Understanding the Home Financing Process in the Seattle Area

Because financing is so important, buyers should have as much information as possible regarding mortgage options and costs. Your work in the pre-approval process at the beginning should help to move the funding process forward provided that you continue working with the loan originator your pre-approval came from.

Often the closing cost of real estate financing is routinely greater than 2 to 3% of the purchase price. So, it’s important that you are prepared for those costs or you may want to consider asking the seller of the property you are buying to pay for them in the form of a seller credit.

What Kind of Loan?

There are several types of mortgages available out there from a variety of lending sources all with pretty similar characteristics. In general, the mortgage you choose will likely be determined by at least several key factors:

• How much down? Loans with 5% down payment are standard for conventional loans, 3.5% for FHA loans and 0% for VA and USDA Loans. The widely available no down payment financing of years past has largely disappeared other than a few limited options involving state grant programs for low income borrowers.
• Less than 20 percent down? If you are placing less than 20 percent down, lenders will want the mortgage guaranteed by an outside third party such as the Veterans Administration (VA), the Federal Housing Administration (FHA), the USDA (Rural Guaranteed Program) or a private mortgage insurer (PMI). Private mortgage insurance is required by a lender to protect against mortgage defaults. More than 2.5 million VA, FHA and PMI loans are generated each year.
• How's your credit? The best rates and terms are only available to those with solid credit. To get the best loan and rates available, make a point of paying credit cards, installment payments, rent and mortgage bills in full and on time. In order to make sure you have the highest possible scores when your credit report is pulled, you should have your credit card balances as low as possible in relation to your available credit. You should also review your credit report when it is pulled by the loan originator to make sure that it is accurate and if there are any mistakes they can be corrected. Some loan originators also offer credit improvement information with their credit reports which can be very helpful if you need to improve your score in order to qualify for the mortgage.

How Do You Get a Loan?

To obtain a loan you must complete a written loan application and provide supporting documentation to the loan originator. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the application process, the loan originator will review your documentation with you to make sure that it can support your application including your monthly income and assets. 

One thing that many first-time home buyers aren’t aware of is that gross (pre-tax) income is used for income calculations with those people that are salaried W2 paid employees. For hourly employees their monthly income is calculated by looking at the Year To Date earnings and dividing by the number of months while also comparing that to the earnings during previous years.

If you are self-employed your income will be calculated from your tax returns using the net income that was reported. Over the past several years lenders have started reviewing the tax returns of almost all borrowers so no matter your type of employment you should expect that if you have unusual income deductions or information reported that it may affect your loan approval.

Loan Review & Underwriting

After the application and disclosures are signed and you have provided copies of your documentation to the loan originator your loan then moves to underwriting review. Almost all loans are initially reviewed by an electronic underwriting system for electronic approval to start with. The loan will then go in front of a person to review all of the details and aspects of it for full underwriting approval. The underwriter will determine what conditions (information, documentation, details) are needed in order for the loan to be completed and funded. 

It’s highly likely one of those conditions will be an appraisal of the value of the property, which is done through the use of a third party Appraisal Management Company. Other conditions are likely to include a title report, documentation of property insurance and verification of employment. After all of the conditions have been completed and signed off by the loan underwriter the loan is ready for closing, documents to be sent out for signing and for loan funding.