This article reviews the loan application process the transaction agent (TA) must guide his buyer through to ensure the buyer closes on the most advantageous loan terms available.
Role of the transaction agent (TA)
The ability of a buyer or an owner to obtain financing is an integral component of most real estate transactions, whether the intended use of the loan proceeds is for:
- new property acquisitions;
- tenant improvements (TIs) under a lease;
- construction of buildings; or
Preparing a loan application to submit to a lender, whether private or institutional, is the catalyst which sets the machinery of the mortgage industry in motion when submitted.
Unfortunately, all too often, a buyer needing purchase-assist funding is left to grapple single-handedly with the lender to look out for his own financial interests with no protective assistance. It is the duty of the gatekeeper who brought the buyer into the marketplace, the buyer’s selling agent, called a transaction agent (TA) when a loan is involved, to diligently ensure his buyer gets the best financial advantage available to him for the class of loan the buyer seeks.
The TA neither arranges nor makes a loan. His principal task is negotiating the real estate transaction, usually between a buyer and seller. However, for the sales transaction to close, and for the TA to get his fee, a loan needs to be arranged with a lender to provide supplemental funding for the buyer’s payment of the purchase price. The TA’s compensation for negotiating the real estate transaction is only fully earned and payable when he has taken all step necessary to eliminate the loan funding contingency, the ultimate event allowing escrow to close.
This all-encompassing duty of the TA to diligently serve the buyer includes policing the:
- loan application submission;
- lender’s loan processing; and
- funding criteria to vigilantly ensure that all the documents escrow needs to comply with the lender’s closing instructions are in order so funding can take place.
For the buyer, as with any borrower, the greatest risk of loss of savings and future earnings in a real estate transaction occurs when arranging the loan with the lender’s loan representative. The TA is a paid advisor with a duty to the buyer to police all facets of the loan process so the loan contingency will be satisfied and the buyer locates and closes on the most advantageous loan terms available in the market. No less could be reasonably anticipated.
The TA is the buyer’s most reliable and knowledgeable ally in the real estate transaction. This alliance extends beyond the moment the purchase agreement offer is accepted to all critical interactions with the lender who will fund the closing. The lender is not an agent of the buyer but his adversary. As an outsider to the mortgage lending industry, the unassisted buyer is placed in an inherently submissive position to the lender who will instinctively prey on the buyer’s ignorance of the process to increase its profit. Again, no less could be reasonably expected.
What must be understood by the TA is that the lender’s product – money – is unpriced until closing. This holds true in spite of the good faith estimate of costs (GFE) and interest rate disclosures that are given to the buyer within three business days following the lender’s receipt of the loan application. [See first tuesday Form 204 (DRE 883)]
The most competent TA has experience policing lenders and is aware of the methods they use to glean the highest rates, most points and garbage fees from the unprotected buyer. If the lender’s tactics are anticipated by the TA, the TA can counsel the buyer so he will be on guard against any form of deceit. By doing so, the TA prevents the lender from pulling the wool over the buyer’s eyes, as history has proven they are prone to do.
Before meeting with a lender
A buyer’s first step toward obtaining a loan requires him to submit a standardized Uniform Residential Loan Application to a lender as a prospective borrower. [See first tuesday Form 202 (FNMA 1003)]
The application itself, designed to be completed by the buyer/borrower with the assistance of the TA and the lender’s loan representative, establishes the:
- type of mortgage sought by the buyer/borrower and the terms of the loan;
- intended use of the loan funds and the property’s information [See first tuesday Form 202-3];
- buyer’s/borrower’s (and co-borrower’s) information and employment history;
- monthly income and combined housing expenses [See first tuesday Form 207 (FNMA 1020)];
- assets and liabilities [See first tuesday Form 207-1];
- details of the transaction and declarations; and
- acknowledgment and signatures.
However, before submitting the application to the lender, the TA needs to inform the buyer about what to expect during the loan application process. By doing so, the buyer is prepared and well-informed to respond defensively during the loan packaging process which is when the financial stakes are at their highest for both the buyer and lender.
Before submitting the application to the lender, the TA needs to inform his buyer of:
- the expectations held and the role of each servicer or affiliate involved in the loan transaction (the lender’s loan representative, the lender funding the loan, any mortgage loan broker involved, private mortgage insurance (PMI) carrier, credit agencies, the appraiser, title insurer and escrow company, etc.);
- what is going to take place during the application process (submission of the application, lender disclosures, payment of lender costs, gathering documents, funding requirements, etc.); and
- what to guard against (issues fabricated by lenders to drive up interest rates and fees beyond their initial estimates on unwary buyers without justification prior to closing).
The TA should also assist the buyer in gathering the documents needed to be submitted in conjunction with the loan application. These documents frequently take the form of W2’s and recent pay-stubs to evidence the employment information represented by the buyer in section four of the loan application. [See first tuesday Form 202 (FNMA 1003)]
Other portions of the loan application will need to be later verified with supplemental documents, such as:
- an appraisal report to establish the value of the property serving as security, as called for in section two;
- recent bank statements;
- verification of deposit or tax returns to establish the buyer’s assets, as called for in section six; and
- a credit report to establish the buyer’s liabilities and capacity to repay the loan, also called for in section six. [See first tuesday Form 202 (FNMA 1003)]
The necessity of separate applications to multiple lenders
When a loan contingency exists in a transaction, which is almost always the case in sales of real estate, the buyer will need assistance when negotiating with the lender to ensure he will end up with the most competitive loan rates and terms available. To best achieve this, the TA needs to advise the buyer to consider submitting separate loan applications to multiple lenders, a minimum of two. This is no different than getting a bid on the purchase price of the same automobile from two car dealers, except that substantially more money is involved.
By submitting applications to at least two lenders, the buyer is armed with a fail-safe system to bypass unscrupulous changes by the lender, their representatives, or any mortgage loan brokers involved: if one lender’s costs and rates change unreasonably at the time of closing, the buyer has another loan application in process with a different competing lender. Multiple applications keep the lenders vying for the borrower’s business, and will assure they remain so to the last minute – the moment of funding.
Lenders, of course, do not like to be competitive. Thus, they instinctively advise buyers not to submit multiple applications for credit, claiming additional applications will interfere with debt ratio analysis during the loan processing.
However, a buyer who submits applications to two lenders has a bargaining chip against a lender who later:
- loads on the garbage fees at the time of closing; or
- is unable or unwilling to originate the loan on the terms initially represented by it, or at the lower prevailing par rate available elsewhere at the time of closing.
The submission of a loan application to a lender, much less multiple lenders, does not commit the buyer to any obligation to any lender. Though a lender may disclose reasonable and competitive estimates and loan terms before and at the time the initial loan application is submitted, luring the buyer to stay with them during the loan packaging process, the lender has no obligation not to boost its costs, fees or the interest rate at any later stage in the process, usually reserved for three days before closing.
Within three business days after submitting the loan application to the lender, the lender must hand the buyer the lender’s GFE of costs. On this form, the lender discloses all loan related charges to be paid by the buyer, such as origination fees, credit report fees, insurance costs, and prepaid interest it intends to charge or be reimbursed for originating the loan. [See first tuesday Form 204 (DRE 883)]
If the estimate of costs and rates worked up by the loan representative prior to submission of the loan application are widely divergent from those furnished in the GFE and accompanying Truth-in-Lending (TILA) annual percentage rate (APR) disclosures, the lender’s true colors are instantly exposed. The buyer, with the proper guidance of the TA, can determine whether the loan representative gave them straight forward and honest information, or if the initial interview with the loan representative was a fabrication to entice the buyer to apply for a loan.
To compound this deception, lenders often change their rates and charges immediately prior to closing. When they do so, they hand the borrower a second “refreshed” GFE and TILA (APR) disclosure with modified (more specifically, increased) charges and loan terms, presented to be signed at least three business days before closing.
If there is no backup application with another lender, the borrower has no alternative available to protect himself against the lender going in for extra profits at the last possible opportunity. However, with loan applications in the works with two or more lenders and negotiations establishing which lender ultimately offers the best terms and rates, the TA is able to direct the buyer to the lender who offers the superior set of loan costs, terms for payment and interest rates.
Although the second application doubles the buyer’s application costs, these costs are de minimis in comparison to the total dollar amounts involved in the transaction. The TA should not let the borrower be dissuaded on these grounds.
Multiple government agencies, both federal and state, promote the practice of submitting multiple applications. To assist the buyer with the task of comparing the products of two or more lenders after multiple applications have been submitted, entities such as the California Department of Corporations, Freddie Mac, the Federal Reserve, and the Federal Trade Commission publish Mortgage Shopping Worksheets. These worksheets, designed to be completed by the buyer with the assistance of the TA, contain two columnar itemizations of all the variables commonly occurring at the time of origination and over the life of a loan.
After submitting loan applications to two lenders and receiving the corresponding GFE and TILA (APR) disclosures, the buyer will possess all the information needed to fill in both columns, one for each lender. Once complete, the buyer and TA can clearly compare the terms offered by the competing lenders and proceed to close on the more advantageous offer. The California Department of Corporation’s Mortgage Shopping Worksheet can be obtained at //www.corp.ca.gov/Education_Outreach/pdf/resources/mortwork.pdf.
Fundamentals of the Uniform Residential Loan Application
The Uniform Residential Loan Application prepared by the buyer, with the professional assistance of his TA, supplies the lender with necessary information about the buyer and the property securing the loan. It also gives the lender authorization to start the loan packaging process, activity necessary for the lender to determine whether the buyer is qualified to obtain a mortgage, and if so, on what terms. [See first tuesday Form 202 (FNMA 1003)]
Generally, the loan would be sought in a sales transaction by a buyer who requires the money to fund the purchase of a property. However, the loan may also be used by an owner of vacant land to construct a dwelling, or used by a property owner to improve or renovate a property he currently owns, or to refinance an existing mortgage. In some instances, the loan could be sought by a tenant on a long-term lease who has agreed to make tenant improvements (TIs) to the property he rents.
As can be inferred by its title, the Uniform Residential Loan Application is intended primarily for use on residential property loans, such as one-to-four unit residential property, condominiums (attached or detached), or rental property of any size which is exclusively residential.
However, as a generic loan application, it can be used to apply for a loan secured by any type of property since it contains all the information required for arranging all types of real estate loans. In practice, the type of property intended to be purchased by the loan proceeds is clear based on the description of the property in the loan application.
Components of the Uniform Residential Loan Application
Once the TA has reviewed the loan process with the buyer, who is referred to as the borrower in the loan application, the application must be completed and submitted. The application itself is designed to be completed with the loan representative, though it is crucial that the TA also be present during this critical step of the transaction.
The first section of the Uniform Residential Loan Application calls for the borrower, with the assistance of the loan representative, to enter the type of mortgage sought, such as conventional, VA or FHA-insured. The borrower must also indicate the total amount of the loan requested, the anticipated interest rate (fixed or adjustable), the periodic payment schedule (constant or graduated), as well as the amortization period (positive or negative).
In the second section, the borrower identifies the property which will be used to secure the loan, as well as the purpose of the loan, such as purchase-assist, refinance, or personal-use equity loan, and the intended use of the property, be it as a primary residence or for investment purposes. The source of down payment funds and closing costs are also to be entered here.
Information relating to the borrower, such as his name and social security number, is entered in section three. Here, and in section four, space is left to insert any co-borrower information if the liabilities, income or assets of the co-borrower will be considered for loan qualification purposes. If the liabilities, income or assets of a co-borrower are community property, the borrower is also to mark the appropriate community property box at the top of the form.
California is a community property state, meaning most assets and liabilities incurred during the marriage are shared between husband and wife, including real estate interests. If community property is not involved in the transaction for which the borrower is applying for a loan, then the spouse is not a co-borrower and that spouse’s separate assets cannot be seized by the lender.
If the assets and liabilities are to be considered community property (as is generally the case with home purchases by a husband and wife), then the borrower is one spouse and the co-borrower is the other spouse.
However, a separate application regarding assets and liabilities must be filled out by the co-borrower and separately submitted to the lender if:
- the assets and liabilities result from separate property owned by a co- borrower;
- the co-borrower is a necessary party to the transaction as the separate property encumbered will be considered community property; or
- the co-borrower is a co-signer of the note as a primary borrower.
The borrower and co-borrower will prepare the Balance Sheet Financial Statement – Assets, Liabilities and Net Worth, first tuesday Form 207-1, if their assets and liabilities are sufficiently joined to make one combined statement viable. If not, each co-borrower is to prepare their separate loan application for individual consideration by the lender with separate financial statements if they are self-employed.
The borrower may later complete the Statement of Information – For General Index, first tuesday Form 401-4, to disclose confidential information to be used by the title company to search the general index (GI) for information on the borrower and any co-borrower regarding judgments and other legal difficulties which might interfere with their taking title or providing the security interest in the property required by the lender.
Section four of the Uniform Residential Loan Application calls for the borrower’s (and co-borrower’s) employment information to determine his source of income. Space is provided for the entry of the position currently held by the borrower, his title, and years spent at that specific job and within that profession. The borrower is to mark the checkbox to indicate if he is self-employed. Lenders use this information to determine the financial stability of the borrower, as well as his ability to repay his debts.
Next, in section five, the borrower is to report his monthly income and combined housing expenses. A self-employed borrower should submit a profit and loss statement or have a printout of one from his company if it is a major source of his income.
The borrower’s assets and liabilities are entered into section six which establishes his net worth. The lender desires detailed information about the borrower’s assets and is entitled to know all of the borrower’s liabilities as they affect his ability to repay the loan. However, the borrower may not want to disclose all his assets. Thus, a balance must be struck between maintaining financial privacy and disclosing enough assets (though all liabilities) to the lender to get creditworthiness clearance so the loan will be funded.
In section seven, spanning pages five and six, the borrower is to enter details about the transaction the loan will be funding. Items called for include the purchase price of the property if the loan is purchase assist. The price entered should be the net of any rebates or discounts or other allowances received by the borrower whether directly or indirectly, or from the seller or the brokers involved. Also called for in section seven is the cost of repairs, alterations, or improvements made to the property. If the loan is to be used for a refinance, the estimated cost would be entered here at section “d”, leaving “a”, “b”, and “c” blank.
Next, in section eight, the borrower (and any co-borrower) makes a declaration of any relevant miscellaneous creditworthiness issues which need to be disclosed to the lender, such as debt enforcement or debt avoidance they have experienced.
The ninth section is signed by the borrower (and any co-borrower) to acknowledge and agree to the following conditions:
- the information provided by the borrower (and any co-borrower) is true and accurate, and if it is not, informs the borrower of the penalties of misrepresentation;
- a trust deed lien will be recorded on the property described in the application to secure the loan;
- the property will not be used for any illegal purposes;
- the purpose of the application is to induce the lender to lend funds to the borrower;
- the property will be occupied as represented in the application;
- the lender will retain the application whether or not it decides to fund the loan;
- the borrower will amend the application and resubmit it to the lender if the facts originally stated substantially change;
- if the borrower defaults on the loan, the default will be reported to one or more credit reporting agencies;
- the borrower may assign the loan to others, though the borrower will not be able to sell the property subject to the same rights as the lender to assign its position;
- the lender or any of its affiliates has made no representations about the value of the property which will secure the loan if funded;
- an emailed or faxed version of the loan application is equally valid as the printed copy of the form; and
- the lender is authorized to verify all aspects of the loan application as represented by the borrower.
The bottom of the loan application, section ten, contains a non-mandatory portion specifying the borrower’s ethnicity, race and gender. This portion of the loan application is used by the federal government to monitor the lender involved and ensure its compliance with fair housing, equal credit opportunity, and home mortgage disclosure laws.
The bottom of section ten is to be completed by the loan representative who assisted the borrower to complete the application. The loan representative is to indicate how the application was taken, whether in a face-to-face interview with the borrower, through the mail, over the phone, or via the internet.
Post-submission: TA duties still exist
Even after the Loan Application has been submitted to the lender, the TA’s duty to the buyer to continue to oversee the functioning of the lender has not been extinguished.
To program his continued engagement in the transaction, the TA uses the Tracking the Loan Origination Process, first tuesday Form 339, to set a schedule with the loan representative for when the loan processing activities are to occur. This form provides the TA with a clear picture of what events are to take place and when, and if they are not timely handled by the lender, provides the TA with the opportunity to get on the phone and remedy the failure and get the process back on track. [See first tuesday Form 339]
After submission of the loan application, it is the TA’s obligation to police the lender, follow up on his inquiries to the lender’s loan representative, and get weekly updates to keep the underlying transaction on schedule for closing. Since closing the sales transaction is contingent on obtaining a loan, the TA does not want the buyer he represents to lose the deal, and in turn cause the TA to lose his fee, due to any lender inadequacies.
Progress reports from the lender to the TA must be agreed to with the loan representative, and will likely require the buyer to give authority to the lender to discuss the loan handling with the TA. Though the lender may resist any attempt to allow oversight of its actions, the buyer’s interests are best served by the TA’s continued oversight of the schedule set for completion of each stage of the loan packaging process to ensure delays are avoided.
The TA has a duty of care owed to his buyer to protect against known foreseeable harm and loss of money in the form of extra interest and charges taken by the lender.