KNOWLEDGE IS POWER

KNOWLEDGE IS POWER

LENDING PROCESS

Understanding the process begins with knowing what to expect.  Whether you are purchasing a new home or refinancing your existing mortgage, click through to learn more: 

IMPORTANT TERMS

Obtaining a loan for the first time can be a daunting challenge.  To make things just a little less complicated, there are a few terms that are helpful to understand as you begin. 

HELPFUL LINKS

The internet is both a wonderful and intimidating place to find quality information on the mortgage lending process. Here are a few sites for homebuyers and homeowners alike.

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RESIDENTIAL LOANS

CONFORMING

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Conforming Loans are loans that adheres to the underwriting guidelines published by FNMA or FHLMC. These guidelines proscribe specific requirements for income and assets, thresholds for LTV, CLTV, DTI, and FICO Scores, as well as a host of other items that relate to the overall risk profile of the loan. One of the most publicized guidelines is the maximum loan amount. Each year, the FHFA is responsible for reviewing and re-establishing the maximum loan amount (referred to as the “Conforming Loan Limit”). The Conforming Loan Limit for 2018 is $453,100. Conforming Loans are eligible to be sold to FNMA or FHLMC and are viewed as a ‘benchmark risk’ by the secondary markets, where investors buy and sell bundles of mortgages and mortgage-backed securities. Because the guidelines are well known to investors, bundles of ‘conforming’ loans generally benefit from strong investor demand and are typically priced more efficiently than ‘non-conforming’ loans.

CONFORMING HIGH BALANCE

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Conforming High Balance Loans are Conforming Loans that adhere to all of the underwriting guidelines published by FNMA or FHLMC, except the loan amount.  For certain counties designated as ‘High-Cost’ areas, the FHFA allows for an exception to the Conforming Loan Limit.  This exception is intended to accommodate the need for higher loan amounts due to higher median home values.  Commonly referred to as the “High Balance Loan Limit,” these higher loan limits, if available, vary from county to county.  Conforming High Balance Loans are eligible to be sold to FNMA or FHLMC but are commonly viewed as somewhat riskier (than Conforming Loans) by secondary market investors.      

JUMBO

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Jumbo Loans have a loan amount above the Conforming Loan Limit or the High Balance Loan Limit (as applicable). While a larger loan amount may not necessarily seem like a bad thing, Jumbo Loans often have underwriting requirements that are more restrictive than those of a typical Conforming Loan.  Higher down payment requirements, lower DTI thresholds, higher FICO limits, and more stringent income qualification rules are just some of the ways investors try to limit the perceived incremental risk of Jumbo Loans.  Because Jumbo Loans are not eligible to be sold to FNMA or FHLMC, these loans are typically aggregated and securitized by banks / finance companies (in the form of Private-Label Mortgage Backed Securities) or held directly in bank portfolios. 

GOVERNMENT

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Government Loans are regulated and insured by the federal government.  The three primary types of Government Loans (related to housing) are regulated through the FHA, the VA and the USDA.  FHA Loans are the most common type of Government Loan.  Available only through approved lenders, FHA loans are explicitly insured by the Federal Housing Authority.  Originally intended to promote home ownership, the FHA loan program provides expanded mortgage options for households that may have limited access to funds for a down payment, or credit histories that make the terms of a Conforming Loan relatively unattractive.  FHA loans are subject to separate FHA county loan limits.  VA Loans are subject to the oversight of the US Department of Veterans Affairs.  Originally established as a benefit for veterans of the armed forces and national guard, the VA guarantees a portion of the loan so that private lenders are able to offer more favorable terms to qualified veterans.  One of the most significant benefits of a VA Loan is that qualified veterans can obtain up to 100% financing for their primary residence.  USDA Loans are regulated by the US Department of Agriculture. Focused on housing in eligible rural areas, USDA Loans are intended to assist low- and moderate- income households to obtain mortgage financing for their primary residence. 

REVERSE MORTGAGES (FHA HECM)

While there are a few different variations of the FHA HECM reverse mortgage, the two most common include (i) a fixed rate lump-sum loan used to eliminate a traditional mortgage payment (thereby improving monthly cash flow) and (ii) an adjustable rate line of credit, which provides government guaranteed access to accumulated home equity that can be used to fund retirement cash flow needs in the future.  First created by an act of congress in 1988, the FHA Home Equity Conversion Mortgage (‘HECM’) was established to provide a mechanism for America’s retirement-age population to access the equity in their homes.  Often referred to generically as a ‘Reverse Mortgage’, the HECM program has undergone significant changes recently and is now viewed by many as a viable retirement planning alternative.  An FHA ‘HECM’ loan (unlike other reverse mortgages) is insured by the Federal Housing Authority.  A HECM allows homeowners age 62 or older to borrow money based on the accumulated equity in their primary residence.  Unlike other home loans, a HECM does not require any payments until the last remaining Borrower moves or passes away.  The Borrower remains the owner and, while the HECM loan is outstanding, is obligated to: (i) keep the home in good repair, (ii) continue paying property taxes, and (iii) maintain property insurance on the home.  The FHA HECM loan is a non-recourse loan, which means that in the event of default, the lender can only look to the sale of the property and not to any other assets of the Borrower or the Borrower’s heirs.  

PIGGY-BACK SECOND MORTGAGE

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For most conventional loan programs, borrowers with a down payment of less than 20 percent will need to pay for mortgage insurance.  The cost of mortgage insurance can vary, and is influenced by both credit score and down payment amount.  A “Piggyback” Second Mortgage is a subordinate mortgage loan that is made simultaneously with your primary mortgage.  It can be a fixed rate amortizing loan (similar to a 30yr fixed rate mortgage) or it can be a variable rate loan such as a Home Equity Line of Credit (HELOC).  The purpose of a “Piggyback” mortgage is to fill the gap between your down payment and the 20 percent down payment required to avoid mortgage insurance.  A “Piggyback” structure is sometimes referred to as an “80/10/10” (or similar numbers) – where 80% of the purchase price comes from a primary mortgage, 10% comes from a subordinate mortgage, and 10% comes from the down payment.  It is generally used when the combined monthly payment for a primary mortgage and a subordinate mortgage is less than the monthly payment for a primary mortgage with mortgage insurance.  It may also be used if the borrower anticipates receiving a large sum of money that would allow them to payoff the subordinate mortgage in a short period of time or to accommodate other situation-specific considerations. 

SPECIALTY LOANS

LOT & LAND

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Secured solely by land (and not a housing structure), Lot Loans and Land Loans provide a mechanism to finance the purchase of vacant land – most often as part of a plan to build a home on the land.  A “Lot” loan refers to the fact that the underlying property has road access and utility infrastructure, whereas a “Land” loan is more typically associated with raw, undeveloped property.  Because the property has a different risk profile than a typical home purchase and there is limited secondary market demand for these loans, the economic terms may be significantly different than what most borrowers expect.  Higher down payment requirements, higher interest rates, shorter repayment terms and additional collateral (e.g. personal guarantees) are some of the ways investors offset the perceived risk profile of these loans.

CONSTRUCTION

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Used to fund the construction of a new home, a Construction Loan is used to fund the materials and labor costs necessary to construct a house.  Construction loans may or may not include the purchase of the lot on which the home is being built.  Most often, Construction Loans include an initial outlay, followed by a series of ‘draws’ as the construction progresses.  Construction Loans require substantial planning and close coordination between the investor, the borrower, and the contractor.  There is a great deal of work that goes into reviewing the plans, scheduling advances, performing periodic inspections, and coordinating payments to the contractor and their subcontractors.  Like other specialty loan programs, the terms of a construction loan may be different than what most borrowers expect.  Investors typically require the borrower to maintain at least 20% equity in the project and traditional construction loans have repayment periods measured in months rather than years.  Interest rates are typically higher as well, reflecting the risk profile of financing something that has not yet been built, as well as the property inspection and construction oversight required while administering the draw schedule.  During the construction phase, payments are often interest-only (and in some cases, may include an interest reserve to fund interest payments from the loan proceeds), with principal payments beginning when the home is completed.

INVESTOR FIX & FLIP

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Similar in many ways to a construction loan, an Investor Fix & Flip Loan is geared more toward a real estate investor purchasing a home to be renovated and sold rather than a homeowner purchasing a home to be built and occupied.  The availability of these types of loans can vary widely based on the real estate investor’s experience in a particular market geography and/or property type.  Real estate investors with a track record of successfully purchasing, renovating and selling homes in a timely way… for a profit will often have access to more favorable terms.  Because the underlying collateral is viewed from the perspective of an ‘investment’, Fix & Flip lenders typically demand higher interest rates and may require personal guarantees and/or cross collateralization with other projects to ensure they are repaid.  There is, however, the opportunity to borrow a higher percentage of the project’s value if the real estate investor has a success track record. 

PRIVATE LOANS / HARD MONEY

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Private Loans and Hard Money Loans are for unique situations and are priced accordingly.  Loans may be offered by wealthy individuals, small investment groups, or regional investment funds.  The purpose of the loan can range from short-term bridge financing and foreclosure bail outs to early stage real estate investors seeking funding for their first few projects.    Because different investors have experience lending into different situations, the availability and pricing for these kinds of loans can vary widely.  Terms are often defined based on the specific needs, and you should expect the lender to enforce the loan agreements to the fullest extent of the law to ensure they recover their principal and any other amounts due to them.  If venturing into the world of Private and Hard Money Loans, attorney representation is highly recommended.

COMMERCIAL

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If a mortgage loan is secured by something other than a residential building with 1-4 units, it likely falls into the category of a Commercial Loan.  Collateral for a Commercial Loan can include apartment buildings (large or small), office buildings, warehouses, retail buildings, or mixed use projects. 

Q

Refinance-Process

Identify Your Objective 

Are you trying to reduce your monthly payments?  Or get a better interest rate?  How does the equity in your home contribute to your retirement plan?  Do you need cash for a renovation?  Are you trying to pay-off your debt faster or consolidate other debts?  Whatever the case, have an objective in mind.  There are a lot of variables and having a ‘guiding light’ will help you stay on track. 

Begin the Conversation 

Narrowing the options begins with a conversation.  Talk about your objectives and explain what you are trying to achieve.  You can make a lot of progress with just a phone call. 

  • Initial Indication – If you have a fair sense for your credit score, we can generally provide everything you need to evaluate your loan options in a 15-20 minute conversation, without collecting any sensitive personal information. 
  • Loan Application – Takes about 25 minutes and covers these general areas: 
    • i.Credit – Your FICO score, credit history, and monthly payment obligations; requires Social Security numbers, date of birth and the current address for each borrower who will be on the loan. 
    • ii.Income – The monthly income that is used to cover your monthly mortgage payment; typical documentation includes copies of recent paystubs or, if self-employed, 2 years of tax returns. 
    • iii.Assets – Understanding the source of funds that will be used for the down payment and related loan costs; typical sources include a bank account, an investment account, a 401(k) loan, or a gift from a relative. 

Select and Lock your Loan 

With credit, income, and asset information, we can produce detailed analyses that outline the expected costs and calculate the estimated monthly mortgage payments for each loan program.  This can be an iterative process, but once we have found a loan program with the combination of pricing and payments that meet your needs, we can register and lock your loan.  Remember that interest rates are market-driven and regularly change throughout the day.  By locking the loan, we ‘reserve’ the interest rate in effect at that point in time. 

Disclosures and Documentation 

After finalizing your loan application, you will receive a package of loan disclosure documents for your signature.  We will also provide you with a list of the supporting documents we will need to submit for loan approval.  This initial list of supporting documents will be provided to the underwriter to validate the information included in the loan application.  If you have a complicated situation, we will evaluate the information you have available and/or reach out to an underwriter for specific guidance. 

Underwriting Review 

While you are pulling together the initial supporting documents, I will order an appraisal to verify the fair market value of your home.  The appraisal, together with the supporting documents will then be reviewed by an underwriter.  The underwriter will evaluate the documents and determine if there are any additional “conditions” to approving your loan.  It is rare to have no additional conditions, so expect to be asked for a few more documents at this point. 

Final Approval & Closing 

Once all loan approval conditions have been satisfied and the appraisal has been reviewed, we will receive your final loan approval.  This means that you are past underwriting and the loan is “Clear to Close.”  The title company then starts to prepare the loan closing documents that will show the final costs and the amount of funds you will receive at closing (or you will need to bring to the close).  When the lender approves the final Closing Disclosure, it will be sent for you to review as well; if everything looks good, you are ready to close. 

Post-Closing Follow-Up 

We view ourselves as one of your key financial advisors, now and into the future.  We will continue to stay in touch and will always be available to answer any questions you might have regarding your mortgage – whether related to monthly payments, making one-time principal payments, eliminating mortgage insurance, interpreting information you receive from your loan servicer, or any other mortgage-related topic. 

Q

Important Terms

USDA – “United States Department of Agriculture.”  

FHA – “Federal Housing Administration.”  

FHFA – “Federal Housing Finance Agency.” 

VA – “US Department of Veterans Affairs.” 

Conventional Loan – a mortgage loan that is not insured by a government agency. 

Government-Backed Loan – a mortgage loan insured by the FHA, VA, or USDA. 

Conforming Loan – a conventional loan that conforms the guidelines established by Fannie Mae and/or Freddie Mac. 

GSE – “Government Sponsored Enterprise.”  While there are other GSEs that operate in support of housing finance, the two most commonly referenced are FNMA and FHLMC. 

FNMA – “Federal National Mortgage Association.”  aka “Fannie Mae.” 

FHLMC – “Federal Home Loan Mortgage Corporation.”  aka “Freddie Mac.” 

Escrow Account – An account held by the mortgage servicer to fund periodic payments made by the servicer to third parties on behalf of the borrower, most often for property taxes and hazard insurance. 

Discount Points – Fees paid to a lender in exchange for a lower interest rate.  One ‘Point’ is equal to 1.00% of the principal loan amount.  Also commonly referred to as “Points” or “Mortgage Points.”  

Basis Point – a measure defined as 0.01% commonly used when discussing mortgage loans, interest rates, and discount points.  100 basis points is equal to 1.00%.   

Title Insurance – Insurance policy issued by a Title Company to protect the owner (in the case of “Owner’s Title Insurance”) or lender (in the case of “Lender’s Title Insurance) against legal challenges asserting claims of an ownership interest in the subject property or the fraudulent transfer of ownership interests. 

Hazard Insurance – Insurance policy required by lenders to insure the physical structure of the home that is collateral for the mortgage.  The insurance policy is commonly paid through an escrow account by the lender on behalf of the borrower.  The borrower is free to choose which insurance provider they select to provide this coverage, although there are certain minimum policy requirements that must be met.  Also commonly referred to as “Homeowner’s Insurance” or “Property Insurance.” 

FICO Score – A credit scoring system used to rate the creditworthiness of a borrower based on a variety of factors, including payment history, credit utilization, and credit capacity.  In the United States, there are three principal credit reporting agencies that capture an individual’s credit history and publish FICO scores that are referenced in the mortgage lending process.  The credit scores used by mortgage lenders are based on algorithms specifically intended to predict mortgage credit quality, and may be different than FICO scores used to obtain consumer credit or personal inquiry services such as Credit Karma. 

DTI – “Debt-To-Income.”  A ratio commonly used to express the amount of debt service a borrower is obligated to make on a monthly basis relative to the gross amount of their monthly income. 

LTV – “Loan-To-Value.”  A ratio used to express the principal loan amount relative to the market value of the underlying property. 

CLTV – “Combined Loan-To-Value.”  A ratio used to express the combined principal loan amount of all mortgage loans (primary loan and subordinate loans) relative to the market value of the underlying property. 

Seasoning – Commonly used to describe the amount of time that funds have been on deposit in a bank account.  Funds that have been recently deposited into a bank account may not meet “seasoning” requirements, implying that the original source of the deposit must also be verified in order for the investor to meet federal Anti-Money Laundering requirements. 

Reserves – Cash or other liquid assets that could be made available to make mortgage payments if a borrower’s regular monthly income is interrupted.   

P&I – “Principal and Interest.” 

Mortgage Insurance – Insurance policy issued by a Mortgage Insurance Company for the benefit of the lender to reimburse them for losses attributable to a qualified borrower default.  If a borrower defaults on a mortgage loan, the lender will foreclose on the subject property and may submit their losses for reimbursement under the terms of the policy.   Mortgage Insurance is typically required by a lender if the down payment is less than 20% of the market value of the subject property.  Also commonly referred to as “MI.” 

PMI – “Private Mortgage Insurance.” 

BPMI – “Borrower Paid Mortgage Insurance.” 

LPMI – “Lender Paid Mortgage Insurance.” 

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Phone: 303-433-9900
Fax: 303-433-9906

Phone: 303-433-9900
Fax: 303-433-9906