December 5th, 2017 10:59 AM by Jackie A. Graves, President
are six distinct phases of the mortgage loan process: pre-approval, house
shopping; mortgage application; loan processing; underwriting and closing.
Here’s what you need to know about each step.
loan pre-approval sets you up for a smooth home buying experience.
few things have changed since the real estate meltdown a few years ago. For
purchase transactions, real estate agents will first want to know if you can
get a loan. In the old
days, financial institutions were doling out money to anyone with a
heartbeat. Unfortunately, soft lending standards helped fuel an eventual rash
of foreclosures. Suffice it to say, conditions on the ground have changed since
then. Today, the best way to approach a real estate agent is with a lender
pre-approval in hand. It shows that you’re ready and able to
don’t take much time. They involve pulling a three-bureau credit report (called
a tri-merge) that shows your credit score and credit
history as reported by third-party, respected institutions. Within
the credit report, a lender can see your payment history (to see if payment
obligations have been on-time and in-full) and your
lines of credit (past and present).
lender will be able to pinpoint a loan amount for which you qualify. This
pre-approval will save you a lot of time since you will be able to focus
exclusively on houses in your price range.
pre-approvals also signal to the seller that
you’re a serious buyer. Being prepared is particularly useful
when making an offer on a house. If you intend to negotiate the
deal (and why wouldn’t you?), a pre-approval gives your offer a little extra
gravity. Being ready
to go can also help in a hot market where it’s not uncommon
for sellers to entertain multiple, simultaneous offers. Sellers tend to focus
on the path of least resistance: the buyer who is pre-approved.
As you do your online research,
you may read the term mortgage pre-qualification.
It is not the same as pre-approval, and it’s important to know the
A pre-qualification is a less
meaningful measure of a person’s actual ability to get a loan. It’s a very
lightweight “at a glance” look at a borrower’s credit and capacity to repay a
mortgage. It’s usually determined by a loan officer asking a potential borrower
a few basic questions like,
“How is your credit?” There’s
no third-party verification of the borrower’s answers. While the conversation
with a loan officer can be helpful for other reasons, there’s no tangible
result that proves anything to anyone (like to your real estate agent or a
During the pre-approval phase,
one of the best things to do is to gather up documents needed for mortgage pre-approval. Anything
you can do, to prepare in advance, will reduce the stress when you find the
right home and make an offer. At that stage, you’ll be able to hand over all
your paperwork to your loan officer at once. Being ready is a solid move! You
can even download a pre-approval document checklist.
may have already started shopping online via real estate portals like Zillow,
Trulia or Redfin. At this stage, it’s a good idea to start working with a real
estate agent and viewing homes.
for houses online is convenient, easy and fun. There are a few things you’ll
want to know in advance.
none of the online resources are 100% accurate. In fact, Zillow’s home price
estimates, called Zestimates, are off nationally by about 8%. And that’s at a very broad, national
level. The accuracy can drop even more as shoppers drill down to specific towns
and neighborhoods. Zestimate inaccuracy isn’t necessarily a bad thing,
it’s just something a smart shopper should know. There’re still a lot of
reasons to use a real estate shopping and comparison.
There’s a strategy that can
help you deal with Zestimates. The 8% inaccuracy cited above can swing in
either direction. Zestimates can be high or low. Here’s what
that means to you. If you are pre-approved for a $400,000 loan, that means you
could include searches on homes up to $432,000 (8% greater than the $400,000
baseline approval). You real estate agent can help you fine tune your
choices. An experienced realtor, with a good understanding of the local
market, will have a sense about which homes may be negotiated down
to a price you can afford.
second thing you’ll want to know is that listings on big real estate portals
are not always up-to-date. Multiple Listing Services (MLS), used by real estate
agents, reflect the most up-to-date inventory.
for whatever technical reason, portals don’t show 100% of the
available inventory. Furthermore, agents may know about homes
that are coming on the market before the listings are made public. It’s
good to have a professional with his or her ear on the ground in the market
where you want to buy.
Real estate shopping engines are great for:
Searching by location using map-based queries
Getting ideas about neighborhoods that fall in your price range
Putting together a list of properties you want to see in person
They are not as good at:
Predicting a precise and final sales price
Showing all listings in the market
Revealing listings that will hit the market soon
When you’ve visited properties
with your agent and picked out the home you want, it’s time to make an offer.
Your real estate agent will know the ins-and-outs of how to structure it. It
will include contingencies (or conditions) that must
be satisfied before the deal is complete. Here are a few common ones:
Appraisal must come in close to the loan amount,
Home inspection does not find issues with property
Borrower is approved for loan
fact, HUD mandates a VA Escape Clause on every purchase offer.
expressly agreed that, notwithstanding any other provisions of this contract,
the purchaser shall not incur any penalty by forfeiture of earnest money or
otherwise or be obligated to complete the purchase of the property described
herein, if the contract purchase price or cost exceeds the reasonable value of
the property established by the Department of Veterans Affairs.
Contingencies protect you and
your earnest money, a deposit that tells the
seller you’re a committed buyer. Typical earnest money deposits are 1% to 2% of
the sale price. The funds are released from escrow and applied to your down
payment at closing.
With terms of the deal
approved by both parties, the purchase agreement (a
binding offer) is signed by the seller and buyer. At this point, you can move
forward to finalize the loan.
Applying for a Mortgage
A few documents are needed
to get a loan file through underwriting. Some of the information will be
gathered online or over the phone. A lot of it will already be stated on some
documents you’ll provide, like employer address which can be found on a pay stub.
While the list looks long, it won’t take much effort to round them up. The
lists below will help you keep track. Your loan officer will also indicate
which items will not be needed and also help you prioritize which items to send
Name of current employer, phone and street address
Length of time at current employer
Salary including overtime, bonuses or commissions
Two years of W-2s
Profit & Loss statement if self-employed
Pensions, Social Security
Bank accounts (savings, checking, brokerage accounts)
Investments (stocks, bonds, retirement accounts)
Proceeds from sale of current home
Gifted funds from relatives (e.g. down payment gift for FHA
real estate agent will be able to grab some of the harder-to-find items such as
Expected sales price
Type of home (single family residence, condo, etc.)
Size of property
Real estate taxes (annual)
Homeowner’s association dues (HOA)
Estimated closing date
prepared to explain any missteps in your financial background. It’s good to have
dates, amounts and causes for any of the following:
Fixed or adjustable
Forward or reverse
Government insured: VA, FHA, USDA
you are applying for a VA loan you will need proof of your military
service. The VA can provide a Certificate of Eligibility (COE). Your lender
will be able to pull it for you. If you want to get it yourself, you can do so
via the eBenefits website.
All the documentation from
above is pulled together to produce the Loan
Estimate. The Loan Estimate describes
the terms and predicts the costs associated
with your loan. By law, you must receive it within three days of your
Loan Estimate includes closing costs, the interest rate and monthly payments
(principal, interest, taxes and insurance). A notification is included
if interest rates can change in the future, as would be the case with
Adjustable Rate Loans (ARMs). It also includes information about any special
features such as pre-payment penalties or if the loan balance can ever increase
in spite of you paying on time (called negative amortization).
this stage, you’re not yet approved nor denied a loan. A loan estimate
is simply a statement of the terms and estimated fees in plain
English. It’s like getting an estimate for car repairs; no one has picked up a
wrench yet, you’re just getting a sense of the work that will be done and
how much it’ll cost.
Quick note: Most types of loans — but not
all — use the Loan Estimate at the application stage. Some loan products, like
reverse mortgages, still use two older forms – the Good Faith Estimate (GFE)
and Truth-in-Lending (TIL) disclosure.
can get a sneak peek of what Loan Estimates look like plus an even more
detailed explanation of each section of it on the Consumer Financial Protection
Bureau (CFPB) website.
processors gather documentation about the borrower and property, review all
information in the loan file and assemble an orderly and complete
package for the underwriter. They’ll open the file and get the following
wheels in motion:
Order credit report (if not already pulled for a pre-approval)
Start verifying employment (VOE) and bank deposits (VOD)
Order property inspection if required
Order property appraisal
Order title search
underwriter is the key decision-maker. They closely evaluate all the
documentation prepared by the loan processor in the loan package. They cross
check to see if the borrower and property match the eligibility requirements of
the loan product for which the borrower applied. For example, for a VA loan,
the underwriter will verify the borrower’s military service.
review at the borrower’s credit history and their capacity to repay the loan.
The collateral (the property) is also weighed into the decision. They verify
information and double check for accuracy. They’ll sniff out any red flags that
indicate potential fraud.
everything reviewed, the underwriter approves or rejects the loan. Sometimes
underwriters approve the loan with conditions. For example, they might ask for
a written explanation of borrower’s credit history, such as late payments
Lock Interest Rate
some point after initial approval and before closing, the interest rate for
your loan is locked. Interest rates trade up and down every day that bond
markets are open for business. You and your loan officer will choose
the time to make the commitment.
insurance is ordered before the closing meeting so that you can walk
away with the keys to your new home, ready to move in. This is also the
time to make sure that all the offer contingencies have
been satisfied. Once any conditions are satisfied, the closing is scheduled.
Documents (everyone in the
mortgage industry calls them loan docs) are
drawn, meaning they are printed out and sent to the title company (or
attorney’s office) where the closing meeting takes place. You can expect
a big stack of papers.
of the documents worth calling attention to is the Closing
Disclosure. It should look somewhat familiar. Think of it as the companion
to one the first documents you received in the mortgage loan process, the Loan
Estimate. The Loan Estimate gave you the expected costs.
The Closing Disclosure confirms those
costs. In fact, the two should match pretty
closely. Laws prevent them from differing too much.
Three-Day Review Period
have the right to review the Closing Disclosure three
days prior to the closing meeting. This quite period gives you
a chance to review all of the terms of the loan. In most cases, you’ll compare
the Loan Estimate to the Closing Disclosure but in some cases, you’ll compare
the GFE to the HUD-1 Settlement Statement.
this stage, you’re like a space ship on the launching pad. The countdown has
begun. Most of the time, everything goes as planned. Small things in the loan
docs are allowed to change, like typos. However, bigger changes
reset the three-day review period. Continuing with the space launch
metaphor, the “countdown” would start over if:
The APR on the loan changes by more than 1/8th of a percent
(most fixed loans) or 1/4th of a percent (most adjustable rate loans).
A prepayment penalty is added to the mortgage.
There’s a change of loan products (e.g. change from a fixed rate
loan to an adjustable rate loan).
have the right to a final walk-through of property 24 hours before your closing
meeting. You can make sure the seller has vacated property. You can make
sure any contractually stipulated repairs are complete.
closing is the moment for which you’ve been waiting. It’s time to sign a bunch
of documents and complete your purchase or refinance. Some docs seal the
deal between you and the lender. Other docs seal the deal between you and
the seller (if it’s a purchase transaction).
bring two official forms of identification such as a driver’s license and
passport to the closing.
closing costs are not rolled into the loan amount, talk to your loan officer
about how you will transfer funds either electronically or via cashier’s check.
Closing costs include settlement fees (the
cost of doing the loan) plus any prepaid expenses
(put in an escrow account) for homeowner’s insurance, mortgage insurance and
checkbook will come in handy for any small differences in the estimated balance
owed and the final amount.
closing meeting will take a couple hours, and there’s a lot of paperwork. Your
hand will be tired when it’s all over.
Disclosure (or HUD-1 and TIL in some cases) – a summary of loan
terms, monthly payments and closing costs.
Note – as it sounds, it’s the promise that you’ll repay the
loan. It shows the loan amount and terms of the loan and the lender’s recourse
if you fail to make payments.
of Trust – secures the note above and gives the lender a claim
against the home if you fail to live up to the terms.
of Occupancy – if the house is newly constructed, this is the legal
document you’ll need to move in.
sure to read all documents. And ask questions! Lastly, don’t sign any forms
with blank lines or space.
everything is signed, your participation in the closing meeting is done.
Congrats! The very last closing items happen in the background; the title
company will complete the recording and funding.
Right of Rescission
law provides an opt-out or cancellation of some types of mortgage transactions
called a Right of Rescission. You have until midnight of
the third business day
after signing the closing docs to rescind (cancel) the following:
A refinance transaction on an owner-occupied home
transactions do not have this feature.
you have it, the six distinct phases of the mortgage loan process! Hopefully,
you feel a little more educated about each step and feel more comfortable about
what to expect along the way.
Tony Mariotti – To view the original article click here