by a myriad of variables like your credit score, down payment, loan amount, type of property, purchase or refinance, and on and on and on.  Accurate quotes and locking in rates are impossible with out a complete loan application.

2. Property address - Mortgage interest rate locks are tied to the property.  An executed earnest money contract is required for purchase transactions.

3. Known closing date - An executed earnest money contract with an estimated closing date will do for a purchase.  A refinance in most instances will require 30 to 45 days to close and fund.

With out these three items you are getting a skewed or best guess quote.  Financing a home is the biggest financial decision most people make.  When you need surgery do you go to the cheapest surgeon?  An honest and competent mortgage professional will guide you to the closing table with the least amount of pain.

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1. Prequalifying - The most important step in the process.  It is in your best interest, prior to shopping for a new home, to talk to a loan officer.  The guidelines for the mortgage industry are constantly changing and what was an approveable loan last month might not be this month.  The prequalifying process is an informal discussion which will encompass your employment, income, assets, debts, and credit to make an initial determination about your financing options. For more information about prequalifying see my post “What is the Mortgage Prequalifying Process?”.

2. Loan Application - The formal step of the process.  Your loan officer will ask for documentation to support the information provided during the prequalifying step.  He/she will ask for two years tax returns w-2’s and 1099’s, a recent paycheck stub, and most recent bank/investment/retirement statements.  It is from these documents that a loan application is completed and the ideal loan program is determined.

3. Loan Processing - The verification step of the process. After the loan application is completed your loan file is handed off to a loan processor.  It is the job of the loan processor to verifiy the information provided in the loan application, gather additional documents to meet investor guidelines, and prepare the file for submission to underwriting. The processor coordinates the underwriting and closing process, collects documents needed from the title company, along with the buyers insurance company to obtain home owners insurance information.  The loan officer leads the show.  The processor is the stage manager making sure everything comes together on time.

4. Loan Underwriting - The validation step of the process.  When the file is completely processed it proceeds to underwriting.  The underwriter reviews the loan file to ensure that it meets the guidelines of the investor and will approve, suspend or deny the loan.  The underwriter typically requests additional information (called conditions) to support an approval.  If the loan file is suspended the underwriter will tell us what other information will be needed to get an approval.  If the loan file is declined the underwriter will tell us what factors caused the denial (ideally the loan officer caught these factors at prequalification).  After underwriting the file goes back to the processor and if the loan is approved it is on to closing and funding.

5. Loan Closing and Funding - The money and keys step of the process.  With a clear approval your loan file is ready to move to the closing department. The closing department for the mortgage company works with the title company to verify that all fees and other loan costs are accurately reflected on a HUD1 settlement statement.  When a final settlement statement is determined loan documents will be released to the title company where you will go to close your purchase.  The title company acts as a disinterested third party ensuring the closing goes according to the sales contract and the loan closing instructions from the mortgage company.  The title company will also collect and distribute all funds.  Prior to showing up for closing you will want to obtain a cashiers check for the amount shown as “cash from borrower” on page one of the HUD1 settlement statement.  Make sure to bring your check book and your drivers license as well.  Once you and the seller have signed all of the closing documents your loan funds, money is distributed by the title company, and you get the keys to your new home.

Under the big top of mortgage financing there is a lot going on.  With a good loan officer as the ring leader a complicated process will become an enjoyable show.

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1. How much of a mortgage payment can you comfortably afford to make every month? A monthly mortgage payment is comprised of PITI, or the principal and interest payment on the amount borrowed along with monthly property taxes, monthly home owners insurance payment and depending on down payment percent a mortgage insurance premium.

2. Who do you work for, how long you have been there, your position, how much and how you get paid? A recent pay check stub will help with this information.  For income qualifying purposes mortgage investors use your gross monthly income which is what you earn prior to taxes and everything else being deducted.  Take your gross monthly earnings, divide it by 41%  and you get the amount of debt including the new house payment (PITI) you are allowed to have for most mortgage investor guidelines.  Two years of average income (documented by tax returns) will be used if you are self employed, work as contract labor, earn commission or receive large bonuses (you absolutely need to talk to a loan officer if this is your case).

3. How much cash do you have available to close on the purchase of a home? Cash to close is made up of three variables the down payment, closing costs, and prepaid items.  Down payment is the cash investment required for a mortgage.  Closing costs are the actual costs to close the loan.  Prepaid items are costs that set up the loan for property tax/insurance reserves and eventual payment, daily interest from the closing date to the end of the month for the mortgage, along with a one year home owners insurance premium due at closing.  Do you have any retirement accounts or brokerage accounts?  Some programs allow the use of a 401K loan as a down payment to buy a home.

4. How much debt are you obligated to pay on a monthly basis? You will need to know the monthly amount owed for each fixed payment like car notes, child support, student loans and personal loans.  You will also need to know the minimum monthly payment due on credit card or revolving debt.  Your monthly credit obligations plus the mortgage payment (PITI) are divided by your gross monthly income to determine your qualifying ratios, remember 41% is generally the maximum guideline.

5. Would you describe your credit rating as excellent, good, fair, poor? If it is fair or poor what caused it?  Everyones idea of credit rating is different and a good loan officer can help you understand your rating prior to pulling a credit report.

When I think about the mortgage prequalifying process one word comes to mind “honor”.  Prequalifying is about honoring the client where they are right now regardless of their current circumstances.  Excellent credit or poor credit, lots of cash available for down payment or limited funds it does not matter.  Everyone can achieve the dream of home ownership it is a simple function of timing and preparation.  The process of prequalifying for a mortgage leads to two positive options. Yes, you can buy a home today or you need a game plan so you can buy tomorrow.

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