How It Works, Loan Application

Government Shutdown

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Hello all,

I disappeared for a while, and it shows.  It’s October already!  Work took off and I lost sight of my blog. I’m 12 days late on this post but I thought I would share some of the issues we are seeing with the shutdown:

The IRS is working with only 9% staff. This effects the ability for us to pull tax transcripts. 

Since 2009, Fannie Mae ‘highly recommended’ that lenders pull transcripts from the IRS prior to closing a loan.

What’s a transcript? 

After you file your taxes the IRS turns your income information into an electronic record which can be requested with the borrower-signed form, 4506-T.

Why do we pull a transcript? 

When you complete a loan application, you typically give your loan originator a copy of your tax return by which she calculates your income for qualifying.  It would be possible to give them a fake, unfilled tax return with ’embellished’ income.  To prevent such fraud, we pull the IRS record and compare it with the return you provided.

It’s not required to do this, yet we know Fannie Mae will do it if they audit that loan. To avoid any issues, most lenders have adopted the policy of ordering and reviewing tax transcripts.

http://www.ctne.ws/archives/266

Several days into the shutdown our institution made a business decision to close loans without these transcripts as did a number of other investors.  There are some; however, that refuse to purchase a loan without transcripts and that’s their choice.

USDA is closed. 

The U.S. Department of Agriculture insures loans through their Rural Development program. These loans are currently suspended.

Why?

USDA issues a ‘conditional commitment’ once they receive certain pieces of information.  With no one to issue a conditional commitment, loans are unable to close.

Verification of Employment 

We’ve seen several instances were we have been unable to obtain a verification of employment for government workers. In come cases we can get around it.  There have been instances were getting this information was painfully slow and the closing was delayed.

Business as usual:

For the most part, we have been conducting business as usual with very few delays.  For those of you affected, as frustrating as it is, don’t blame your lender or financial institution.  We are as annoyed as you are with the situation. We are doing our best to work around the issues.

Photo credit: Nick Papakyriazis via photopin cc

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Loan Application, Your Mortgage File

To Lock or Not To Lock . . .perhaps float?

Undoubtedly, the interest rate is the single most important factor associated with shopping for a mortgage.  Even more important than closing costs, the interest rate can cost you hundreds of thousands of dollars over the term of the loan.  It will also determines how much your monthly payment will be.

So, it’s important to understand the terminology associated with interest rates.  To start with, asking for an interest rate quote from your bank does not guarantee you that rate.  Rates change daily, if not hourly because they are subject to the jitters of the broader economy. Also, there are no guarantees.

Rates are not fixed by your lender!

Most quotes are generic and are rates published by the banks marketing department so it stands to reason it will be the lowest rate they offer. In order to get an accurate rate, you will have to formally apply for a mortgage.

Why?

Rates are subject to the factors of your personal financial situation such as credit score, the value of your home, your loan term and many other factors.  Your lender will be unable to determine the rate until you give them those facts.

Just because you’ve taken your application and given the lender your financial information, you still might not have a commitment from them.

Locking in a rate

Getting a commitment from your lender means you must ‘lock’ in your rate. Locking in your rate has broad implications to your bank and so they are cautious until they have a good idea that you can and will go through with the loan.

When you agree to lock in a rate you are commonly agreeing to a few other things.

  • The length of time the rate is locked for
  • Any discount points involved.

The topic of discount points is one for another blog.  In short, a discount point is an additional charge (above the origination charge) associated with securing that rate.

Beware! Your loan is not locked indefinitely . 

As I’ve said above, rates are chaining constantly so your lender is unable to lock in your rate indefinitely. Typically, your rate is locked in for 30, 45, or 60 days.  They can be locked in for other periods but these are standard. Make sure you know how long your rate is locked for.  If you do not close on your loan before the rate expires, you may be subject to a higher rate or additional charges. 

Locking is not the only option.  If you have a higher appetite for risk, you can ‘float’ your rate. Floating means your rate is subject to change with the financial markets. You are ultimately responsible in this scenario (although a good loan officer will help you determine when it’s best to lock). If rates decrease, you will be able to take advantage of the lower rate.  If rates increase, you may end up with a higher rate. Consult with your loan officer about the best strategy.

With a better understand of the rate locking process, you will be better able to ensure you get the rate you want. This knowledge will enable you to make the best choice for you.

Good luck!

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Loan Application, Your Mortgage File

FHA, VA, Conventional . . .oh my!

There are many options when it comes to a mortgage. They can be confusing so I’m going to clarify them for you. Let’s start with an important concept. When a bank grants a loan there is a chance they will loose a great deal of money which is known as risk (if you want to know more about this, let me know and I’ll explain the losses incurred by foreclosures).  The majority of us are wary of taking risks. We insure our automobiles, health, life and more to avoid loosing thousands of dollars in case of an event. Banks do the same thing.

We choose large insurance companies like Progressive, American Family, etc — which are private companies– to do the job for us. Or, if your situation allows, there are government insurance programs available. New York 137

Banks insure loans in the same manner. They can employ a private company (MGIC, Radian and Genworth to name a few). Or, they can have the government do it (FHA, VA, and USDA).

Like your insurance company, there are rules that must be followed in order for these companies (or the government) to insure your mortgage. Some are stringent but offer better terms. Others are lenient but the terms more expensive.

The take away? FHA, VA and USDA  are all government programs that insure your mortgage if you can comply with the rules.  Conventional loans are typically privately insured or even uninsured (depending on your loan profile).

What determines which product you take? You should discuss your credit profile in length with your loan officer. He/she knows the benefit of each program and will be able to guide you into the right program. So remember, each type of program has different rules. Contrary to what you might think, it is not your lender just making things up as they go. I promise.

 

And for those interested, I took this tiger picture on my trip to NYC last spring.  Can anyone guess where it’s at?

 

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Loan Application

Changes To Your Financial Profile

The mortgage process can often take up to thirty days or more. It’s difficult to keep your life on hold while the process is being completed. As such, you are likely to make changes that affect your financial profile. You might need to buy a new car, renew a lease, open a credit card for unexpected expenses, start a new job and so on. As routine and casual as it is, you must remember to keep your loan officer or processor in the loop regarding any change. In fact, it would be wise to seek their counsel prior to making these changes. 

change blog

The reason is obvious to me because I’ve been in the industry for years. The slightest change in your financial profile can cause a great disturbance to your loan approval, or cause further delay because each change must be documented. Please try to remember that the mortgage company has regulations and guidelines that require them to document many facets of your financial profile.  Exclusion of these changes constitutes a violation of these regulations.

For example, I worked with a borrower for over 40 days to get her loan approved. As required by the regulations, I called her employer ten days prior to her close date only to discover that she had quit her job. Upon talking with her, she informed me that she had started a new job but had been there less than a month, which is what’s typically required. This caused us to delay the closing several more weeks until I could get a paycheck stub that complied with my guidelines.
So remember, any change, no matter how small or casual should be communicated with your lender first so they can explain the repercussions and offer advice.

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Loan Application

What Does Your Lender See?

Professionals in the mortgage industry rely heavily on information that you provide. Although burdensome,  providing accurate and complete information will prevent unnecessary delays. Despite any previous relationship with your lender, don’t assume they have what they need. The mortgage industry follows a different set of rules and may require a deeper look at your financial profile than had you applied for an auto or credit card loan.

Makes sense? A mortgage loan can be hundreds of times larger than your credit card. The larger the loan, the more your lender will inquire.

The purpose of a mortgage application is to gather data which will be used to assess the probability you will repay the loan – or, the level of risk you pose to the lender. If information is missing the loan officer or processor must follow up and request it from you.

Pretend you are painting a financial picture for your lender. An abstract and undefined scene will raise questions and cause hesitation while a realistic portrait will allow the lender to clearly see the necessary details.

As you paint, remember that each detail of your loan application must be validated through documentation. They won’t believe it unless they see it!

Good luck!

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