The Loan Process

The first stage of the lending process revolves around filling out the application, verifying information on the application, confirming the value of the property, and validating any encumbrances and liens on the property. Most residential lenders use a standard application that is accepted by major secondary market investors such as FNMA and FHLMC. The form, commonly known as form 1003, is initially completed by the consumer. A final form is prepared by the lender after verifying the information on the consumer's application for accuracy.

The following lists the sections of the form 1003 residential loan application:

Type Of Mortgage And Terms Of Loan ; Property Information And Purpose Of Loan ; Borrower Information; Employment Information ; Monthly Income And Combined Housing Expenses; Information Assets and Liabilities ; Details Of Transaction ; Declarations ; Acknowledgment And Agreement; Information For Government Monitoring Purposes ; Addendum For Additional Information

Validation Process

Depending on the type of loan, the lender may be interested in validating: employment and/or income and credit information.

Credit Report: Credit reporting agencies can access public record files to determine if a consumer has any collections, judgments, liens, repossessions or foreclosures. Other information on a consumer's credit report may include present and past addresses, present and past employment and banking relationships. The reports indicate the present and highest balance on the credit, terms of the repayment and the payment history. Sometimes past credit problems can be easily explained with a letter of explanation.

Verification of Income: If verification is required, the lender may need: the two most recent pay stubs from borrower's employer; W2's from the borrower's employer -- most recent two years; Written verification of employment from the employer; Federal tax returns for last two years; Current period profit and loss statement for self-employed borrowers. All or some of the above may be used to validate the borrower's employment and income. Periods of unemployment or changes in income may need to be explained.

Borrowers may provide: A copy of the last 2-3 months of bank depository or investment company statements; Written verification of deposit from the depository institution; Copy of the sales contract on any real estate to be sold. The verification of mortgage can be confirmed by a credit report, existing lender (in writing) or from a current statement. Some or all of the above may be used by the lender to verify the funds to close. Even though refinancing an existing loan does not necessarily require cash to close, lenders still may require validation of the borrower's assets.

Other Material Information: There may be other material items on the loan application that the lender may need to validate such as social security, child support, future raises, etc..

Property Value Confirmation: The security or collateral for residential mortgages is real property. Residential real property includes single family detached, attached homes, condominium units and homes in a planned unit development (PUD). These properties can be used for primary residence, second homes and investment. Before lenders issue a loan commitment, they want to know the value of the property so that they can assess the overall risk of the loan. An independent appraisal on the property is the most effective approach in determining the value. Appraisals use three approaches in the valuation analysis:

Cost Approach: The value of the land plus the cost of the improvements less depreciation.

Market Approach: Compares subject property with similar properties that sold recently in the area.

Income Approach: Determines the value based on the rental income that can be derived from the property.

Most appraisals begin with a physical inspection of the property by a professional appraiser. During the inspection, the appraiser measures the property, locates the rooms on a drawing, and notes the overall condition of the property and surrounding neighborhood. After the inspection, the appraiser locates both the sales activity and current listings in the area from real estate data bases and prepares a written report. The report indicates the value of the property and summarizes the important aspects of the valuation process. After the appraisal is completed, the consumer is normally entitled to a copy of the appraisal from the lender. It is best to have your lender arrange or refer you to one of its approved appraisers. Most lending institutions will not accept appraisals from non-approved appraisers or may charge $100-$300 to evaluate it

Title Search

During loan processing, lenders require that a title search be performed on the property which will reveal the legal description, the owner of record and outstanding liens and encumbrances on the property. Liens are items such as property taxes, mortgage loans, and judgments. Encumbrances may be road maintenance agreements, right of way and utility easements. Usually, a plot map or land survey is prepared as part of the title search to show the location of the improvement on the property. After the search has been completed, the title company will prepare a written document that reflects their findings and delivers the report to the lender. This report is commonly called a preliminary title report.

Closing

Closing is the meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement, closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.

After the loan is closed, the title company will prepare a title policy that reflects the new mortgage loan as a lien on the property. The policy is called an American Land Title Association (ALTA) policy. Additionally, if there was a transfer of title, the new owner usually obtains a title policy as well. The consumer is also normally entitled to a copy of the appraisal from the lender.