Now that you have found a buyer who has seen your property and wants to purchase it, it’s time to pre-qualify that buyer for a mortgage. Though the process may sound intimidating, I will make it easy for you.

THE PRE-QUALIFYING PROCESS

Pre-qualifying buyers for a mortgage is really as simple as having the buyer complete and sign a preliminary mortgage application. Basic  information such as address, employer, and current yearly income must accompany the applicant’s signature. This allows the bank to access the buyer’s credit report and verify stipulated information. If another person will be purchasing the property along with the buyer, that second individual must complete the co-applicant information, replete with signature. Once the application has been completed, inform the buyer that you will submit the application to your bank and call him as soon as you hear word of whetherthey qualify.

Mortgage Pre-Qualification Form

With this preliminary application completed, it’s time to find a mortgage company to work with. When you are first starting out, I recommend calling a number of mortgage companies, telling them you are a real estate investor looking to work with a mortgage company that does FHA loans and has flexible guidelines. Ask to speak with the loan officer or broker, then inquire about the following:

• Are they a direct underwriter for FHA?
• How long does it takes his company to issue a mortgage commitment?
• How many points do they charge?

In essence, what you’re doing is pre-qualifying the mortgage company. You should not send a mortgage to a company without asking these basic questions. The reason for asking whether the mortgage company is an FHA approved direct underwriter is because if they are, they will fund your mortgages much faster than a company which is not. Being an FHA approved direct underwriter means that some of the world’s largest banks, such as Chase and Bank of America, have given authority to that mortgage company to underwrite mortgages on their behalf. The significance of this to you, as an investor, is a much faster mortgage process. And faster mortgage processes equal faster swelling of your wallet.

Next, you will want to work with mortgage companies that are willing to give you a fast commitment on a mortgage. Direct underwriters usually render a mortgage commitment within one week for your buyers. So as you can see, direct underwriting capability is vital.

Once you have selected a mortgage company, inform the loan officer that you’ll be faxing pre-qualification applications whenever you get a new buyer. Ask the loan officer to notify you within 48 hours as to whether the buyer qualifies for an FHA mortgage. If the loan officer then informs you that the buyer qualifies, it is time to organize the buyer’s remaining paperwork. While the loan officer will tell you what is required from the buyer to initiate the mortgage process, I will now take the time to inform you beforehand just what will be needed.

Directly below you will find a checklist. Make copies of it.

Required Information for

FHA Mortgage Application

• Last two years  W2 ‘s
• 1-MONTH PAY STUBS
• 3-MONTHS BANK STATEMENT
• 2-MONTH SECURITIES/PENSION ACCOUNT STATEMENT IF ANY.
• PROOF OF ADDITIONAL INCOME IF ANY
• COPY OF SOCIAL SECURITY CARD
• PICTURE ID
• LETTERS OF EXPLANATION FOR DEROGATORY ACCOUNTS
• COPY OF CONTRACT OF SALE
• NAME AND ADDRESS OF LANDLORD
• BANKRUPTCY DISCHARGE PAPERS IF BUYER HAD FILED FOR
• BANKRUPTCY.

You should generate a file for each of your buyers which includes the items on this checklist. Each time a buyer brings you one of the items, check off the appropriate box. Once all the items are together, schedule an appointment with the loan officer so that you can bring the buyer in, enabling the loan officer to complete the standard mortgage application  #1003,with the buyer. When you meet the buyer at the mortgage company, don’t forget to bring all the buyer’s paperwork that was previously given to you. When I first started, I used to tell the buyer to bring their paperwork with them at the time they came to fill out the mortgage application; unfortunately, the buyer always forgot to bring something. The absence of necessary paperwork at this meeting only delays completion of the process, as the loan officer can’t submit an incomplete package to their underwriter. As a result, I now always collect all the buyer’s necessary paperwork myself. Because time is money, it might be a good idea for you as well.

At the outset, I recommend that you allow the loan officer to sit down with the buyer and fill out the application. However, after seeing how the loan officer completes the #1003 several times, you will likely feel confident in completing it yourself prior to the actual meeting (which is perfectly legitimate). Completing the #1003 mortgage application is straightforward and easy. So once you feel confident doing it, do it. Any time you can save in the mortgage process increases your profits. Besides, if you make the loan officer’s job easier, he/ she will tend to make things easier for you!

So do you see how I do things? Efficiency is key. Just as I am in total control of the various aspects of my business, so you can come to be. Don’t leave it up to anyone to do things for you. Take control of the situation. Don’t wait for the loan officer to continually call your buyer to bring in additional information. You tell the loan officer that if any additional information is needed, she must call you. At the same time, you must hound the buyer to bring in what is required to close the mortgage. Loan officers have plenty of other mortgages to consume their time; they are not nearly as concerned about completing your deal as you are. It is your business — handle it. Only you can assure fast results, so it is up to you to be involved in the entire mortgage process.

Once the buyer is approved and the application signed, it is time to order an appraisal. Hopefully, by this point, you will have selected an appraiser. If you haven’t, it is certainly time to do so. Remember, you must tell the loan officer that you will order the appraisal; then ask her what bank name you should tell the appraiser to put on the appraisal. All appraisals require the sales price, name of buyer, name of seller, name of  bank, and FHA case number if it is an FHA loan. This information needs to be given to your appraiser before he examines the property.  You must also let the appraiser know what type of loan it will be. The loans I work are almost always FHA. FHA appraisals have an extra section that must be completed.

The next step in the mortgage process is ordering a title insurance policy. Title insurance protects the lender from claims which may be imposed against the buyer or the property itself. Ordering the title policy is not your job. The buyer’s attorney or title company/escrow agent will do this. The only thing you have to do is acquire the exact name and address of the bank which will go on the title policy. You can glean this information from the loan officer, then simply forward it to the closing agent. Also, before ordering title, the title insurance company and the loan agent will need the names of the buyer and seller, and a copy of the sales contract. While no one requires you to do these things related to title insurance, I do them because I want to close faster and get my money. When you assume control of the process, everything goes smoother and faster.

An additional item that mortgage companies require for an FHA loan is a survey of the property. A survey essentially maps out and indicates the boundaries of the property. You don’t have to order this; either the buyer’s attorney or the title insurance company orders it. Before a surveyor performs the survey, he must have the legal description of the property. This can be found on the title of the property. You don’t have to know this, but I believe a real estate investor should know everything about a real estate transaction.

Once all conditions are met for the mortgage, and the title of the property is clear, then the mortgage company schedules a closing date with the closing agent. Before the date of closing, the bank mails closing instructions and wires money to the closing agent. The instructions basically tell the closing agent what additional information is needed to close, as well as forms which need to be signed by the buyer (such as the mortgage and mortgage note). At closing, your attorney or the title company or escrow agent prepares  a deed and affidavit of title which must be signed by you. The deed transfers ownership to the buyer and the affidavit of title states that you are who you say you are and are the actual owner of the property. Additionally, the closing statement or HUD-1 must be signed by both you and the buyer. This statement discloses the amount of money you are walking away from the deal with, as well as all the fees involved in the transaction.

That’s all there is to the mortgage process and selling your property. What I’ve discussed with you will give you a strong foundation until you finally go through the process yourself and actually live what I’ve been telling you. As you will discover, most things sound more intimidating than they actually are. Once you go through it several times, you will become more comfortable and more confident. If you take anything away from this chapter, I hope it’s the fact that you must always stay in control of the entire process. Stay on top of all parties involved to make sure they complete their tasks. If you don’t, trust me, things will take much longer to finish and you will end-up closing three to six months later.

FHA MORTGAGES

While you do not need to know the following subject, as I stated before, legitimate real estate investors SHOULD be familiar with all aspects of real estate transactions. It is far more difficult for informed investors to become confused or taken advantage of in this business.

An FHA insured loan is a mortgage that is insured by the Department of Housing and Urban Development (HUD) against default. The main benefits of obtaining this type of mortgage for your buyer are the low income requirements, and credit flexibility.

Now let’s get into the particulars of FHA mortgages. As far as FHA guidelines regarding income requirements, the lender looks at the buyer’s debt-to-income ratio, just as they do with other loan programs. Debt-to-income ratio is a comparison of gross income (before taxes) to housing and nonhousing expenses. Nonhousing expenses include such things as credit cards, car loans, student loans, and child support. The buyer’s monthly mortgage payments should be no more than 29% of their gross income;  with conventional mortgages this ratio must be no more than 28%. When combining the proposed mortgage payment with nonhousing expenses, the debt should total no more than 41% of the buyer’s income. There are, however, other factors the lender considers, such as the amount of the down payment and credit history.

The maximum loan-to-value (LTV) ratio with FHA loans is 97%. This refers to the amount of money that can be borrowed in relation to the appraised value of the home in question. Each loan has a specific LTV limit. For example, with a 97% LTV loan on a home priced at

$100,000, the buyer can borrow up to $97,000 ($100,000 x .97 [97%] = $97,000), and would have to pay $3,000 as a down payment.

The higher the LTV, the less money your buyer, or should I say you, have to put down. In order to protect lenders against a loss (that would normally occur if the buyer goes into foreclosure), higher LTV loans (80% or more) require mortgage insurance.

Let us now look into the matter of credit histories. Whenever anyone utilizes credit as a purchasing mechanism (borrows money to pay for products or services instead of paying cash), the company with which that credit record is established reports the borrower’s payment history to three credit bureaus: Equifax, Experian, and Trans Union.

With their accumulated credit histories from all pertinent companies, these credit bureaus then give the borrower a score. This score is a number representing the likelihood that a given individual will be unable to repay a loan. Lenders use it as a qualifier for a mortgage. The higher the score, the better one’s chance of securing a loan. As it is, however, the three bureaus do not consort together to generate one unified score. Rather, each bureau  generates their score individually. Mortgage companies always go with the middle score. At times, there can be a large difference in scores from one credit bureau to another, for wide number of reasons (usually because some financial companies report to only one bureau and not the others). In the mortgage business, anything above a score is considered excellent credit. Provocatively, I have had buyers who have been approved for an FHA loan with scores as low as 510. The lowest score FHA will generally accept is 500. If you remain in the business long you will, come across applicants with no credit score. This simply means that they have not established a credit history. But no credit is better than bad credit, and FHA will accept ‘no credit applicants’ if they can provide three alternate credit references, such as telephone companies, electric bills, or water bills.

FHA loans are more flexible than conventional lenders in its qualifying guidelines concerning credit. FHA guidelines make you eligible for a loan if: two years have passed since a bankruptcy has been discharged, all your judgments have been paid, any outstanding tax liens have been satisfied, and three years have passed since a foreclosure or deed-in-lieu has been resolved.

As for income requirements, FHA mortgage lenders like to see buyers who have been at the same job for at least two years. Just so you are informed, below is a breakdown of the various closing cost fee categories for FHA buyers (the fees for non-FHA buyers are very similar):

• Attorney’s or escrow fees
• Property taxes (to cover tax period to date)
• Interest (paid from date of closing to 30 days before first monthly payment)
• Loan origination fees (points)
• Recording fees
• Survey fee
• First premium of mortgage insurance
• Title insurance (buyer and buyer’s lender)
• First payment to escrow account for future real estate taxes and hazard insurance.