Triad Homes Group

Lender Basics

Frequently Asked Questions

1. What’s the difference between pre-qualification and pre-approval?

Pre-qualification is a simple process. The buyer is asked specific questions about their income, assets and liabilities. Based on this information, they are provided with an amount for which they may qualify. This process can be done strictly on a verbal level or electronically over the Internet.

On the other hand, a pre-approved buyer is one who is actually approved for a loan of a certain amount. The pre-approval process is much more involved. The borrower will provide proof of income, assets and liabilities and this information will be verified by the lender. Because of this verification, pre-approved buyers are much more attractive to sellers than pre-qualified buyers.

2. When dealing with borrowers, what concerns lenders the most?

When dealing with borrowers, lenders’ main concern is risk.

Lenders proactively manage these risks by requiring four things from a borrower:

1. Down Payment – statistics have proven that borrowers who put down 10% or more unlikely to default on a loan.
2. Excellent Debt to Income Ratios – borrowers with high debt and low income are a high risk because they are using too much of their income to pay their current debt; e.g. credit card debt, car loans, and so on. We describe a person with high debt and low income as having a high DTI (debt to income ratio).
3. Job History – long term employment is a good predictor that a borrower will have a steady stream of income, which will not be interrupted by a career change or termination.
4. Excellent Credit – a credit score tells an underwriter a great deal about a borrower. Lenders take a close look at FICO scores. FICO stands for Fair Isaac Credit Organization, the organization that developed the formulas used by credit bureaus to calculate credit scores. (Go to www.myfico.com to learn more.)

3. Why do credit scores vary? And what do lenders like?

The three major credit bureaus are: Experian, Equifax and TransUnion. Credit scores will vary from bureau to bureau because each bureau puts different emphasis on different factors; these factors are delinquencies, too many credit cards, balances that are too high, too many recent credit inquiries, tax liens, judgments, bankruptcies, length of credit history, and so on.

Credit scores are calculated using a scorecard that allocates points for each of the above factors; however, lenders do not get to see the entire scorecard, all they see are the final scores. FICO scores can range from 300-850.

Here’s how lenders typically react to FICO scores:

560-600 – Lenders will not consider extending a conventional loan, but they thoroughly evaluate the borrower and may have other types of loans that meet his/her needs.

620-680 – Lenders will thoroughly evaluate the borrower. Loans to borrowers with credit scores in this range will take longer to process.

700+ Lenders will do a basic evaluation – these loans process faster and don’t have as much paperwork.

5 factors that decide your credit score

1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history.

2. How much you owe. If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits.

3. The length of your credit history. In general, the longer you have had accounts opened, the better. The average consumer’s oldest obligation is 14 years old, indicating that he or she has been managing credit for some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years.

4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.

5. The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example.

4. What are the main types of loans?

All of the numbers are subject to change, particularly Maximum Loan Amount. Use these numbers simply for the purpose of comparing the different types of loans:

[Table=15]

5. When a lender looks at a residential contract, what does he/she look at?

Lenders zero in on: (1) the sales price; (2) down payment amount; (3) closing date; (4) seller contributions, looking for anything that might indicate an inducement to sell, which is illegal; (5) special provisions, such as other buildings on the property; and (6) whether it’s investment property or not.

6. What goes on behind the scenes from Pre-Qualification to Funding?

(1) LOAN OFFICER pre-qualifies the buyer via telephone or Internet. LOAN OFFICER writes a pre-qualification letter.

(2) BUYER completes a loan application and provides verifiable documentation; e.g. bank statements, W-2s, etc.

(3) LOAN OFFICER assesses the BUYER’S assets, debt, income, credit rating and available cash for a down payment.

(4) LOAN OFFICER pre-approves the BUYER and writes a PRE-APPROVAL LETTER.

(5) BUYER gives a copy of the PRE-APPROVAL LETTER to the AGENT.

(6) BUYER and AGENT tour homes and one that meet buyer’s criteria.

(7) BUYER’S AGENT presents an offer with the PRE-APPROVAL LETTER  to the LISTING AGENT.

(8) LISTING AGENT presents the offer to the SELLER; they consider it a serious offer because of the PRE-APPROVAL LETTER.

(9) Offer is rejected and resubmitted until the BUYER and SELLER come to an agreement.

(10) A contract is executed.

(11) The BUYER’S AGENT gives a copy of the fully executed contract to the LOAN OFFICER and a recent survy, if available.

(12) LOAN OFFICER initiates an appraisal and a new survey, if necessary.

(13) LOAN OFFICER submits the BUYER’s file to an UNDERWRITER.

(14) UNDERWRITER reviews the BUYER’s file and requests additional information, if necessary.

(15) UNDERWRITER approves the loan.

(16) UNDERWRITER sends a list of closing conditions to the LOAN OFFICER.

(17) LOAN OFFICER works with the BUYER to meet the closing conditions.

(18) LOAN OFFICER submits documents to the UNDERWRITER, verifying that closing conditions have been met.

(19) UNDERWRITER approves the documents and is satisfied that closing conditions have been met.

(20) BUYER’S file is is returned to the LOAN OFFICER and prepared for closing.

(21) Documents are drawn and sent to the TITLE COMPANY.

(22) TITLE COMPANY drafts a closing statement.

(23) TITLE COMPANY facilitates a closing meeting where funds specified by the LENDER are collected.

(24) Funds are dispersed by the TITLE COMPANY after successful closing.

Basic Loan Types

Questions? Comments?