How Does The Underwriter Look
at My Loan?
What is Title Insurance?
What is an Escrow?
How Does the Escrow Process Work?
How Do I Open an Escrow?
How Long is the Escrow
How Do I Know Where My Money Goes?
What Information Do I Need to Provide?
What is an APR and What Does it Represent?
Where Does an APR Come From?
How is an APR Determined?
What is an Example of an APR?
What is the Difference Between the Interest Rate
and APR?
Topics
How
the Underwriter Looks at Your Loan
When your loan package is submitted, it goes directly into the hands of an
underwriter whose job it is to determine your "creditworthiness" or your ability
to repay the loan. The underwriter must take all of the following into consideration
when making the decision to approve or disapprove your loan.
Your Employment
History
A consistent history of employment in the same line of work is considered
ideal. "Job-hopping" is not looked upon favorably because it may lead to unstable
income. However, if you have switched jobs within the same line of work for
advancement in that work, there should be no problem.
Your Income
The underwriter looks carefully at your "capacity" to repay the loan. Your
job stability and gross income (in relation to your expenses) are critical
in this regard. Most income must be verified as having been received for at
least two years to be used for qualifying purposes.
Your Credit
History
Your credit history is an indication of your "character" or your willingness
to repay the loan. The underwriter looks closely at your past payment record
(your credit report) in determining this. Any consistent patterns of late
payments collections, etc. are not looked at favorably. Bankruptcies must
be discharged for at least two years with re-established credit and the reason
for the bankruptcy must be fully explained. Good explanations for all derogatory
credit will need to be obtained. All outstanding collections, liens and judgments
will have to be paid off through escrow. (Consult your Loan Officer about
any credit questions you may have.)
Your Assets
The money you have available for the down-payment, closing costs, cash reserves
(monies left over after close of escrow to cover 2-3 months mortgage payments)
and other liquid assets is your net worth or "capital". The underwriter wants
to see your ability to save money and manage your financial affairs. They
also need to see the "source of funds" or where the money for the down payment,
etc. is coming from. Cash from under the mattress is not acceptable - we must
verify that have had the money (or the asset) for a two to three month period.
Never move money around (pay off bills, get a gift, etc.) without first consulting
your Loan Officer about the best way to do is since it can seriously affect
the underwriter's view of your loan.
Your Debts
The underwriter is concerned with the amount of debt you currently have because
it affects your qualification and your ability to repay the loan. Any excessively
heavy use of credit is not looked upon favorably.
The Property
Because the property is the lenders "collateral" for the loan, the value,
marketability and condition of the property is extremely important. The underwriter
looks at the appraisal for this information.
Title Insurance
In California, most real estate transactions are closed with a title insurance
policy. Many homebuyers just assume that when they purchase a piece of property,
possession of the deed to the property is all they need to prove ownership.
This is not true. Hidden hazards may attach to real estate. A property owner's
greatest protection is a policy of title insurance.
WHAT IS TITLE INSURANCE?
It is a contract of indemnity, which guarantees that the title is as reported
and, if not reported and the owner is damaged, the title policy covers the
insured for their loss up to the amount of the policy. Title insurance assures
owners that they are acquiring marketable title. Title insurance is designed
to eliminate risk or loss caused by defects in title from the past. Title
insurance provides coverage only for title problems, which were already in
existence at the time the policy was issued.
THE TITLE SEARCH
Title companies work to eliminate risks by performing a search of the public
records or through the title company's own plant. The search consists of public
records, laws and court decisions pertaining to the property to determine
the current recorded ownership, any recorded liens or encumbrances or any
other matters of record which could affect the title to the property. When
a title search is complete, the Title Company issues a preliminary report
detailing the current status of title.
THE PRELIMINARY REPORT
A preliminary report contains vital information which can affect the close
of escrow: Ownership of the subject property, where the current owners hold
title; matters of record that specifically affect the subject property or
the owners of the property; a legal description of the property and an informational
plat map.
What is an Escrow?
An escrow is an independent "stakeholder" account and is the vehicle by which
the interests of all parties to the transaction are protected. The escrow
is created after you execute the contract for the sale of your home and becomes
the depository for all monies, instructions and documents pertaining to the
sale. Some aspects of the sale are not part of the escrow. For example, the
buyer and seller must decide which fixtures or personal property items are
included in the sales agreement. Similarly, loan negotiations occur between
the buyer and the lender. Your real estate agent can guide you in these non-escrow
matters.
HOW DOES THE ESCROW
PROCESS WORK?
The escrow officer takes instructions based on the terms of your Purchase
Agreement and the lender's requirements. The escrow officer can hold inspection
reports and bills for work performed as required by the purchase agreement.
Other elements of the escrow include hazard and title insurance, and the grant
deed from the seller to you. Escrow cannot be completed until these items
have been satisfied and all parties have signed escrow documents.
HOW DO I OPEN AN
ESCROW?
Either your real estate agent or the buyer's agent may open escrow. As soon
as you execute the Purchase Agreement, your agent will place your initial
deposit into an escrow account at the Title Company.
HOW LONG IS THE
ESCROW?
The amount of time necessary to complete the escrow is determined by the terms
of the purchase agreement. It is normally 30 to 60 days, but can range from
a few days to several months.
HOW DO I KNOW WHERE
MY MONEY GOES?
Written evidence of the deposit is generally included in your copy of the
sales contract. The funds will then be deposited in a separate escrow or trust
account and processed through your local bank. You will receive a receipt
for the fund from the Title Company.
WHAT INFORMATION
DO I NEED TO PROVIDE?
You may be asked to complete a Statement of Identity as part of the paperwork.
Because many people have the same name, the Statement of Identity is used
to identify the specific person in the transaction through such information
s date of birth, social security number, etc. This information is considered
confidential.
The Loan Process
To some, the loan transaction process may seem long and arduous; to avoid
this situation, we have outlined the steps involved in securing a loan for
the purchase of a home. It is through better understanding and clear communication,
that we can help to make the experience a rewarding and memorable one.
The Loan
Application
This is one of the most crucial steps to the whole process. By thoroughly
completing the loan application and gathering the associated documentation,
your loan officer can work with you to insure a smooth and timely transaction.
Processing
the Credit Package
During this phase of the transaction, your Loan Officer and Processor will
be working with you to put all of the pieces together. This will involve the
ordering of the credit report, property appraisal, and all of the necessary
supporting documentation for your loan.
Loan Submission
By this time, your loan officer will have presented you with the various financing
options that will be available for your transaction. The loan is submitted
for normal underwriting, and loan approval follows usually within a 24 to
72 hour time frame. By law the lender will send you various government disclosures
within three days of application. If your interest rate is locked, these disclosures
will be quite accurate. If your interest rate is not locked, the disclosures
are largely based on estimates and often change substantially up until close
of escrow. Always rely on the program disclosures provided by GARBER FINANCIAL
for the most accurate breakdown of closing costs.
Formal Loan
Approval
The underwriter, after complete review of the credit package will issue a
formal written approval with the closing typically conditioned upon the receipt
of additional documentation to "complete" the picture.
The Closing
Process
During this phase of the home financing process, the lender will generate
loan documents which are forwarded to the title company in preparation for
the buyer and seller to sign and execute all necessary documents. After signing,
the papers are returned to the lender for final review, the loan typically
funds 24 to 72* hours after signing and records the day after funding. NOW
the home is officially yours!! *Refinance transactions require a 3 day right
of recession and CAN NOT fund until 3 working days have passed after document
signing.
Components
of a Mortgage Payment
Your monthly mortgage payment is made up of several components. This housing
expense is commonly referred to as "PITI", Principal, Interest, Taxes and
Insurance. PMI (see below) and homeowner's association dues may also make
up a portion of your total payment.
Principal
The original balance of money loaned, excluding interest. Also, the remaining
balance of a loan, excluding interest. The interest is calculated on the principal.
Interest
The charge for the use of the money.
Taxes
The county assessor charges property tax based on the value of your home.
There are two tax installments due each year. The first installment is due
November 1st and is delinquent on December 10th. The second installment is
due February 1st and is delinquent on April 10th. Taxes may be impounded,
depending on the amount of your down payment (anything less than 20% requires
an impound account). An impound account is a trust account set up by the lender
to which a portion of the monthly payment is credited so that funds will be
available for the payment of taxes and insurance. This way, the lender actually
pays your tax bill for you. (Supplemental taxes are not included. )
Hazard Insurance
A contract that pays for loss on a home from certain hazards, including fire.
You obtain homeowner's insurance from your own insurance agent. The standard
policy pays replacement costs, minus depreciation based on actual cash value.
Talk to your insurance agent about the different types of insurance available.
Hazard insurance may be impounded.
PMI (Private Mortgage
Insurance)
Depending on the amount of your down payment, you may be required to have
PMI (anything less than 20% requires PMI). Because loans with small down payments
involve substantially more risk for the lender, they need protection in case
the loan goes into foreclosure. Because this insurance is available, lenders
can offer loans with lower down payments. PMI requires an up front fee which
is payable as a part of your closing costs and it is also required to be paid
monthly with your payment. The cost of PMI varies according to the amount
of your down payment. FHA also charges a fee for mortgage insurance and which
is called MIP or Mortgage Insurance Premium. There is both an up front fee
(which may be financed) and a monthly charge. VA charges a funding fee, which
may also be financed.
GFE (Good Faith
Estimate)
A Good Faith Estimate is an estimation of the costs that are expected to be
incurred with the origination and processing of your loan. There are two sections,
one listing Non-Recurring closing costs and the other Recurring closing costs.
Non-recurring closing costs are one-time costs and based upon the purchase
price (or appraised value) and estimated loan amount. Notwithstanding changes
in the loan amount, these estimates should be very close to what you will
see at your close of escrow. Title fees are state regulated. Escrow fees include
all miscellaneous title company charges with the exception of endorsement
fees, notary fees, courier fees, and recording fees (which have been assigned
an estimated total amount). "Points" are quoted based on the current interest
rate and loan program quoted. These points are accurate at the time of quote
and will not change if the rate has been locked, provided your loan is lender
approved. If the rate has not been locked and/or the loan program is changed,
you will receive an updated good faith estimate. Be aware that items such
as city transfer taxes, inspections, and homeowner association dues may not
show up on the initial good faith estimate if a property has not yet been
found or the information has not yet been provided to the lender. Regarding
"no point, no fee" transactions, a credit will be provided to cover the non-recurring
closing costs. The recurring costs are ongoing costs associated with home
ownership. These costs will vary based on the following circumstances: If
the date of the close of escrow changes, the prepaid interest amount will
change. Mortgage interest is paid in arrears. The earlier in the month you
close escrow, the more prepaid interest you will pay (example: close of escrow
on June 14th, will require 16 days of prepaid interest). In this example,
the first mortgage payment would be due on August 1st. This payment would
cover interest due from July. So you see, at close of escrow you pay 16 days
of interest due for June, no payment is due for July, and then the August
1st payment covers interest due in July. If you choose to have taxes and insurance
impounded, the lender will collect "reserves," which may not be reflected
on your GFE. If your close of escrow date is near tax due dates, expect that
you may have to make a full property tax payment. The amount of insurance
required by the lender may not be known until your loan has been approved
and documents have been sent to title; be prepared to pay one year on a purchase
transaction and as much as one year for a refinance transaction (depending
on when last paid). We make every effort to insure accuracy on your Good Faith
Estimate.
What is an APR and
what does it represent?
APR is an acronym for Annual Percentage Rate. This term was specifically designed
to help consumers understand the relative cost of a transaction, and to guide
them in their search for the best loan.
Where does an APR
come from?
The Truth in Lending Act is a federal law that requires creditors to provide
information to consumers about the terms and costs of a loan. The intent is
to help consumers better understand loan transactions, and to assist them
in comparing loans offered by different lenders. The law is administered under
a Federal Reserve Board regulation known as Regulation Z. One of the required
disclosures that lenders must make in a mortgage loan transaction is something
commonly referred to as the APR.
How is an APR determined?
The concept of the annual percentage rate can be difficult to understand because
it is based on a complex mathematical formula, which is prescribed in Regulation
Z. What is important to understand though is that the APR is a measure of
the cost of credit expressed as a yearly rate. The APR reflects the amount
being financed, the interest rate, the timing of the payments, and any other
costs (prepaid charges) required as a condition of the mortgage loan that
make up the finance charge. The finance charge, another required disclosure
under the Truth in Lending Act, expresses as a dollar amount the costs associated
with the loan, including interest and charges payable by the borrower such
as points, loan fees, origination fees, application fees, and insurance, to
name a few.
What is an example
of an APR?
When the various components mentioned above are factored together using the
APR formula, the APR can be calculated. Because the APR takes into consideration
the various fees that are required as a part of the loan, the APR is often
higher than the actual rate of interest for the loan.
EXAMPLE:
Type of Loan Fixed Rate
Initial Interest Rate 8. 000%
Loan Term 30 Years
Amount of Loan $90,000.
Total Prepaid Charges $2,673. 27
APR 8.5273%
What is the difference
between the interest rate and APR?
Keep in mind that the APR is an artificial measurement of the relative cost
of the loan transaction. It doesn't have a bearing on the actual rate of interest
on a particular loan, but it does take the rate of interest into account.
Your loan specialist can calculate the APR of various loan programs for you
and can explain why these differences between interest rates and APRs occur.
Because the APR expresses the overall cost of the loan as a percentage, comparing
the APR of a particular mortgage loan with a similar loan is one way to measure
the relative cost of the loans. This isn't the only factor to consider when
getting a mortgage loan, but it can be very useful in helping you decide.
Be sure to take into account all of the other information that is provided
to you by your loan officer including the interest rate and any fees or charges
that you may have to pay. Just because an APR is lower on one loan than on
another, it doesn't necessarily mean that particular mortgage loan is the
best loan for you. Consult with us. As your loan specialists, we will help
you to understand all of the costs associated with obtaining your mortgage
loan and guide you on your way to purchasing or refinancing your home.
