Let’s take the confusion out of the mortgage approval process.
A typical home loan will follow these 5 major steps and take between 14-45 days to complete.
MORTGAGE LOAN PROCESS
Step 1: Pre-Approval
The mortgage pre-approval (also called a pre-qualification or “pre-qual”) is done “pre” (i.e. before) shopping for a home!
There are multiple loan options available, each with its own set of requirements, fees, closing costs, points, and interest rates. Your chosen mortgage professional will help you evaluate the most suitable mortgage programs for you. If you qualify for more than one type of loan, you should get pre-approved separately for each.
At this stage your lender is looking at your ability to repay a loan. Lenders assess candidates on a case by case basis by reviewing factors, such as your current employment, employment history, income, assets, debts, credit reports, credit score, and how you plan to use the property.
Once your lender has evaluated your financial situation, they will let you know how much they are willing to lend you, (i.e. your home shopping fund), and you will receive a pre-approval letter to accompany any offer you make on a home. This letter is important as it lets the Seller know that you have the ability to obtain funds for the amount you are offering them.
Step 2: Application
Once you have a home under contract your real estate agent will send a copy of Real Estate Contract to your lender and you will have 3 days to formally apply, or make application, for the mortgage loan. This is the true start to the loan process.
Many lenders will use a standard form for application known as the Uniform Residential Loan Application (URLA). This form will ask you for information about the property you wish to buy, the type of loan you plan to use, and additional personal and financial information about you.
Within 3 days of applying for the loan you will receive a verified Loan Estimate (LE); this is a three-page document outlining the terms of the requested mortgage loan. The LE is honored for 10 days and will detail your estimated interest rate, monthly payments, closing costs, taxes, insurance, and penalties.
If you choose to accept the terms of the Loan Estimate, your application will move to the next step.
Step 3.: Processing
This is the step where all previous information and documentation collected about you and the property is Verified! Verified! Verified!
The Processor will order a credit report (if it has not already been done) and collect supporting documentation from you for the file. Be prepared to provide items such as bank statements, tax records, employments letters, pay stubs, and W2’s (to name just a few) as they seek to verify your income, employment, assets, and debts.
The Processor will also check for potential risky issues with the desired property by ordering a title report and appraisal. The home appraisal is used to determine the value of the property and insure the bank is making a good investment by not lending more than what the property is worth.
Once all required documentation is collected, the complete package is then sent to underwriting.
Step 4: Underwriting
The underwriter ultimately decides if the loan is approved or not. They evaluate the complete package, double check that all loan documentation is accounted for, make sure everything complies with the associated loan guidelines, and eventually determines if the amount of risk the bank would assume with the loan is acceptable or not.
Risk is reduced by the underwriter’s confidence in:
1. Your ability to make your monthly payments.
2. Your track record of paying your debts in the past.
3. The home’s market value based on the appraisal.
If the underwriter sees major issues, the loan may be rejected outright or received conditional approval until further documentation can be collected and evaluated.
If all requirements are met and the loan is deemed acceptable, the underwriter will pronounce the loan “clear to close,” which mean the loan can move to closing and be funded.
Step 5: Closing
At least 3 business days before closing you will receive a Closing Disclosure. This is a standardized 5- page form outlining the final details of the loan you selected. It will include your loan terms, monthly payments, and the fees and closing costs you are required to pay. Now is the time to compare the stated terms and details to those you previously received on the Loan Estimate (Step 2) and ask any questions before getting to the closing table.
The closing date is specified on your Real Estate Contract. The loan documents, or “loan docs”, are sent to the title company chosen to handle the closing for you to sign.
After the loan docs are signed, they are returned to the lender who reviews them for a final time and grants funding of the mortgage loan. The funds are then disbursed accordingly and the mortgage note and deed of trust are recorded at the county recorders office.
NICOLE BREKELBAUM is the founder & content curator of NWAREALESTATE.COM where she utilizes her background in education and real estate to provide homebuyers and sellers with resources they can use to make more confident and informed real estate decisions. Nicole is an Executive Broker at Collier & Associates in Fayetteville, AR.