Let Southwest Funding show you how we put the pieces together for your new home loan. Our loan origination professionals are here to find a loan program that best fits your needs – today and in the future. We have defined the process into seven pieces starting with pre-approval and ending with loan servicing to help you better understand the lending process.

1. Pre-Approval
2. Application
3. Process Loan Application
4. Underwriting Loan Application
5. Decision
6. Loan Closing
7. Loan Servicing

You can be ‘pre-approved’ before formally applying for a loan.  Southwest Funding gathers information from you about your income and debts and makes a preliminary financial determination about how much house you may be able to afford. Usually, a pre-approval letter is issued showing the amount for which Southwest Funding has pre-qualified you.

Please understand that the lender will take the information that you give about your income, assets and debts in order to pre-qualify you. The pre-approval is only as good as the information that you give, and is subject to the lender’s verification of that information during the formal application process.

It's a good idea to know how expensive a home you can afford before you start shopping for one, and a pre-approval from Southwest Funding can help. If you can provide a pre-approval letter, sales agents and sellers will know that you are an able buyer and may take your offer more seriously. A pre-approval letter may sway a home seller to negotiate with you as opposed to another buyer who is not pre-qualified. If you are refinancing the loan on your existing home, then the pre-approval process should help you decide whether refinancing is a good idea for you.

The selection of a mortgage program can be rather complicated, and we highly recommend that a mortgage professional help you with the decision process. There are a countless number of loan products available in the marketplace today, and the guidelines for these products change continually. A mortgage professional that stays current on these programs can play a valuable role in analyzing your options.

Here are a few items you need to consider before selecting a program:

• How long do you plan to own the home?
• What is your financial outlook for the near-term and long-term?
• Do you have future financial obligations (such as college, retirement, elderly care) that might limit your future ability to meet debt obligations?
• How comfortable are you with a payment amount that changes over time?
• Will you consider a balloon payment?
• What is your liquid asset position? Are you willing to make a larger down payment?
• Are you self-employed?
• How is your credit history?
• Are you a first-time homebuyer?
• Will you have adequate funds available after debt payments for retirement funding and other needs?

As stated earlier, there are a number of mortgage products available. The most common types are the fixed-rate programs where the monthly interest and principal payments are fixed for the life of the loan. Other programs, referred to as ‘adjustable-rate’ loans, allow for the interest rate to change at specified intervals. The interest rate on adjustable-rate loans can go up or down depending on changes to the index interest rate on which the loan’s interest rate is based. Some adjustable-rate loans allow for a fixed period, such as one, three or five years, before the interest rate becomes adjustable. After that fixed period, the interest rate will change each year thereafter.

Another kind of adjustable-rate loan is the graduated payment mortgage, known as the “GPM,” where payments are fixed for only one year and will change by a specified amount annually. The advantage of the GPM is that often borrowers are able to qualify for a larger mortgage than they otherwise would, and may be able to ‘grow into’ the payment if it later increases. Unfortunately, this type of program is not for everyone because many GPM programs have negative amortization, meaning that the loan balance can actually increase since the interest rate used to calculate payments in the early years of the loan is lower than the rate used to calculate the interest that accrues. The shortfall is added to the loan amount. The loan fully amortizes (or pays off by the scheduled end of the mortgage term) by raising the interest rate in the later years to offset the shortfall.

There are also mortgage products available to serve the needs of a specific type of borrower. For example, there is a product called a “reverse” mortgage. This is a special type of loan designed for older borrowers who want to make use of the equity in their home without selling it. A reverse mortgage allows the lender to make payments to the borrower instead of the borrower to the lender. However, at the end of the term, the house is sold to pay back the amount loaned with interest. This type of program is not for everyone and there are a number of caveats that need to be considered. If you are considering a reverse mortgage, you definitely need to talk with a mortgage professional.

Another program for specific needs is called a “balloon” mortgage. Balloon programs are ideal for borrowers who know they will not occupy the home for long periods of time. For example, the borrower may know that he or she will be transferred to another location in three years, and will likely sell the home and pay off the loan anyway. Since balloon loans usually have shorter terms (usually five to seven years) than a typical fifteen or thirty-year loan, the interest rate is often more favorable than that on a fifteen or thirty-year loan. A balloon mortgage usually offers many of the features of a fixed-rate loan, such as a conversion option to a longer-term loan in the event that your plans change unexpectedly. A balloon mortgage may be a fairly attractive financing vehicle if you are comfortable with the lump-sum payment that will be due at the end of the term. Still, there are many options and features that you should fully understand before selecting this type of program. Please talk to a mortgage professional before selecting any of these special programs.

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The key form that you must complete is the loan application form itself (known as a ‘1003,’ from the Fannie Mae form number). The application identifies the property being financed, the borrowers, their employment information, their assets and liabilities, and other pertinent information that will support the decision on whether the borrower is financially able to maintain the payments. The property being financed is also being evaluated to see if it is adequate security for the loan. Clearly, it is vital that the loan application be complete and accurate. The next stages of the loan may go more quickly if there are no discrepancies or issues in the application.

All lenders rely on credit information from national credit repositories obtained by ordering and reviewing a credit report for all the borrowers on the application. Lenders will compare the debt information on the application to the credit report and investigate and document discrepancies are in the loan file.

Based on the information in the application, credit history (from the credit report) and other factors, your Southwest Funding loan officer will evaluate all the available loan programs to determine the best product fit for you. It is important to be working with a professional originator who understands your needs but at the same time knows the loan program guidelines and underwriting requirements to find the right program. This is why Southwest Funding recommends that you work with one of our trained professional loan officers before you make financing decisions.

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Southwest Funding's loan processor reviews the credit reports and documentation that you supplied as part of your loan application to verify your income, assets, employment, debts, and payment histories. The processor will contact your employer and bank directly to verify your relationship with them. If the credit report indicates unacceptable late payments, collections or judgments or other credit history issues, then the processor will request a written explanation from you. If there are incorrect entries on your credit report, the loan processor will work with you to get them removed.

The processor will also order and review a title company commitment to issue a title policy on the property insuring your ownership and the lender’s lien, a property survey in some cases, a tax certificate to be sure that the property taxes are current, and a flood certificate to ascertain whether the property is in a federal flood zone. If the property is in a flood zone, then the lender may still be able to make the loan as long as you obtain flood insurance on the property (see the explanation of flood insurance below).

The processor will also order and review the property appraisal. The appraised value of the property is essential, since the property serves as the sole security for the loan. The appraised value, as part of the loan-to-value (LTV) calculation, will also determine how large a loan the lender can make based on that security. The loan product for which the borrower applied will have specific guidelines for a maximum LTV ratio. The appraised value from the appraisal and the maximum LTV ratio from the guidelines will yield the maximum amount that the lender can lend to stay within the loan product guidelines. Maximum LTV guidelines vary widely among loan products. For example, most conventional loans allow maximum LTV ratios of seventy-five to eighty percent of appraised value, although they may be higher for loans with private mortgage insurance (PMI). In addition, depending on the type of loan program, maximum loan amounts may also be limited by local, state or federal law.

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Once Southwest Funding has received all the information that we need through processing your loan application, we will ‘underwrite’ your application, which means that we will compare your credit and income information and the property you want to finance against our loan guidelines for the loan product you want. Generally, we will look for verified, stable income, manageable debts (including the anticipated payment on the house you wish to finance), and a credit history, as shown through your credit report, indicating a willingness and an ability to repay money lent to you. We will review the property appraisal to be sure that it indicates a value sufficient to justify the loan amount, as well as a house in good enough condition to meet our guidelines.

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We at Southwest Funding will do everything we can to get your loan application approved. In some cases, we are not able to approve a loan application because it does not meet our guidelines. If that occurs, we do offer a full range of alternative loan products for which you may qualify, and we will be glad to take another application for one of these products so that you can reach your home ownership goals.

If Southwest Funding approves your loan application, then we will give you a conditional commitment to fund your loan. It is conditional because we may need some additional information or action from you (sometimes called ‘closing conditions’) before we can close your loan. Typical closing conditions are proof of hazard insurance on your home and flood insurance, if the home is in a federal flood zone.

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Once you have helped us clear up any conditions to your loan, we will schedule a closing date with a title and escrow company or closing attorney, whichever is the common practice in your area. At closing you will sign the documentation to take ownership of your home (if you are purchasing) or transfer your home loan to us (if you are refinancing), as well as get title insurance for your home. If your loan is an ‘escrow’ loan, you will deposit an amount to fund your escrow account, which we will maintain to pay the property taxes and hazard insurance premiums on your home as they come due. You will receive a ‘settlement statement’ that will detail all of your expenses in the transaction, as well as how your loan proceeds were distributed. You will also receive a title policy that insures your ownership of the property (see “Title Insurance”). If there are repair items to your home that have not yet been completed, the title or escrow company or closing attorney may hold the funds to make the repairs and have you, the seller and the contractor who will do the work sign an escrow agreement for the funds.

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After closing a loan, a lender typically “delivers” the loan to an investor and arranges for the administration or “servicing” of the loan, either by the originating lender, by the investor, or by a third party servicing company. Loan servicing includes receipt and tracking of monthly mortgage payments, related accounting to the investor and handling of customer inquiries. In addition, the loan servicer must ensure that all taxes and insurance premiums are disbursed from the escrow account to the proper taxing authorities and insurance carriers. The loan servicer must also complete and deliver to the borrower an annual escrow analysis to demonstrate that adequate funds are available to meet the projected tax assessments and insurance premiums. In the event of delinquencies, bankruptcies or foreclosures, the loan servicer represents the investor and handles all the legal notices, filings and other necessary actions to protect the investor’s interests. For all of these services, the loan servicer is compensated by receiving a small portion of the monthly payment from the borrower, usually between one-quarter to one-half of one percent.

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At any point, feel free to e-mail or call us regarding any questions you may have. You can find our contact information on each page or you can contact a professional loan officer directly. We are here to personally help you through the entire home financing process.