At the Omni Mortgage Company, we take great pride in offering information that is helpful to our borrowers. The mortgage approval process can be stressful enough, without the added stresses of unanswered questions. We've included answers to the most common questions that come up during the mortgage approval process. Of course, if you need additional information, we invite you to Speak with a Loan Approval Consultant today. 

Why do interest rates fluctuate all the time?

Because lenders pool mortgages into securities and then sell them in "the secondary market" where they are competing with other world-wide investment opportunities. These securities act similar to corporate and treasury bonds and any inflationary news translates into smaller values for fixed-rate securities and necessitates a rise in mortgage interest rates.

People in the mortgage business and borrowers hope for poor economic news which translates into little or no inflation and low mortgage interest rates.

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Necessary documentation

For salaried borrowers:
  • last 2 year's W2's
  • pay stubs for past 1 month
  • statements for all significant asset accounts for the past 2 months
  • complete Federal tax returns for past 2 years if: you own rental, property or if more than 10% of your income is from commissions.

For self-employed borrowers:

  • Complete Federal tax returns for past 2 years (this must include all pages) Be sure to include all K1's (partnerships) even if you did not include it with your return.
  • Year-to-date Profit and loss statement
  • last 2 months statements for all significant asset accounts.

In either case if you own other residential real estate which you rent you may need to present lease agreements and a lender always needs your 1040's for the past 2 years.

If your tax returns are "on extension" you will need a copy of the request for extension.

If this is a purchase transaction you will need a fully executed copy (signed by both parties) of the sales contract.

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 What will the Lender look at when approving my Loan?

When underwriting a loan the lender is looking at three things:
 
Credit. Credit has to do with your past payment history as shown on your credit report. Generally a lender is looking for a minimum of 12 months of "on time" payments. Although, any derogatory marks will need to be explained.
 

Collateral. Collateral has to do with Loan-to-Value ratio's. An LTV ratio is simply your loan amount divided by the value of your property. The lower the LTV the better from a lenders perspective. Purchases on primary residences will have LTV's which are higher than re-finances, second homes, and investment properties. Depending on your situation you may be able to obtain a mortgage with as little as 0%. However, any LTV greater than 80% will require Private Mortgage Insurance.

Capacity. Capacity has to do with your ability to repay your obligations. This is generally measured by two ratios. The first ratio measures your ability to repay your housing related debt. It is calculated by taking your total mortgage payment, including taxes and insurance, and dividing by your gross (before tax) monthly income. Generally, this ratio should be 33% or less. The second ratio measures your ability to repay your total monthly debt. It is calculated by taking your total monthly fixed debts and dividing by your gross monthly income. This ratio should be no more than 42%.

Note: Although these are the standards for the industry, strengths in one category may offset weaknesses in other categories.

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What is a FICO Score? And Why does it matter?

A FICO score is a numeric representation of your credit profile. The higher the FICO score the better credit risk you are. FICO is a product of Fair, Isaac Company.

  • They are based on years of computer modeling aimed at predicting who might be a credit risk.

  • Their purpose is to reduce the cost of examining a credit report and speed mortgage approvals.

  • The important negative factors are: bankruptcies, delinquencies, credit lates, collections, too many "tapped out" credit lines, "too much" credit, too little credit history.

  • It will become more important than ever to keep a good or perfect credit history.

  • If you hear of two products: Loan Prospector or Desktop Underwriter, these are nothing more than Automated Underwriting Systems created by Freddie Mac and Fannie Mae to speed up your approval process. If a lender runs your loan through one of these systems they will have a loan decision in about 4 minutes.

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Down Payment

You can purchase a home with as little as 0% down payment. If your down payment is less than 20% of the purchase price, or 20% of the appraisal for a refinance you will need Private Insurance (PMI). The down payment must be well-documented. That is, you must show, for example, bank statements proving that you have had the money for at least 2 months. If the source of the down payment is a gift from a relative you will need:

  • a "gift letter"

  • a copy of the check from them to you and a copy of the deposit slip showing it going into your account.
    The purpose of all this is to make sure that the down payment is not a loan and most especially not coming from the seller.

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Private Mortgage Insurance

Private Mortgage Insurance (PMI) is needed on all loans where the loan-to-value (the loan amount divided by the value of the property) exceeds 80%. (There are some examples of "self-insured" loans where the rate is increased and there is no formal PMI but you pay one way or another.) The mortgage insurance premium depends on the loan-to-value ratio. It is 4-tiered: 80.01%-85.00%, 85.01% to 90.00%, 90.01% to 95.00% and 95.01% to 100% each step costing more. The mortgage insurance also depends on the loan amount and the type of loan. Adjustable rate loans have higher premiums than fixed rate loans. At the present time you can choose between monthly and annual premiums.

The PMI is given by a different party than the lender. Your lender will send a copy of your loan application package to the MI company for their approval. Among the loan documents you will sign at closing is a PMI agreement. Your lender will collect the PMI payment along with your principle and interest. It is usual that when your loan-to-value equals or exceeds 80% your property tax is also collected.

PMI policies usually have "escape" clauses describing under what conditions you can stop paying PMI. It is necessary that you read the PMI policy to determine this. Make no assumptions.

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Pre-qualifying

Pre-qualifying is a process whereby a loan officer takes information about you, either over the telephone or face-to-face and indicates how big a loan of a particular type you will qualify for. The lender would then give you a "pre-qualification letter" which is of considerable value in dealing with a Realtor or a potential seller. Realtors and sellers are interested in dealing with people whom they know to be able to get the loan necessary to close the deal. Most lenders prefer to get the income and asset information from you, get a loan application and pre-qualifying credit report and then write the letter.

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Pre-approval

Pre-approval is a step beyond pre-qualifying. In a pre-approval you are actually approved for an amount and for a certain type of loan. The pre-approval is contingent you finding or making an offer on a property.

With a pre-approval you can close the loan faster and often will find your offer more acceptable to the seller. Sometimes sellers are anxious and will take somewhat less in price from someone who can close quickly.

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Rate Locks

The interest rate on your loan is not set until your lender confirms your rate lock. Your loan must close before the "lock expiration" date or you can lose your rate lock.

You can lock your rate before your loan is approved, you can even lock your rate before your loan is submitted. In general, you can get a 45 day rate lock for an extra 0.125 in rate or 0.5 points in cost. It must be noted that the cost for extended locks can vary significantly with the volatility of the market. When rates are volatile long term locks are more expensive.

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Is my loan going to be sold?

You should assume that your loan will be sold. The "servicing" on your loan is a marketable security and your lender can sell your servicing. The good news is that this tends to keep interest rates low. 

As part of the loan documents you will be asked to sign a form granting recognition to the fact that your loan may be sold. You will also be provided with a form from the lender indication what percentage of their loans have been resold in recent years.

Keep in mind that there is a Federal regulation which gives you the ability to make payments to your old lender for a period of time after your loan is sold. This will protect you from having your payment reported as "late" if you send it to the old lender soon after it is sold. Protect your rights in this regard.

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