Bankrolling It: Underwriting and You
Once we’re in contract a lot will happen in different arenas. And now, the lending process will begin. And loan approval these days is long and winding. This is what you should expect to happen all within the span of 14–21 days. Mortgage underwriting since the housing crisis has swung the other way — almost perversely so — no more easy credit. Will there be another bubble of increasing prices, easy money and unsustainable values? Not if the underwriters can help it. Nowadays, they will scrutinize every money transfer, credit report entry, dollar and cent of your down payment must be documented and documented again. Think of it this way: every link and every statement entry must be verified so the narrative makes sense. So prepared to be responsive and to answer the same questions a couple times over. Just keep smiling.
NOTE: Having your FICO Score ahead of time puts you in the best position to negotiate loan terms. A 100-point difference on your FICO Score could save you $40,000 on your mortgage over time, so make sure it’s accurate and correct. A single missed credit card payment, for example, can knock a score down by 50 points, which can change a lending scenario by thousands of dollars.
Step 1. The Application
The key to the loan process going smoothly is the initial preparatory work. Whether it’s a mortgage broker or a bank–based lender, you’ll need to provide them all pertinent documentation as early as possible so we can avoid unnecessary problems and delays. Remember, call HR and make sure they’re not going on vacation, pdf your documents, keep records of all fund transfers (such as selling investment funds); any funds transfer for down payments or all–cash deals early; don’t buy a new car or take on a new large line of credit, for example.
Step 2. Requesting Documentation
Within 24 hours of ratification of the Purchase Contract, the lender may request a lender’s credit report (if one hasn’t been pulled already), an appraisal on the property, verifications of employment, mortgage or landlord records, a preliminary title report, picture ID, W–2s (2 years), and any other necessary supporting documentation used in the underwriting process. Be responsive as these are the type of folks who wanted it 15 minutes ago.
These are the documents you need ready (in pdf format):
- Last 2 years of W–2s &1040s; self–employed and/or tax returns (personal & business returns (e.g., 1120, Sched. K–1)(Ensure they are filed and certifiable)
- Last month of pay stubs & employer verification Last 2 months bank statements (checking, savings, IRA, Money Market, etc)
- Photo I.D. Rent history/checks/landlord info Gift Letter from relatives/investors; don’t forget they can ‘loan’ you money through forgivable loans
- All cash? Funds verification/bank statement
- Changing jobs? Offer letter from new employer + 1 pay stub from pay cycle
- For current home owners: current mortgage statement/sales contract
- For Anything Unusual: Explanatory information for any special cases or situations [/box]
IMPORTANT: During the Underwriting process you’re going to compete IRS Form 4506-T. What, praytell is that? It is your authorization for the underwriters to order and pull a transcript of your tax return for a given year or for the most recent numbers Monsieur Uncle Sam has for your tax number. Form 4506, on the other hand, is a request for a copy of your return (+$57 fee). Keep in mind that e-filing or even filing in person at the IRS (Golden Gate Avenue in Civic Center) will add around 4 to 6 weeks to when the IRS can verify your return. Why does this matter? For some underwriters a personally filed copy with a “FILED” stamp is enough, but for many other underwriters the transcript reporting is the only valid confirmation they accept of your current tax status. It becomes an issue if our escrow period overlaps with this 4 to 6 week period.
Take away point: File early.
Step 3. Loan Submission!
Once all the necessary documentation including the appraisal is assembled, your loan processor will put the loan package together and submit it to the underwriter for approval.
The Preliminary Approval for Fannie/Freddie/FHA Loans
The formal loan application must be documented by the following forms:
- The purchase contract and any relevant addenda
- The Uniform Residential Loan Application (Form 1003 or Form 1003(S)) and, if applicable, a Statement of Assets and Liabilities (Form 1003A or Form 1003AS) The initial loan application must include sufficient information for the underwriter to reach an informed decision about whether to approve the mortgage loan
- The final loan application signed by the borrower must include all income and debts disclosed or identified during the mortgage process
- A complete, signed, and dated version of the original and final Form 1003 or Form 1003(S) must be included in the mortgage file[/box]
Step 4. Loan Approval
Preliminary loan approval generally takes anywhere from 24 hours to 10 days, whereby a lender’s underwriter will scrutinize the application materials and, if necessary, issue conditions on the loan. Any loan conditions must be satisfied before the loan can close. Be flexible, diligent and responsive as we are at their whim.
A lender’s decision factors are influenced from their initial eligibility review, which should have happened before underwriting begins during the pre-qualification phase of this all. Post-2013 standards require documentation showing a borrower’s ability to repay and underwriters must examine at least 8 underwriting factors in their decision including:
- Credit history
- Current and expected income or assets
- Employment status
- Monthly debt to income ratio or residual income
- Current debt obligations, alimony, and child support Cost of mortgage-related obligations
- Monthly payment amount on the subject loan & any simultaneous loan
- loan–to–value/appraised value/combined loan–to–value
- representative credit score with adjustments/corrections
- loan type, post-funding reserve amounts
- purpose of property
- occupancy plans
- zoning and number of units.
Step 5. The 72-Hour Cooling Off Period
By this point you’re probably wondering how much money you have to send over to the title company. That depends on what amount is stated in the Closing Disclosure document. Within 1 to 5 days after the loan approval, the title company will issue the CD, which is a standardized form that came into use starting in late 2015. The document is supposed to describe and itemize the amounts, charges, costs and credits relating to the transaction. The amount due from you guys (i.e., the remainder of the down payment, advance premiums for insurance and related fees) will be indicated clearly. If there are any changes to the bottom line this will have the ability to derail an on-time closing as each time a Closing Disclosure is issued it must then be followed by a mandatory 3-day cooling off period. So if you see something wrong or if something looks awry say so immediately so we can fix it asap.
You MUST acknowledge receipt of the form as there is a mandatory 72 hour waiting period before the final loan documents (including the Note and Deed of Trust) can be completed. If there are any changes in costs what the buyers will have to pay an entirely new CD must be generated and a new 72-hour period has to run before loan docs can be finalized. Don’t forget you still have to sign the docs too! Our Escrow Officer will either call you directly or have us make an appointment with you to sign all the the loan documents, which must be signed before a notary public in ink. Be sure you have to have your ID ready!
Step 6. The Signing
After the amounts are finalized, the title rep will reach out to you directly to coordinate the signing. The loan documents are made up of the loan note itself and the deed of trust (i.e., mortgage lien that will be recorded against your title deed). There’s a lot of jargon in these documents that are reply standard and routine. Namely they ask you have insurance in place along with spelling out your loan’s structure. In addition to the signing loan documents you’re going to be signing deed transfer documents, a formal loan application perhaps, permission for the lender to get your credit report and tax transcripts as well as other forms related to the transaction. The title person will go over how property taxes work (remember you’ll be underpaying for the initial time you own until the City’s records are updated in which case you’ll be asked to pay expected shortfall between the sellers’ purchase price and your purchase price).
Step 7. Funding
Once all the loan documents are signed, they will be returned to the lender, who then reviews the loan package once more. If all the forms have been properly executed, the funds due to the seller will be transferred by wire to the title company who will then ‘cut’ the checks to everyone identified. Note: ALL fund releases must be by mutual consent of the buyer and seller. Title cannot act otherwise.
Step 8. Document Recording
When title receives the funds from your lender, your Escrow Officer will authorize recordation of the signed property transfer documents with the County Recorder. Mr. or Ms. Officer will then prepare a Final Settlement Statement and disburse the proceeds to the seller, pay off existing encumbrances and other obligations (i.e., their loans) and any fees like HOAs or pro–rated property taxes. And, you’ll have to wait until the next day in San Francisco, as we do not have same–day recording, so the transaction will be recorded the next business day typically unless there’s a holiday involved.
Step 9. And We’re …
The next day: You are on record! Escrow is C-L-O-S-E-D! Congratulations!