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Credit Reports
Most people applying for a home mortgage need not worry about the effects of their credit history during the mortgage process.
However, you can be better prepared if you get a copy of your Credit Report before you apply for your mortgage. That way, you can
take steps to correct any negatives before making your application.
A Credit Profile refers to a consumer credit file, which is made up of various consumer credit reporting agencies. It is a picture
of how you paid back the companies you have borrowed money from, or how you have met other financial obligations. There are five
categories of information on a credit profile:
1. Identifying Information
2. Employment Information
3. Credit Information
4. Public Record Information
5. Inquiries
NOT included on your credit profile is race, religion, health, driving record, criminal record, political preference, or income.
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional who will assist you in writing
your "Letter of Explanation." Knowledgeable mortgage professionals know there can be legitimate reasons for credit problems, such
as unemployment, illness or other financial difficulties. If you had problems that have been corrected (reestablishment of credit),
and your payments have been on time for a year or more, your credit may be considered satisfactory.
The mortgage industry tends to create its own language and credit rating is no different. BC mortgage lending gets its name from
the grading of one’s credit based on such things as payment history, amount of debt payments, bankruptcies, equity position,
credit scores, etc. Credit scoring is a statistical method of assessing the credit risk of a mortgage application. The score
looks at the following items: past delinquencies, derogatory payment behavior, current debt levels, length of credit history,
types of credit and number of inquires.
By now, most people have heard of credit scoring. The most common score (now the most common terminology for credit scoring) is
called the FICO score. This score was developed by Fair, Isaac & Company, Inc. for the three main credit Bureaus; Equifax (Beacon),
Experian (formerly TRW), and Empirica (TransUnion).
FICO scores are simply repository scores meaning they ONLY consider the information contained in a person’s credit file. They
DO NOT consider a persons income, savings or down payment amount. Credit scores are based on five factors: 35% of the score is
based on payment history, 30% on the amount owed, 15% on how long you’ve had credit, 10% percent on new credit being sought and 10% on
the types of credit you have. The scores are useful in directing applications to specific loan programs and to set levels of
underwriting such as Streamline, Traditional or Second Review, but are not the final word regarding the type of program you will
qualify for or your interest rate.
Many people in the mortgage business are skeptical about the accuracy of FICO scores. Scoring has only been an integral part of
the mortgage process for the past few years (since 1999); however, the FICO scores have been used since the late 1950’s by retail
merchants, credit card companies, insurance companies and banks for consumer lending. The data from large scoring projects, such as
large mortgage portfolios, demonstrate their predictive quality and that the scores do work.
The following items are some of the ways that you can improve your credit score:
1. Pay your bills on time.
2. Keep Balances low on credit cards.
3. Limit your credit accounts to what you really need. Accounts that are no longer needed should be formally cancelled since zero
balance accounts can still count against you.
4. Check that your credit report information is accurate.
Be conservative in applying for credit and make sure that your credit is only checked when necessary.
A borrower with a score of 680 and above is considered an A+ borrower. A loan with this score will be put through an
"automated basic computerized underwriting" system and be completed within minutes. Borrowers in this category qualify for the lowest
interest rates and their loan can close in a couple of days.
A score below 680 but above 620 may indicate underwriters will take a closer look in determining potential risk. Supplemental
documentation may be required before final approval. Borrowers with this credit score may still obtain "A" pricing, but the
loan may take several days longer to close.
Borrowers with credit scores below 620 are normally locked into the best rate and terms offered. This loan type usually goes
to "sub-prime" lenders. The loan terms and conditions are less attractive with these loan types and more time is needed to find
the borrower the best rates.
All things being equal, when you have derogatory credit, all of the other aspects of the loan need to be in order. Equity,
stability, income, documentation, assets, etc. play a larger role in the approval decision. Various combinations are allowed
when determining your grade, but the worst-case scenario will push your grade to a lower credit grade. Late mortgage payments
and Bankruptcies/Foreclosures are the most important. Credit patterns, such as a high number of recent inquiries or more than a
few outstanding loans, may signal a problem. Since an indication of a "willingness to pay" is important, several late payments in
the same time period is better than random lates.
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Appraisal Basics
An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights to be appraised.
The appraiser does not create value, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data
pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property.
Considerable research and collection of data must be completed prior to the appraiser arriving at a final opinion of value.
Using three common approaches, which are all derived from the market, derives the opinion, or estimate of value. The first approach
to value is the COST APPROACH. This method derives what it would cost to replace the existing improvements as of the date of the
appraisal, less any physical deterioration, functional obsolescence and economic obsolescence. The second method is the COMPARISON
APPROACH, which uses other "bench mark" properties (comps) of similar size, quality and location that have recently sold to determine
value. The INCOME APPROACH is used in the appraisal of rental properties and has little use in the valuation of single family
dwellings. This approach provides an objective estimate of what a prudent investor would pay based on the net income the property
produces.
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Underwriting
Once the processor has put together a complete package with all verifications and documentation, the file is sent to the lender.
The underwriter is responsible for determining whether the package is deemed an acceptable loan. If more information is needed the
loan is put into "suspense" and the borrower is contacted to supply more information and/or documentation. If the loan is acceptable
as submitted, the loan is put into an "approved" status.
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Closing
Once the loan is approved, the file is transferred to the closing and funding department. The funding department notifies the broker
and closing attorney of the approval and verifies broker and closing fees. The closing attorney then schedules a time for the borrower
to sign the loan documentation.
At the closing the borrower should:
Bring a cashiers check for your down payment and closing costs if required. Personal checks are normally not accepted and if they
are they will delay the closing until the check clears your bank.
Review the final loan documents. Make sure that the interest rate and loan terms are what you agreed upon. Also, verify that
the names and address on the loan documents are accurate.
Sign the loan documents.
Bring identification and proof of insurance.
After the documents are signed, the closing attorney returns the documents to the lender who examines them and, if everything is
in order, arranges for the funding of the loan. Once the loan has funded, the closing attorney arranges for the mortgage note and
deed of trust to be recorded at the county recorders office. Once the mortgage has been recorded, the closing attorney then prints
the final settlement costs on the HUD-1 Settlement Form. Final disbursements are then made.
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Summation
A typical "A" mortgage transaction takes between 14-21 business days to complete. With new automated underwriting, this process speeds up greatly. Contact one of our experienced Loan Officers today to discuss your particular mortgage needs or Apply Online and a Loan Officer will promptly get back to you.
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