6 Easy Steps For Your Mortgage Loan Process
Since the decision to become a homeowner is an important one (buying a home will likely be the biggest investment you ever make), familiarize yourself with the home mortgage process before you even begin house hunting. Odds are you'll need to take out a mortgage to purchase a house, so it only makes sense that you have some idea of how the mortgage process works. Fortunately, the home loan process isn't that difficult to figure out. We’ll walk you through the six steps of the home mortgage loan process:
1. Mortgage Pre-Approval
The first step is a step that many homebuyers mistakenly skip. You don't have to get pre-approved for a mortgage, but it's certainly a good idea. People who don't get pre-approved often find themselves at a disadvantage when submitting an offer. This is because the seller may not take them seriously since there's no guarantee that they can secure a loan for the offer that they've submitted. This puts you at a serious disadvantage if you're bidding against another buyer who has been pre-approved.
Additionally, you may get approved, but the amount you were approved for may be less than what you thought it would be, leaving you unable to make a competitive bid on the house you were looking for. In the end, getting a mortgage pre-approval will help prevent you from wasting time looking at houses that you can't afford and will allow you to position yourself as a serious buyer in the eyes of a seller.
To get pre-approved for a loan, a lender will screen you to determine whether or not you will qualify. They will look at your income, your credit score, your credit history, your debt-to-income ratio, your employment history, your assets, and more. Based on this information, the lender will tell you whether or not you qualify for a loan and how big of a loan you'll likely qualify for. They will provide you with a mortgage pre-approval letter that you can then use as proof should you decide to submit a bid to a seller.
Organize Your Documents
The reason it's a "pre-approval" is simply because you're doing it before you find the house you want to buy instead of after you find the house you want to buy. The process of being "pre-approved" is the same as the normal approval process. This means that you will need to provide the exact same documents. These are the documents that the lender will request for a mortgage pre-approval:
- A copy of your driver's license
- Your social security number (to pull your credit report)
- Pay stubs that prove your current income and employment
- The last two month's worth of statements on all your accounts
- The last two year's of W-2 forms
- Your last two federal tax returns
2. Home Shopping
Once you've been pre-approved for a mortgage, you'll know that you will be able to secure a loan to buy a house. A lender will generally tell you off the bat if you don't have the credit score or debt-to-income ratio needed to qualify, which will save you a lot of time since you can focus on improving those instead of looking at houses you can't buy. If you are approved, you'll be informed as to how large the loan is you've been approved for. This gives you a better idea of what your price range will be so you don't waste your time looking at houses that your loan won't cover.
When it comes to house hunting, you can go about it in many different ways. However, you should really sit down and figure out what your budget is first. Remember, just because you've qualified for a certain amount doesn't mean you can afford to buy a house at that amount. You may have other debts to your name or other financial obligations to take into consideration as well. While you can start your house hunt online, it's always a good idea to contact a local real estate agent.
Making An Offer
One of the reasons it's a good idea to work with a real estate agent is that they can help you put together an offer once you've found a house you want to buy. There's a lot more to just naming a price that you're willing to pay. An official bid has to be structured in a certain way and should contain contingencies. These contingencies typically include:
- That the sale is contingent on no major problems being discovered during the home inspection.
- That the sale is contingent on the appraisal being close to the bid (the lender can't lend you more than the appraised value).
- That the sale is contingent on the buyer receiving final loan approval.
3. Loan Application
Even if you've been pre-approved for a mortgage, it does not mean that you've secured a loan. For example, things might change for you financially from the time you were pre-approved to the time that you made a bid on a house. It's why you should never make large purchases of any kind during this period or attempt to obtain other loans or lines of credit since these actions can hurt your credit score. Once your bid has been accepted, you'll need to officially apply for your loan.
Type Of Mortgage
There are numerous types of loans that you can apply for. Each of these loans has different requirements and terms. The following are a few of the different types that you should be familiar with:
- Fixed Rate Loans - Fixed rate loans are loans that require you to pay a fixed monthly interest rate. This means that the amount of interest you pay every month will be exactly the same for the duration of the loan, no matter what the market is doing. Securing your loan at a low fixed rate can be hugely beneficial, especially since it makes it easier to budget from month-to-month.
- Adjustable Rate Loans - Although often lower than fixed rate loans initially, adjustable interest rates can go up and down from month to month based on rate indexes and margins. This means that it can cost you less than a fixed rate one month but more the next.
- Forward Loans - The term "forward loan" is rarely used unless it's in comparison to reverse loans. Forward loans are traditional loans in which the lender provides you with a loan that you must then pay off on a monthly basis according to the loan agreement.
- Reverse Loans - A reverse loan is a type of mortgage that only homeowners aged 62 and above can qualify for. Essentially, the lender provides monthly payments to the homeowner until they either sell their home or pass on. The loan is then repaid through the auction of the house or by the family of the homeowner (if they want to keep the house).
- Conventional Loans - Conventional loans are loans that are not backed by the government. They are issued by private lenders, such as banks or other financial institutions. There are two types of conventional loans: conforming and non-conforming. Conforming loans conform to the standards established by Fannie Mae and Freddie Mac. Lenders will often sell these loans off to them. Non-conforming loans do not conform to these standards, which means that the lender cannot sell the loan off.
- Government-Backed Loans - Certain loans are insured by the government and issued through approved lenders. They tend to have more favorable terms because there's less risk involved for the lender. For example, FHA loans have low credit score minimums, while VA loans and USDA loans don't require down payments.
- Jumbo Loans - Jumbo loans are a type of non-conforming conventional loan. They exceed the loan limits established by Fannie Mae and Freddie Mac, which means that the requirements are much more stringent. Jumbo Loans are used for higher priced properties.
The Loan Estimate
The loan estimate describes all of the loan's terms as well as the estimated costs associated with your loan, which include the closing costs, the monthly payments, the interest rate, and the mortgage insurance. If your loan contains special features, such as pre-payment penalties or negative amortization, they must be included in the loan estimate. Lenders are required by law to provide you with the loan estimate within three days of your application.
4. Loan Processing
Once your application has been submitted and you've received your loan estimate, your loan will process. If you weren't pre-approved, a loan processor will pull a credit report to check your financial standing. They will order a property inspection if it's required, order a title search, and order a property appraisal. Additionally, they will double check all of your documents.
Reviewing Your Documents
One of the jobs of a loan processor is to check the veracity of all of the information that you've submitted. This includes checking your assets and your place of employment. The meticulousness with which your application is checked means that trying to exaggerate the facts to improve your chances of qualifying is not a good idea. Any inconsistencies found in your application will bring the loan process to a screeching halt.
5. Mortgage Underwriting
Once the loan processor has processed your application and checked it's veracity, they will send it to the mortgage underwriter. The loan processor will have organized your application to make it easy for the underwriter to review. They will make sure that you match all of the eligibility requirements of the loan product to which you applied. For example, if you're applying for a VA loan, they will cross check your military history with the service requirements established by the VA to qualify for the VA loan.
Besides checking the eligibility requirements, the underwriter will also review your credit history, your income, your assets, and your debts. This helps them to determine whether you are capable of paying back the loan or not. They will also keep an eye out for anything that appears like potential fraud. All of this goes into their final decision to either approve or reject your application. In some cases, they may approve the loan with conditions. For example, the approval is pending a written explanation of a debt collection on your credit history.
Lock Interest Rate
Once your application has been approved, the interest rate on the loan you applied for will be locked. This is important since interest rates trade up and down from day-to-day whenever the bond markets are open. You and your lender will decide when to lock the interest rate. If you wait too long, the rate may go up, so do it as soon as possible after you've been approved.
A few tasks will need to be done following your loan approval prior to the closing. For example, title insurance will need to be ordered. This ensures that you and your lender are protected against anyone who comes forward with a claim of ownership on the house other than the seller. You'll want to have title insurance by the date of the closing. All offer contingencies will need to have been satisfied before the closing is scheduled as well.
6. Loan Approval And Closing
Following the approval of your loan, you can schedule the closing with the seller. The closing is the date on which the sale takes place. A lot of paperwork will change hands during this meeting. One of the most important documents you'll receive is the Loan Disclosure. It's similar to the Loan Estimate that you should have received except that all the costs listed in the Loan Disclosure are confirmed, not estimated. However, the costs in the Loan Disclosure should be very similar to those in the Loan Estimate; in fact, there are laws in place that prevent them from differing too much.
Keeping that in mind, the following are three important facets of the closing process that you'll want to be aware of:
Three-Day Review Period
You'll be given your Loan Disclosure document at least three days ahead of the closing. This should give you ample time to review the terms of your loan. Compare the items to those listed in your Loan Estimate. Any large changes made to your Loan Disclosure document will require the three-day review period to reset.
For example, the review period will reset if the APR on a fixed rate loan changes by more than 1/8th of a percent or if the APR on an adjustable rate loan changes by more than 1/4th of a percent. It will also reset if the loan product itself changes, such as if the loan changes from fixed to adjustable rate loan, or if a prepayment penalty is added to the terms. Small changes, like fixing spelling errors, will not cause the review period to reset.
The closing meeting is the meeting during which the sale will take place. You will need to sign numerous documents to complete your purchase. Some documents will confirm the loan terms with your lender while others will confirm the sale between you and the seller. There will be closing costs that you will need to pay if they weren't rolled into your loan. The lender should provide you with instructions on how to pay for them (whether it's to pay electronically prior to the closing meeting or to bring a cashier's check). These closing costs include everything from settlement fees to pre-paid expenses.
Be sure to bring two forms of ID, such as your driver's license and passport, along with your personal checkbook in case you have to pay for any minor differences in the estimated balance that's owed and the final amount that you owe. The closing meeting should take no more than a few hours.
Some important closing documents that you should receive include:
- The Closing Disclosure - The main summary of all of your loan terms. This includes how much your monthly payments will be as well as how much your closing costs will be.
- The Promissory Note - The promissory note is the legally binding agreement that you will repay your loan. It includes how much the loan is for and what the terms of the loan are. It also includes the recourse that the lender can take if you don't repay the loan (such as foreclosing on your home).
- The Deed of Trust - The deed of trust secures the promissory note and provides the lender with a claim against your home if you don't meet the terms of the loan.
- The Certificate of Occupancy - If the house is brand new, you will need a certificate of occupancy in order to move in.
Your Mortgage Broker Should Be With You Every Step of the Way
Upon first glance, the mortgage process may seem a bit complicated, especially when you consider the fact that it goes through three different people (lender, loan processor, and underwriter) before it can be approved. However, the lender (also referred to as the mortgage broker) will help guide you every step of the way. They can look at your credit report and income from the very beginning and let you know whether you'll qualify for certain home loans or not so that you won't waste your time going through the entire process only to be rejected. They will also provide professional advice on how you can improve your standing to qualify for certain loans or improve the terms on certain loans as well.
Ready to shop for a new home? Feel free to ask questions from one of our advisers!