Although prospecting for clients can often be a sizable portion of a mortgage banker-broker's job, once the client is in line and ready to be matched with a home finance loan, it is the banker-broker's responsibility to do more than just acquaint the individual with the available lending options, they are also relied upon to provide an overview of the lending process from start to finish.
A. Loan Origination
The mortgage loan process begins with what is known as a loan origination where the banker-broker requests information from the prospective borrower in an effort to determine the most applicable lending vehicles to fit their needs.
In this initial stage, the banker-broker attempts to gain as much information as possible with respect to the prospective borrower's financial history and the property to be mortgaged.
To gain insight into the borrower's credit background, the banker-broker will require specific financial data, such as earnings statements, proof of supplemental income, inventories of debt, and estimates of monthly expenses. The banker-broker will also ask for the same information from a co-signer (if indeed there is one.)
The following is a partial list of documents required by a banker-broker to process a client's mortgage application:
- Verification of income.
- Earnings statements: W-2 forms, recent pay stubs, and tax returns for the past two years.
- If individual is self-employed: profit and loss statements and tax returns for current year and the previous two years.
- Supplemental income: social security, overtime bonus, commission, interest income, veteran's benefits, and more.
- Listing of assets.
- Bank account numbers (both checking and savings), address of bank branch, checking and savings account statements dating back 2-3 months.
- Itemization of savings bonds, stocks, and investments and their estimated market values.
- Titles to motor vehicles paid in full.
- If applicable, copy of canceled checks paid as deposits on the desired property.
- Disclosure of debts.
- Credit card bills covering billing periods for the past few months.
- Evidence of previous mortgage or rental payments.
- Copies of alimony and/or child support payments.
- Origin of the proposed down payment. If money for down payment is a gift from a relative, a copy of a gift letter and copy of a gift check will be required. Essentially, the gift letter states that the money does not need to be repaid.[i]
Additionally, to verify other financial data, the banker-broker will need to conduct a credit check (permission is required) on both the principal borrower, as well as, the co-signer (if applicable).
B. Mortgage Loan Origination Checklist
Included within the checklist of things an applicant needs to submit are:
- Application form (employment information, house that is being considered for purchase)
- Financial documentation (earnings, monthly expenses, debts) to gauge a willingness and an ability to repay the mortgage.
- Credit bureau report.
Due to the time and efforts involved in cross checking an individual's financial data, bankers and brokers charge an application fee (typically ranging between $100 and $300).
On the whole, the general rule is that to qualify for a mortgage, candidates are evaluated based upon criteria similar to that of other loans: income, debts, assets, and current rates.
However, what differentiates mortgages from other types of loans is that the desired property acts as a form of security (collateral); so, if the conditions of the loan are not satisfactorily met property ownership reverts back to the lender.
All in all, the three major factors that affect the affordability of a mortgage are:
- Current Interest Rates. [ii]
C. Estimated Value of Property
In order to process the loan request, the banker-broker will need to assess the size of the loan being requested. The amount of the loan requested is a reflection of the estimated value of the property* coupled with the individual's present financial status.
*Note: To determine the value of the property, the borrower will need to enlist the aid of a real estate appraiser (best to be an objective third party professional) capable of providing a professional estimate of a property's appraised value.
Note: There is a fee associated with the use of an appraiser. On average, the cost starts at $300 and goes up based upon the size and the perceived value of the property.
The appraiser's estimate may include a culmination of elements such as recent sales of comparable properties, age of property, location, square footage, and the quality of the
D. Appraisal Methods
Overall, where residential properties are concerned, the two most common appraisal methods are:
1) Sales Comparison Approach. An appraiser is able to approximate a property's market value by measuring it against similar properties (called comparables or comps) that have recently been sold in the area.
2) Cost Approach. This approach is a useful tool for new properties because the costs to build new structures are well documented. Essentially, the appraiser's estimate is based upon the cost to replace the property should it be destroyed.
While there are other forms of property assessments, such as the comparative market analysis (CMA), which is performed by a real estate agent, and is based upon comparable sales and specific property attributes, it is required that the appraiser's estimate (worth of a property at a given point in time) is the one that must accompany a loan application.
Note: The CMA is an informal estimate of the market value of the property, a price for which the property could be sold at a given point in time, whereas the appraiser's estimate provides information regarding the property's worth at this very moment.
E. Loan Amounts
Once the banker-broker is in receipt of the appraiser's estimate, they are then able to conceive of a loan amount based upon a percentage (like 80 or 90%) of the appraised value of the property. In order to make up for the deficient 10 or 20%, the banker-broker asks the borrower to cover the amount with a down payment.
In cases when the asking price of the home proves to be less than the valued amount
and the original down payment does not sufficiently cover the purchase price of the property, the lender may require a larger down payment to cover the gap
between the purchase price of the property and the value for which it has been appraised.[iii]
F. Loan Stages
Loan References. Lastly, the banker-broker may (because it is not necessarily mandatory) request references from the applicant. Ideally, references should include an employer, business partner, person to whom a loan had been successfully repaid, and those who have known the person for a long period of time either professionally or personally and can attest to their character.
Processing. Once all the necessary documentation has been gathered and supporting information, for instance, the appraiser's estimate, credit check, and references have all been collected, reviewed, and verified, the banker-broker can then put through the loan request to learn of its funding potential.
Underwriting. In this stage, persons trained as underwriters evaluate the scope of the loan and based upon their findings either approve or deny the loan. During the evaluation process, in addition to considering the applicant's creditworthiness and loan requests, they also assess the loan's salability level in the secondary mortgage market.
Secondary Marketing. Comprising the secondary mortgage market, this then, entails the selling of existing loans to investors and the managing of associated mortgage risk factors, such as the borrower's faithful repayment and the interest rate fluctuations.
Normally the secondary sale of the mortgage occurs in tandem with the origination of the loan. Further, commitments are used to secure the future sale of the loan and to safeguard against interest rate changes that could potentially occur between the date of the loan's origination and its sale in a secondary market.
Closing. Upon the closing of loan, an official legal process, both the banker-broker and the borrower will need to be present to sign and record the loan documentation. At this time, the borrower will also receive a disbursement of the loan funds.
Additional terms used to document the process of the mortgage loan transaction include:
Warehousing. This is defined as the financing of loans from the closing stage through its sale to an investor, within the secondary mortgage market.
Note: For the most part, mortgage bankers rely upon short term, revolving lines of credit.
Shipping and Packaging. This is the assembling of the closed loan files for the purpose of sending them off to the investor who purchased it. This final stage officially consummates the sale of the loan and puts an end to all activities associated with loan production.
Loan Administration (servicing). This term encompasses the collection, recordation, and remittance of monthly mortgage payments by and between borrowers to investors. Under the servicing sector, the maintenance of escrow accounts is also a part where efforts are taken to protect the condition of a property (maintenance) acting as collateral for the loan.