Start to finish, here’s an overview of what you can expect when using a mortgage to purchase your home.
Mortgage Pre-Approval
A loan pre-approval sets you up for a smooth home buying experience.
Pre-approvals 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). Your 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.
Mortgage 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.
What about a Mortgage Pre-Qualification?
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 seller).
Once You’re Under Contract the real work of obtaining your loan begins
Mortgage Loan Application
Typically within 7 days of receiving your completed agreement of sale, you’ll need to make a full mortgage application with your lender. 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 in first.
Employment
Name of current employer, phone and street address
Length of time at current employer
Position/title
Salary including overtime, bonuses or commissions
Income
Two years of W-2s
Profit & Loss statement if self-employed
Pensions, Social Security
Public assistance
Child support
Alimony
Assets
Bank accounts (savings, checking, brokerage accounts)
Real property
Investments (stocks, bonds, retirement accounts)
Proceeds from sale of current home
Gifted funds from relatives (e.g. down payment gift for FHA loan)
Debts
Current mortgage
Liens
Alimony
Child support
Car loans
Credit cards
Real property
Financial Blemishes
Be prepared to explain any missteps in your financial background. It’s good to have dates, amounts and causes for any of the following:
Bankruptcies
Collections
Foreclosures
Delinquencies
The Loan Estimate
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 application.
The 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).
At 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.
Loan Processing
Loan 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
More about the Appraisal
The appraisal is a very important step of the mortgage process. This is where the bank hires an appraiser to determine the value of the home you're purchasing. The appraiser will evaluate the property as a whole, from condition, to age, to features, to where it's located and compare it with data about other homes sold in the area to determine the appraised value. If the appraiser determines a value at, or even better, above the purchase price, you're golden. However there is potential that the appraiser may find your home to be worth less than the purchase price. If that happens, don't despair, there are several different strategies we can take to keep your purchase moving forward.
Appeal the appraisal -- we'll work on your behalf to provide the appraiser with alternative comparable properties that support a higher value
Negotiate a lower purchase price
You can elect to cover the amount the appraisal is short in cash, moving forward with a loan based on only the appraised value.
Underwriting
The 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.
Underwriters review 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.
The underwriter also reviews and approves the appraisal.
Mortgage Commitment Issued
With everything reviewed, the underwriter approves the loan and issues a mortgage commitment 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 or collections.
Lock Interest Rate
At 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.
Three-Day Review Period
You have the right to review the Closing Disclosure three days prior to the closing meeting. This quiet period gives you a chance to review all of the terms of the loan.
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).
This may sound like a lot, and truthfully it is a large commitment , but we, along with your lender, are there to clarify any concerns and guide you every step of the way.
Closing
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.
One 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.
We know it seems like a lot, but we promise, we’ve been through this before and along with our trusted partners, we’ll walk you through it one step at a time!
If you have any questions or would like to get started on your home purchase, schedule an appointment with us, as your first step.
Talk to you soon!