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How to Apply for a home loan in Arizona

How to Apply for a Home Loan in Arizona

Before jumping into the mortgage application process in Arizona, it is important that you, the buyer, understands the:  (Scroll down or click on link)

A mortgage loan will most likely be the largest debt you will ever incur. Simply put, a mortgage is a loan to finance the purchase of your home. This is based upon a note that you sign where you pledge your home as collateral (or guarantee that in the case of non-payment of the loan the home can be used to repay the debt). Most mortgage loans these days are amortized over a period of time. Amortization is the term that refers to a fixed payment over a period of time which enables the borrower to reduce the debt gradually through monthly payments of principal and interest. A fixed rate mortgage, for example, has a set monthly payment while the amount of interest paid slowly is reduced to $0 by the end of the loan (even though at the beginning the borrower is generally pay a large portion of interest).

After reviewing the information in this section, call us at (602) 993-0000 to set up an appointment with one of our loan agents to discuss your mortgage options or APPLY NOW 

Overview of the Loan Application Process

Whether it is the purchase of a new home for the first time or if you are the veteran home buyer, it is your goal to get through the mortgage loan process easily while still getting the best deal out there. In order to do so, it is of the utmost importance that you understand the steps that are involved throughout the process. The better you understand the process, the less problems you will incur and the easier it will be for you. The time frame from start to finish will vary depending upon the loan type, the borrower’s history, any contingencies in the contract and the investor involved with the underwriting.

The complete mortgage process in Arizona takes about 21-45 days on average.

Pre-Purchase (Occurs before the loan process begins) Before one begins shopping for a home, you should have a fairly solid idea of how large of a loan you will qualify for—i.e. how much you can borrow. 

PRE QUALIFY NOW It is essential to explore and discover exactly what are your needs. Are you on a fixed budget, for example, and only want a $600 a month payment? Are you looking for programs that will enable you to build up equity quickly? Or, are you looking to get the most home for your financial and credit situation? Once this is established, the agent and buyer begin searching for a suitable home. Once found, the agent negotiates a contract on the home and you move to the next step—the application process.

Step 1. The Application (Occurs between days 1 and 5) The buyer (now called “borrower”) completes a mortgage loan application with me. We sit down and begin the foundation of your loan file. Within three days of application, the borrower receives a Truth-in-Lending disclosure and a Good Faith Estimate which itemizes the approximate costs associated with applying for a loan.

Step 2. Opening the File (Occurs between 3 and 5 days) Assembling the loan package with all of the required documents is the most time-consuming step throughout the mortgage loan process. All of the information provided on the application must be verified and supported by documentation. Once the file is turned in, my loan processor orders a property appraisal and a credit report, mails out Verifications of Employment and Deposit (VOEs and VODs), the borrower orders homeowner’s insurance (hazard insurance), order the preliminary title work and gather/prepare the other documents that will be necessary to complete the loan package. VOE: Employers are asked to verify for each borrower the last two years of employment history and gross income, and state the probability of continued employment. VOD: Financial institutions are asked to verify the existence of each borrower’s funds. Typically, the borrower must have at least 3%-5% of his/her own funds for the down payment, sufficient funds to pay for closing costs, and 2 months’ cash reserves of the principal, interest, taxes, insurance (PITI) payment. All funds must have been on deposit, usually, for 90 days.

Step 3. Processing (Occurs between days 5 and 25) The processor reviews the credit report and verifies the borrower’s debt and payment histories as VOEs and VODs are returned. If there are any late payments, collections or judgments shown on the credit report, a written explanation is required from the borrower. Also, the processor reviews the appraisal and checks to see if there are any property issues that may require additional comment by the appraiser. Finally, the processor packages the loan in a pre-determined order and sends it off for underwriting approval. It is vital that when you are asked to provide a document, you do so as quickly as possible. Failure to do so often leads to delays and having to push closings beyond the contractual date. During this step, it is their chief responsibility to “pre-underwrite” the file. Pre-underwriting is a proactive step where they not only shuffle the paperwork but examine the file as an underwriter would in order to ensure the success of a file when it is submitted for approval.

Step 4. Underwriting (Occurs between days 15 and 25) The approval process is known as underwriting. Throughout this process, three things must be established before an approval is given: 1) the borrower’s ability to repay the mortgage loan 2) the borrower’s willingness to repay the loan 3) sufficient collateral (i.e. the property) to secure against the loan This is typically established by looking at the past two year’s of the client’s lives (residency information, employment history and credit history) in addition to looking in the foreseeable future. It is important to remember that the approval or denial of a file is usually determined by someone who has never met the borrower. The decision is made based upon the information and documentation in the file.

Step 5. Mortgage Insurance Underwriting (Occurs between days 15 and 27) If the borrower is putting less than 20% down on the home he/she is purchasing, the loan must be submitted to a private mortgage insurance company. The mortgage insurance underwriter reviews the file much like the aforementioned step. If approved, the okay is given to proceed to the next step. However, if more information is required to make an underwriting decision, the loan is put into suspense and additional information is requested from the borrower.

Step 6. Pre-Closing (Occurs between days 16 and 27) Once the loan is approved, any and all approval contingencies must be met. In addition, the rate is locked (if not done so by now) and the closing documents are ordered and sent to the title/escrow company. Finally, the closing is re-affirmed between the borrower and the title/escrow company.

Step 7. Closing (Occurs between days 21 and 45) Once the closing is scheduled, the borrower brings to the title/escrow company a certified check for the remaining closing costs/down payment. A significant part of your meeting with the escrow agent on the day of closing will be signing various documents.

Lender Expectations

Determining if the borrower qualifies for a mortgage is determined by a wide array of different variables. These variables often vary (and many times will vary considerably), depending upon the type of mortgage that the client wants or that you can qualify for. Before saying “YES!” a lender will look at the following items:

Monthly Income and Expenses:  The first question the lender tends to solve for is “Can the borrower afford the monthly payments on this new mortgage?” To find the answer, the lender examines your current income and expenses plus the cost of the new mortgage and apply them to payment ratios to see if you are within the particular spending guidelines for that particular loan program. The first payment ratio is called the “Monthly Housing Ratio” or commonly referred to as the front-end ratio. This ratio is the total monthly mortgage payment (PITI—principal, interest, taxes and insurance) divided by your total gross monthly income (i.e. before taxes). This tells the lender exactly what percentage of your income will be used to pay your new mortgage. The second payment ratio is called the “Debt-to-Income Ratio” or commonly referred to as the back-end ratio. This ratio is the total monthly mortgage payment (PITI) plus the sum of the minimum payments required on your credit cards, charge cards, car loans, student loans, installment loans, child support paid, alimony paid and other credit obligations divided by your total gross monthly income. This tells the lender what percentage of your income will be used toward your total credit obligations. It is important to also remember that these ratios do not take into consideration the borrowers normal living expenses—i.e. food, utilities, gas and automobile maintenance, entertainment, car insurance, etc. As a rule of thumb, your monthly housing ratio should not exceed 28-33% and your debt-to-income ratio should not go beyond 36-38%. Sometimes exceptions can be made for a borrower with higher than normal ratios IF you can demonstrate your ability to carry a higher mortgage payment (e.g. you have paid on time for the past two years a substantially high rent payment that is comparable to your proposed mortgage payment). As stated before, the lender must know your income before he or she can determine your ratios.

For all applicants, whether or not married, your monthly income includes: gross monthly salaries commissions (using a two year average) bonuses (using a two year average) investment income (two year average and does not include dividend re-investment plans) pension or trust income (must be able to prove a three year continuation in the future) alimony and/or child support (that is received not paid out each month and be able to prove that it will continue for at least the next three years) It is important that the monthly income does not include anticipated raises or unsubstantiated estimates of future commissions and bonuses (even though this can be a strong compensating factor). It also does not include investment income on accounts or assets that will be used for your down payment.

Credit History The second issue the lender looks at is credit by asking the question “Have the borrowers repaid your past debts in a timely fashion?” The lender finds this out during the pre-qualification process by pulling an “in-file” credit report. Also, credit history is established by ordering a residential mortgage credit report (RMCR) that is submitted with the loan package. A RMCR differs from an in-file credit report in that it is a merged report, pulling from a minimum of two credit repositories, verifies accurately the current balances and payments of all of the borrower’s reported credit obligations and typically the company we order the RMCR from interviews you and verifies from you the information reported by the credit repositories. The payment history reflected on the RMCR is of critical importance for it shows how many times you were more than 30/60/90+ days late in making your required monthly payments. It also shows your usual payment patterns, whether you always pay on time or are usually late. In addition, it normally reports any judgments, liens (tax, mechanics, etc.) bankruptcies, divorces and other public record information. It is vitally important for you to disclose any known or possible credit problems to the lender as soon as possible. Typically the lender can work around bankruptcies, foreclosures or other problematic situations if properly explained and documented. However, failure to disclose credit problems or answer all of the related questions on the mortgage application is a sure fire way to be automatically denied for a loan.

Property Appraisal The third question the lender asks is “How much is the property worth?” An appraisal is necessary to establish the value of the property. This is ordered by my loan processor after application and it not only establishes a value on the property but reports on: detailed information regarding the subject property, marketability of the home and neighborhood, obvious construction problems or defects with the house and other factors that affect the value of one’s home.

Source of Cash for Down Payment and Settlement Costs The fourth question the lender asks is “Do you have enough money to close the sale and where are you getting it?” One of the steps during the verification process is to ensure that you have enough money to close on the home by verifying bank deposits, getting sufficient gift letters for the down payment or other written evidence of funds. The following is a list of acceptable sources of funds: checking and savings accounts borrowed funds (against a secured asset—i.e. a car, CD’s, real estate, life insurance, etc.) earnest money deposit gift funds (if it does not have to repaid) IRA’s and Keogh Accounts sale of assets stocks, bonds, trust accounts or other investment accounts However, the lender cannot accept the following as acceptable sources of funds: cash on hand proceeds of a personal or unsecured loan a gift that must be repaid in full or in part cash advance on a revolving charge account or unsecured line of credit cash for which the source cannot be verified

Employment History The final question the lender asks is “Will your future income be stable enough to meet the required monthly mortgage payments?” Ideally, the lender look for a two year history in a profession (not necessarily with a particular employer). Frequent job changes, spotty employment history or unstable employment may cause us to go through extra hoops in order to prove your future job stability.

Before Application Preparation

For many potential borrowers and future home owners, preparing to apply for a loan makes all of the difference in the world. Not only knowing what a lender expects but staying one step ahead of the game will insure success. In the previous section we discussed what a lender expects before approving a loan.

In this section, we will focus on the three areas that often cause problems for a borrower:

Income:  As a standard rule of thumb, most lending guidelines require a two year history in a profession and proof of income at the current pay rate. If you know that in a month or two you will receive a pay raise, wait until the new pay scale goes into effect. Even a 25 cent raise per hour will increase your loan amount by approximately $6,000 (assuming an 8% interest rate over 30 years).

If you are self-employed, you may have to bite the bullet and not write off as many expenses as you could. By doing so, the amount of reported income increases which results in a higher qualifying loan amount. On the other hand, you pay more taxes and completely ignores other available loan programs such as a stated income or no income verification loan. If you currently have a temp job and you know a lender will not accept your income, find a permanent position with an employer. Unless you are drastically switching professions (Marketing Executive to Chemist, for example), it likely that you will be able to use the income to qualify.

Credit Before searching for a home or attempting to apply for a loan, it is highly recommended that you request a copy of your credit report from all three major credit repositories (Experian, Trans-Union, and Equifax). Review the information to see if any known or unknown problems exists that could potentially prevent you from obtaining a loan. If you suspect that you may have credit issues (i.e. recent late payments, open collection accounts, judgments, etc) that report on your credit report, take care of them immediately. If you decide to pay off a collection account, try negotiating with the creditor first. Often times creditors will accept a reduced amount in order to be paid (something is better than nothing). However, if you pay off an account, be sure to have documented proof from the creditor that the account is paid in full. If you plan on paying off several credit cards prior to borrowing money, be sure to pay off the account(s) at least one to two months prior to application. The reason is due to the slow response time of many creditors in showing that an account is paid off on your credit report. If a lender cannot prove that you have paid off an account on your credit report, that debt may be included in your debt to income ratio (thus reducing the amount of the loan you qualify for). For more information on credit repair, visit our credit repair section by clicking here.

Source of Funds Another sticky issue that many borrowers have to dance around is verification of their money in order to close. Lenders generally require that money rests in a bank account for a minimum of three months in the bank. If you know you will be searching for a home soon, put the money in the bank and let it sit there for at least three months. If the funds will be coming from an acceptable source such as the sale of an asset, be sure to document the transaction by a bill of sale, a copy of the check, and a copy of the deposit slip.

Furthermore, when depositing the money into your account, DO NOT take cash back or deposit other items with the money into your account. You want your bank statement to reflect the exact dollar amount from the transaction. For example, you sell your car for $2,000.00 and you make copies of all of the paperwork, your deposit slip should only read $2,000.00. Nothing more and nothing less. If you need to make an additional deposit, do it on another deposit slip. Items Needed For a Loan Application

Finally, lenders will require documentation to prove the items on the application. The following is a general checklist of items you will need for a mortgage: 

Income (including overtime and bonuses, if applicable--one full months paystubs for all borrowers) & Last Two years of W2's If self employed, last 2 years tax returns and a current Profit and Loss statement. Copy of business license, yellow page ad or website.

  • Debts (to include minimum monthly payments on these debts)
  • Employment history (for a minimum of 24 months)
  • The source of your down payment and closing costs
  • Copy of current statement of retirement accounts
  • Current rent (to include name, address and phone of your landlord)
  • Checking and savings account information (preferably the past three months statements on all accounts-ALL PAGES)
  • Explanation of any derogatory credit and credit inquiries for the last 6 months.
  • Any bankruptcy history Any legal actions you are involved in
  • Citizenship status (driver's license, social security card, work visas, passport, etc.) must conform with the Patriot Act Alimony and/or child support obligations (to include the divorce decree(s))
  • Foreclosure history
  • Value of stocks and bonds and current statement Value of life insurance
  • Value of automobiles owned
  • Value of other major assets

Learning about the application process and the different steps involved in getting your loan approved is the crucial first step in the application process. By reviewing your situation and identifying potential hurdles will only make the process easier, smoother, and simpler for you and the lender. If you would like assistance in identifying potential hurdles, help fine tuning the qualifying process and/or someone to go over with you the many different options you may have available, call a loan officer from Sun Nations Mortgage at (602) 993-0000.

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