Mortgage Loan Process

Jumbo mortgage

A survey was taken in the beginning of the year and one of the questions asked on the survey was, “What was the hardest part of buying a home?”. A large portion of the responses referred to “understanding the loan process”. However, the mortgage loan process should not be a confusing or difficult. My team and I are dedicated to making the home buying experience a positive one. There are a number of steps involved in the mortgage loan process but we are going to cover 6 basic steps that will walk you through the entire process. Knowing the loan process will take some of the anxiety away and let you know what to expect at each point of the process. Let’s get started.

Six Basic Steps:

    • Preparation
    • Pre-Approval
    • Application/ Origination
    • Underwriting/ Approval
    • Clearing Conditions
    • Closing

Step 1 – Preparation

Many borrowers skip this important step in the mortgage process but this step should not be overlooked. There should be a little preparation done even before talking to a mortgage professional or looking for a home. First, you need to establish a monthly housing budget for yourself. Yes, when you start working with a loan officer or a lender they will evaluate your financial situation and determine an amount you will be approved for (assuming you get approved). But this number will be based on their assessment. You need to complete your own assessment so that you can determine a payment you will be comfortable with. Next, you need to be aware of your credit history and FICO (credit) score. Credit plays a major role in the mortgage approval process and determining your interest rate. You may need to make some repairs to your credit before starting the loan process. You also need to be saving as much money as possible to cover items such as a down payment, closing cost, and possibly cash reserves. The more money you have saved up the better position you will be in. Lastly, you should start gathering the necessary financial documents you’ll need for the mortgage application process. Getting a jump start on the documents that will be required for approval will make for a smoother loan process. We will cover more on this in the nest step of the process.

Calculate your monthly housing budget “Click Here”

Step 2 – Pre-Approval

This must be one of the most important steps in purchasing a home. Most buyers skip over this step and will start looking for a home before ever getting pre-qualifed In fact, an experienced Real Estate Agent will not even work with a buyer without being pre-qualifed first.

Pre-approved means that you are working with a loan officer and submitting a mortgage application (also referred to as the 1003), along with your financial documents before you found a home. The application should take approximately 20-30 minutes to complete but could take longer. This can be done in person, over the phone, or online. Completion time will vary from borrower to borrower.  The goal with a pre-approval is to find out how much the lender will approve you for, before you start looking for a new home. During this process, the lender will review your application, along with the required documents such as; income, credit, debts, and assets. At this stage your loan officer will evaluate your cash assets and calculate your debt-to-income ratio. Based on this initial review, the lender will issue a pre-approval letter (assuming you will be approved) with the details on how much they are willing to give you. Now you can see why it makes sense to complete a pre-approval.

To learn more about all the benefits of being pre-approved “Click Here”

To review a complete list of the required financial documents “Click Here”

To review a blank copy of the mortgage application (1003) “Click Here”

Step 3 – Application / Origination

This step is actually the start of the loan process. At this point you have made an offer to purchase a home and your offer was accepted. If you completed step 2 (Pre-Approval) from above then you are already head of the process. If not, you will be working with your loan officer to complete the mortgage application, along with providing your financial documents. Just like the pre-approval process your loan officer will evaluate your cash assets and calculate your debt-to-income ratio to determine what you can afford. Different from the pre-approval you will also need to provide financial documents. You will also be required to sign certain disclosures related to mortgage application. It is important to understand that the next step in the loan process cannot begin until the application is completed, all required documents have been provided, and disclosures are signed. Once everything is completed and received your loan application will be sent to a processor. The processor will order and request items related to obtaining a mortgage and prepare your application to be sent to the underwriter for approval.

For a complete list of documents required with you mortgage application “Click Here”

For a complete list of mortgage related items that can be ordered and requested during the loan process “Click Here”

Step 4 – Underwriting / Approval

There are two types of underwriting used to approve loans these days. One type is a manual underwrite. Meaning and underwriter will need to review your file. The other type is the use of a computer system known as an Automated Underwriting System (AUS). Chances are that if you selected a traditional 30 year conventional or FHA loan program your loan will be run through an AUS know as Desktop Underwriting (DU). Your application will be run through the DU system and with in a minutes your application will receive an “approved/ eligible” (good) or a “refer/ ineligible” (bad). The DU system will also create a list of conditions and documentations that will be required to obtain final approval. This is know as DU findings. Whether your application uses an AUS or done manually (man or machine), the end result is the same.

During the underwriting process your application (1003), Credit, appraisal, title, insurance, documentation you provided during the application process, and DU finding (if applicable) will be reviewed by an underwriter for compliance with the guidelines specific to the loan program you have selected. The underwriter will assess whether or not you, the borrower represents an acceptable level of risk for the lender. The underwriter has ultimate power and decision authority over the approval of your loan. This process normally takes 4-5 days to complete but could take a little longer at times. You will receive one of four responses after the underwriter has completed their evaluation; suspended, declined, approved, and the most common response conditionally approved.

  • If you receive a “suspension” then your application is not approvable as is. The good news is that your application was not declined. The underwriter may have some questions or concerns about your application that need to be addressed. If the questions or concerns are answered in a satisfactory manner then your loan will receive an approval or conditional approval.
  • If you are not qualified for the loan program then your application will be “decline”. This should be a rare occurrence if you have an experienced mortgage loan officer and they have done their job properly.
  • Another rare occurrence is to receive an “approval” (as known as clear to close) your first time through underwriting but not impossible. If you receive an approval, with no further conditions or questions then you are all set for closing. We will discuss closing in step 6.
  • “Conditionally approved ” subject to meeting certain condition (as known as stips) is the response most loans receive from the underwriter the first time through. A conditional approval means that there was enough documentation in the file for the underwriter to determine you meet acceptable risk for the program you sleeted but additional documentation is still required in order to receive a full approval (clear to close).

If you have not notice there is nothing you, the borrower is not involved in during the underwriting process. Once your application comes out of underwriting you will receive a denial or an approval letter, also know as the loan commitment. All outstanding conditions that are required to be cleared in order to receive a full approval (clear to close) will be explained in detail on the loan commitment.   This will lead us right into the next step, clearing condition.

Step 5 – Clearing Condition

As stated above the most common receive response from underwriting is a conditional approval. The reason for this is because your application is not 100% ready to close. If you have an experienced mortgage loan officer must of the conditions that need to be cleared will be items that the lender clears behind the scene such as; obtaining a clear title policy, verifying you insurance policy, appraisal, project approval (condo units only), and verification of employment or deposits (VOE or VOD). These items usually take longer to obtain then the underwriting process. There also may be additional documentation that the underwriter is requesting directly from you that will be stated int he loan commitment. It is very important to provide such documents in a timely fashion.

Once all conditions have been receive your application will be summited back to the underwriter for final review to clear the condition. After final review has been completed you will receive “clear to close”. The last stage in the loan process.

Step 6 – Closing

Closing is the last step in the loan process. Once you receive the “clear to close” your application will be sent to the closing department. There is allot involved in the closing process but here is the short version. The closing department will work directly with the Title Company. The lender will send closing instruction and the closing documentation to be signed by you, the borrower at time of closing to the Title Company. Title Company will prepare the final Settlement Statement, also known as the HUD. The HUD will require approval by the lender and other parties involved. This process normally takes 2-3 days to complete. Once the HUD has been approved by all parties the lender will wire the funds for your loan  the Title Company and  they will contact you, the borrower and inform you of the monies required to bring to closing. The monies will need to be presented in form of a cashiers check or wired directly to the Title Company. Usually closing will take place at the Title Company’s office. On the day of closing you will need to bring in the monies and any other information that the Title Company instructed you to bring. Be prepared to sign allot of documents. Once closing documentation has been signed and the funds are collected you will received the keys to your new home and the deed will be conveyed to you. The Title Company will also distribute funds to all receiving parties.

I hope you now have a better understanding on the mortgage loan process from preparation to closing. Don’t forget about getting pre-qualifed before you start looking for a home. If you still have any questions fell free to contact me .

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