What is the Mortgage Process?

The Mortgage Process

Have you ever wondered about what steps your loan goes through before closing? Wonder no more! Here are the steps your loan goes through before you close.

  1. The loan coordinator

Once you finish the application, the loan coordinator takes care of getting everything in order. They make sure that the following items are in order:

  • Employment history
  • Credit
  • Minimum documentation
  • Residential history
  • Loan amounts
  • Attorney, title, and HOA

If everything is in order, the loan coordinator registers and locks the file and sends it to be disclosed. If not, the file will get sent back to the loan officer to get any necessary items.

  1. Disclosure

Once the application and minimum documentation are verified, the application moves to disclosure. During disclosure, they will compile estimate for all third-party fees, and make sure the title and attorney fees are as low as they can be. Once verified, the loan disclosure and “wet docs” are sent out. After everything is signed, they order the appraisal and title. They additionally send the file along to pre-underwriting. If the disclosure isn’t signed, it stays in the application status and won’t move forward.

  1. Pre-underwriting

After the loan disclosure is completed, the loan is moved to pre-underwriting. The pre-underwriter analyzes the documents received to make sure that the loan qualifies for conditional approval. They will also verify the inspection and make sure they have all additional addendums to any contract that may be in place. If there are any additional files needed, the pre-underwriter will reach out to get those files. The loan will be placed on hold if any critical documents are missing. Once everything is in order, the loan will be submitted to underwriting.

  1. Processing

Once all conditions are met, processing releases the early closing disclosure. The early disclosure may have changed due to survey, title, attorney fees, and prorations. If the early closing disclosure is signed, you can close three days later. If it is not signed, you can close seven days later. After everything is signed, the wire is ordered to be released the day of closing, which will be scheduled after signed documents are received.

  1. Closing day

It’s closing day! At closing day, a cashier’s check to cover final closing costs is needed. For a refinance, there is a three day right of rescission.

What is a Down Payment?

Down Payment

A down payment is a type of payment made in cash at the beginning of the purchase of an expensive good or service, such as a home. The payment typically represents a percentage of the full purchase price. Most homebuyers pay 5 to 25% of the total value of the home. A bank or other financial institution will cover the rest of the costs through a mortgage loan.

How down payments affect interest

A down payment instantly reduces the amount of interest you will pay over the life of the loan. Having a sizeable down payment can save you thousands over the life of the loan. Down payments also provide lenders with a degree of security. Borrowers who use a down payment are less likely to default on their loan. Because of this, lenders may offer lower interest rates to borrowers who use a larger down payment.

How down payments affect monthly payments

Down payments also reduce monthly payments on your loan. A down payment is an initial starting payment for your loan. As such, after paying down, you will have less to pay over the course of the loan. The larger your down payment is, the less you’ll have to pay each month.

How down payments affect mortgage insurance

In most cases, a down payment of less than 20% will require you to purchase private mortgage insurance (PMI). PMI is paid to a private insurance company in monthly payments. However, if you have a down payment over 20% or over, you can avoid having to pay these premiums.

How the Tax Bill Will Affect Homeownership

The Tax Bill and Homeownership

The House and the Senate have agreed on a compromise plan for the tax bill. This is how the compromise bill could change homeownership.

  1. Mortgage interest deduction

The mortgage interest deduction is explained as a way to make homeownership more affordable. The compromise bill cuts the federal income tax that qualifying homeowners pay. This is done by reducing their taxable income by the amount of mortgage interest they pay. The deduction will be reduced to interest up to $750,000, instead of the $1 million for anyone who buys a home after December 15, 2017. Anyone who is under contract to buy a home before December 15, 2017, will also be subject this deduction if they are scheduled to close by January 1, 2018.

Another exception to this section of the bill relates to when you refinance a mortgage. The new compromise bill will treat the new loan as if it were originated on its original date. This means the old $1 million limit would apply.

  1. Home equity deduction

In addition to mortgage interest deduction, the current tax law adds a deduction for interest paid on home equity debt. This applies to anything other than to buy, build, or substantially improve your home, such as borrowing a home equity line of credit to pay for school tuition. However, the compromise bill eliminates the deduction for interest paid on any home equity debt.

  1. Property tax deduction

The current tax law allows qualifying taxpayers to reduce their taxable income by the total amount of property tax they pay. The compromise bill limits the deduction to $10,000 for the total costs of property taxes and state and local income taxes.

  1. Mortgage interest deduction for second homes

The current law allows you to deduct interest on mortgage debt on a primary and secondary home. The compromise bill has voted to keep the part of the tax bill in place. However, it reduced the amount of eligible mortgage debt to $750,000.

  1. Capital gain exclusion

Capital gain is the difference between the price you paid for a house and the price you sold it for. It is treated as a taxable income. If you have owned the house long enough, you can exclude $500,000 as income so you don’t have to pay federal income tax on it. The compromise bill doesn’t alter the capital gain exclusion for homes.

  1. Moving expenses

Under the current law, anyone may deduct some moving expenses if you are moving for a new job. However, the compromise bill only allows members of the armed forces on active duty would be allowed to deduct moving costs.

What is a Tenants-in-Common Arrangement?

Tenants-in-common

Tenants-in-common is an arrangement that is characterized by multiple people deciding to purchase one property together. This can be either a primary residence or a vacation home. Basically, a tenants-in-common arrangement is a split homeownership among multiple people. A tenants-in-common arrangement does not have to be an equal ownership. Tenants can own different percentages of the same property.

Tenants-in-common provides a framework for buyers to structure how the property operates. This includes decisions on how to split costs associated with the home to more major decisions concerning the property. While each person owns a share of the property and has rights to live on and use the property, the amount they pay for the mortgage, insurance, and maintenance will vary based on the ownership share.

Advantages

A big advantage of this agreement is the financial advantage. For people who can’t afford to buy a property on their own, a tenants-in-common arrangement works well. This is because all deposits and payments are divided, making the purchasing and maintaining of the property to be less expensive. Borrower capacity may also be greater when an individual with a higher income owners a larger percent of the home.

Tenants-in-common may also be attractive for people who only plan on using a home for a short period of time, such as during the holidays or the summer. If this is the case, the person can choose to have a smaller share of the home.

Finally, a tenants-in-common arrangement allows individuals to choose who gets their share of the property in the event they die. They can also choose to sell their ownership or pass it on to someone else should they not want the property anymore.

Disadvantages

While it can be an advantage that a tenants-in-common arrangement is easily transferable, it can be a disadvantage for others. Any owner can sell their share at any time without the consent of the other owners. This could result in the other tenants living with someone that they don’t know or like.

Since everyone is responsible for payments, if one or more borrowers cease their payments, the other tenants must cover the payments or face foreclosure.

Tenants may also file a partition action, which would force unwilling co-tenants to sell the property.

What is Credit Counseling?

Credit Counseling

Credit counseling is used to help debt settlement through education, budgeting, and other tools to help reduce and ultimately eliminate debt.

How does credit counseling work?

Credit counselors will look at your total financial situation to help you create a plan to pay off your debt, including a money management plan and a debt pay down plan. They can also provide free resources and workshops related to money management. It is important to be completely upfront about your situation, including what you owe and where you owe it. Be forward about your all your current expenses and your income. However, for a credit counselor to really help, you must be completely honest about your situation.

Debt management plans

A credit counselor may recommend a debt management plan. A debt management plans usually involves placing your finances with a company in monthly installments, who in turn, passes those along to your creditors. This means that you will usually stop paying your creditors. Instead, you make one monthly payment to the debt management company and they send your payment to the creditors. A debt management company may also contact your creditors to negotiate lower interest rates.

Debt management plans may also cost you money. It’s possible that you will be charged a monthly fee or an initiation fee to participate in such programs. However, a reputable company will disclose all fees up front, so you know how much it will cost you before starting a program. If they don’t, be sure to ask about the fees before enrolling in a program.

Does credit counseling affect your credit score?

Credit counseling does not directly affect your credit score. In fact, credit counseling helps you gain control of your credit and keep it under control in the future through budgeting and financial management education. Once the debt is repaid, credit counseling may be shown on your credit report. However, even if it does, there might not be any impact on your score.

Bitcoin and Real Estate

What is Bitcoin?

Bitcoin, created in 2009, is a cryptocurrency that exists in a digital form. Recently, Bitcoin has become more popular in the U.S. and international markets, even extending into the real estate market. One of the biggest draws of Bitcoin is that it holds more volatility than traditional money, such as euros, dollars, and yen.

Bitcoin and the real estate industry

Many companies are starting to experiment with allowing cryptocurrencies to be used for transactions such as rental properties or to buy property. An example of this is ManageGo. ManageGo, a New York-based company, provides technology to residential property managers. Early next year, the company plans to begin allowing people to pay their rent with virtual money.

However, because the currency is so new and the value changes every day, there are some hold-ups about Bitcoin. Real estate professionals must find fluid partners who are comfortable working with bitcoin. There are payment service providers who will convert bitcoins into dollars to mitigate any risk associated for buyers.

If a title company chooses to accept Bitcoin, they are the ones who accept the risk.  Property titles secured through a blockchain could revolutionize by speeding up the mortgage and title process. In addition, it can also help to lessen fraud by preventing document forgery.

Blockchain

The real estate industry has been taking steps to adopt cryptocurrencies and their technologies into the way they operate in the market. This can ultimately change the way that property is bought and sold. While noticeable differences may be years away, several states have already begun changing laws to allow Bitcoin technology into transactions.

Most of the focus today is focused on how blockchain technology could affect the way property titles are recorded and transferred in the sales process. Blockchains were developed as an accounting method for Bitcoin and are now used for Bitcoin and other forms of cryptocurrency. It can also be used for tracking who owns a piece of land, office building, or home.

Blockchain has potential to be a game changer in real estate, especially in the case of the multibillion-dollar industry that provides title insurance and plays a major role in real estate sales.

What is Underwriting?

Underwriting

Once a loan goes through the loan processor, it is handed off to an underwriter. During the mortgage underwriting process, an underwriter will ensure that your financial profile matches the guidelines of the lender and the loan. Ultimately, the underwriter makes the final decision on whether to approve or deny your loan request.

What does an underwriter do?

The main task of an underwriter is to assess the risk associated with a borrower. An underwriter will look at things such as declarations of bankruptcy, foreclosure, if you have paid your bills on time, and your credit score to see how you manage debt. This will help them determine your ability to make your mortgage payments.

The three C’s of underwriting: Credit, Capacity, and Collateral

Underwriters use these three C’s to determine the risk associated with a borrower.

Credit

An underwriter will look at your repayment and credit history. Credit is one of the most important aspects of the loan approval process. Your credit report will show how you have handled your past bills. This will also help the underwriter predict your ability to make your mortgage payments on time and in full.

Capacity

Underwriters will analyze a borrower’s employment, income, debt, and asset statements to ensure you have the means to pay off your debts. They will take a close look at your debt-to-income ratio to see that you have enough money to cover your current debts and your new mortgage. In addition to looking at the above statements, an underwriter will also review your savings and checking accounts, your 401(k), and your IRA accounts. This is because an underwriter wants to ensure that if something happens, such as illness or a loss of job, you are still able to pay your mortgage.

Collateral

Collateral refers to the value and type of property being financed. The underwriter wants to make sure that the loan amount does not exceed a property’s value. This is because, in the case of default, a lender may not be able to recover the loan’s unpaid balance. To correct asses the property’s value, an underwriter will order a home appraisal, which will assess the home’s worth. The property type is also important to the underwriter. Lenders assume that borrowers are more likely to walk away from an investment property than they would from a primary residence.

 

How Do Evictions Work?

Eviction

Eviction is a landlord’s legal removal of a tenant from a rental property. There are many different reasons why a landlord may evict a tenant. They include rent not being paid and breach of the rental agreement.

Notice of termination for cause

There are three types of termination notices that you may receive if you breach your rental agreement. These include:

  • Pay rent or quit notices

Pay rent or quit notices are typically given to a tenant when they have not paid the rent. These notices give the person in question a few, typically three to five, days to pay the rent. If the tenant is unable to pay, they must move out.

  • Cure or quit notices

Cure or quit notices are given to a tenant when they violate a term or condition of the lease or rental agreement. This might be something such as violating a no-pet clause or if there has been excessive noise being made. A cure or quit notice gives the tenant a few days to cure (correct) the violation or they will be evicted.

  • Unconditional quit notices

Unconditional quit notices do not give any opportunity to pay the rent or correct a lease. In these cases, unconditional quit notices are only allowed if a tenant has:

  • Repeatedly violated a lease or rental agreement
  • Seriously damaged the property
  • Repeatedly been late with rent payments
  • Participated in serious illegal activity on the property

Notice of termination without cause

Even if you have not violated the rental agreement, a landlord can ask a tenant to move out at any time, given that the tenant doesn’t have a fixed term lease. A landlord can give their tenant a 30-day or 60-day notice to vacate. In this case, the landlord does not need a reason to tend the tenancy. However, many cities with rent control require the landlord to prove a reason for termination. These laws are known as eviction protection.

Eviction lawsuit

Once a tenant receives a termination notice, they must move out of the rental property within the specified time. If the tenant hasn’t moved out before the period is over, the landlord will serve the tenant with a summons and take the tenant to court.

Improper eviction practices

While there are many ways for a landlord to legally evict and tenant, there are also ways for a landlord to illegally evict someone. These include:

  • Self-help eviction

A self-help eviction occurs when a landlord doesn’t go through legal means to remove a tenant from a property. In this case, a landlord tries to coerce, intimidate, or make the tenant’s living conditions worse to attempt to force the tenant out of the property.

  • No proper notice

A landlord must provide the tenant with a notice or quit or pay rent or quit. As mentioned before, this informs the tenant that eviction proceedings will be initiated and the reason for the proceedings.

  • No evidence

No evidence is important during actual eviction proceedings. This occurs when a landlord does not have proper evidence to support the claims for an eviction.

What is Verification of Employment in the Home Loan Process?

Verification of Employment

When applying for a mortgage loan, a lender will have to verify your employment. The lender needs to make sure you are and will remain employed to ensure all income sources are taken into consideration.

Why is verification of employment done?

Employment is verified early in the loan process to ensure that you qualify for the loan. However, employment will be re-verified before closing to make sure nothing has changed.  Any change in your job can affect your ability to pay your monthly mortgage payment. It is often encouraged to avoid changing jobs or to take out new loans or lines of credit when applying for a mortgage.

During the home loan application process, lenders will calculate front-end and back-end ratios. The front-end ratio compares your gross income to your potential housing payment. The back-end ratio compares your total monthly debt (which includes your housing payment) to gross income. These both indicate whether you can afford to pay back your mortgage. Lenders will generally require a front-end ratio to be in the low 30% range. A back-end ratio should be no more than 45%. There may be some flexibility depending on the borrower’s credit profile. As it comes closer to the time of closing, lenders will verify your income to ensure that there has been no reduction. A reduction in income increases your debt-ratios.

How employment is verified

A lender will call your employer to confirm the information you provided them. The lender may also confirm this information by fax or mail. It’s possible that a lender will accept recent pay stubs or income tax returns and a business license for a borrower who is self-employed. However, most loans will require a more thorough employment check, as detailed by Fannie Mae’s, Freddie Mac’s, or the Federal Housing Administration’s guidelines.

What Are Basis Points?

Basis Points

What are basis points?

Basis points are a common unit of measurement for interest rates. A basis point is equal to 1/100th of 1%, 0.01%, or .0001. This means that a 1% change is equal to 100 basis points, or 0.01% is equal to 1 basis point. They are used to denote the percentage change in a financial instrument. Although basis points are small, they can affect your interest rates and the costs to finance your home.

Are basis points important to lenders?

Basis points can be more important to lenders than they are to borrowers. When dealing with large-volume mortgage lenders, basis points can mean the difference between a profit and a loss.

Why are basis points used?

Basis points are popular for larger investments, such as mortgages. This is because smaller increases or decreases in interest rates can represent larger dollar amounts. A small increase in basis points can represent a large change in your interest rate.

How are mortgage basis points used for consumers?

Once a borrower begins to compare mortgage rates and terms, it’s likely they will face basis points. A borrower talks to their loan officer and tells them that they want to lock in their rate. The loan officer advises the borrower that the lender will charge a certain amount of basis points for locking in your rate for that period. For example, if your lender charges 50 basis points, you will have to pay one-half of 1 percent of your mortgage loan for your lock period.

How does a hike in basis points affect a mortgage?

Mortgage payments are composed of interest and principle. When the interest rate goes up, the payment goes up. The payment going up can prevent you from qualifying for a loan. To qualify for a loan, you must be able to repay the loan. If the interest rate hike means that you won’t be able to repay the mortgage, it’s possible that you won’t be approved.