The whole process from applying for a mortgage to closing the loan and disbursement can be a daunting prospect, especially for first time borrowers.
Without going into the specifics of pre-approval (which most home buyers skip anyway), here are the events that borrowers can anticipate to happen in the mortgage loan process.
Once a home buyer has identified the property to purchase, he should immediately start to seek out suitable home loans as there is little time to spare.
There can never be too much time for mortgage shopping.
In fact, it’s almost always the case that time is never enough. Borrower are just relieved that the whole nightmare is over. But a little extra time would be useful.
The type and volume of paperwork required depends on the type of mortgage or any special programs being applied for.
These required documentation containing material information can categorized into 5 groups.
- Property information
Here’s a simple list of items, information, or documents to verify information, which might be requested by the loan officer.
- Agreed transaction price
- Type of property
- Floor area
- Property tax details
- Projected closing date
- Registered name, address and contact number of current employer
- Period of employment
- Job position or title
- Basic salary
- Allowances and claimable expenses like transport and housing
- Variable compensation components
- Computerized pay-stubs
Job stability of the borrower is of a particular concern for lenders as it is an indication of how risky it is to lend to an individual.
If the period of employment is deemed to be too short by a lender, the lender might request alternative documentation of income proof.
- Two years of W-2s
- Social Security
- Rental income
- Dividends income
- Child support obligations
While most people’s income will be solely based on their employment information, a growing number of people are generating secondary incomes to supplement their primary source of income.
There can sometimes play a crucial part in loan approval.
For self-employed individuals, be ready to be asked for bank statements as well.
- Car loans
- Study loans
- Personal loans
- Credit card statements
- Existing mortgages
- Child support
- Cash in bank or cash equivalents
- Real estate
- Financial assets and investments
- Down payment
- Gift of equity
The reason for these requirements are for the lender to determine how strong a financial position the borrower is currently in.
At times, even if a borrower does not have an income to support the home loan requested, a loan can still be approved just because he has a high net-worth.
However in these circumstances, the lender might still demand that the borrower has satisfactory credit.
During this time, a lock might be put in place with a lock commitment letter depending on the lender’s lock requirements and practices.
2) Submission for processing
Loan application submission is actually a two-step process.
The first being submission of the required documents to the loan officer. And the second being submission of the borrower’s case by officer to the credit department for analysis and approval.
At this stage when it become clearer to the loan officer what is being requested by the borrower and his financial position, more documentation might be requested so that predicted issues can be resolved without ever encountering any bottlenecks.
For example, if a borrower is trying for a VA loan, he needs to obtain he certificate of eligibility. And if a confusion of identity arise during KYC, more documentation would be required to verify the identity of the borrower.
After which, the borrower would be presented with the loan estimate form for endorsement.
This form is a legal requirement that lender have to adhere to by delivering it to customers in a timely manner.
For reverse mortgages, a good faith estimate is used instead.
Underwriting is a stage of the mortgage loan process that consist of various phases in itself.
Depending on the operating procedure of a lender, these might consist of the following:
- Preliminary processing
- Credit assessment
- Credit analysis
- Loan approval
- Generating loan contract
The bulk of the time involved in the whole loan process is spent here as staff of the lender work long hours to go through the documentation in order to arrive at a final approval amount, or decline the loan request outright.
At this point the borrower will not be involved until the final result is released. Or if additional documentation is being asked of the borrower.
This is where the loan processor prepares all the required documents from the lender’s side behind close doors.
These can include:
- Credit report
- Internal records of borrowers previous dealings with the lender
- Legal search for past and current lawsuits borrower was involved in
- Validating source of funds (if required) to deter money laundering
- Database search against names of known international criminals and terrorists
- Verification of employment status
- Ordering property appraisal and title search
- Ordering property inspection (if required)
This is a phase where the lender’s staff collate and assemble all the necessary documents for the credit analyst to sieve through.
No decision to loan or not to loan at this stage.
This is the first time where the borrower’s financial position and credit comes into scrutiny.
Assessors have the basic authority to reject an applicant’s application outright with little flexibility as they are ordered to do so as per the lender’s underwriting directives.
They also serve as gatekeepers so as not to allow undeserving applications from getting to the next phase. Otherwise their managers would not even have time for lunch.
Financial ratios are tabulated and basic screening is conducted.
The majority of rejected applications occur at this phase of underwriting.
The analysts are who the assessors are protecting from overwork.
They are somewhat senior assessors who have served their time conducting credit assessment and promoted to analysts.
Their job is to relatively similar to assessors.
A significant role played by them is to determine the final loan amount which they would present to the approver for approval.
This figure will depend on various factors including:
- Property value
- Loan to value
Because of their experience, they are trained to spot mistakes and oversights from every possible angle.
Everything is double checked and a summary of key details are prepared for the next phase, which is handled by the approver.
As the total number of pages for an application up to this point can go up to hundreds, they need to provide these information into an easily digestible format for approvers to make the final decision.
Once a loan request has arrived at this stage, the odds of it being approved is slightly higher than it being declined.
However, there is still the possibility of the loan amount being reduced by the approving officer stationed here.
Otherwise, should critical problems be found here, the loan can be rejected. Or if mistakes were spotted, the case might be routed back to the analyst for task to be redone.
If an interest rate lock is still not in place at this point, it can happen here.
Generation of loan contract
As soon as the loan is approved, the order to generate the mortgage contract is given almost immediately.
At this point, the loan officer is informed of the application’s status, and he started to convince the borrower to accept the mortgage offer.
The terms of the loan agreement will be explained to the borrower in detail.
Interest rate deviation (when required)
Should the borrower run a hard bargain and the lender relents, the case would be referred to the product manager.
This is the person responsible for setting the interest rate and has the authority to reduce interest rates, even to below par rate.
Whether deviation from standard posted rates is a success or failure, the case would go back to the approved status with either the new or previous interest rate.
The broker or loan officer from the bank will then start convincing the borrower to accept again.
4) Hiring and appointment of third parties
There are some essential services provided by third parties that are required. There are also some that are not necessary, but good to have.
Essential services include:
- Private mortgage insurance if the loan is above 80% LTV provided by insurers
- Legal work provided by law firms
- Home inspection (if necessary)
Remember to ask for cash rebates or subsidies from the lender or broker for these expenses.
More about price components that make up total mortgage costs is discussed here.
Also note that regulations require a lender to deliver the closing disclosure to the borrower at least 3 business days before closing takes place.
Once the loan and the terms that come with it are accepted, the closing date can then be scheduled.
The closing venue is usually the attorney’s office.
This is where all the important players turn up including, and not least, the buyer and seller.
This is when the borrower will be presented with an overwhelming amount of documents to inspect.
Some notable ones are:
- Promissory note
- Deed of trust
- Closing disclosure
The property transaction will be closed once all paperwork as been endorsed by all relevant parties.
All settlement costs including junk fees should be paid at this point.
6) Right of rescission (if necessary)
All home owners who are refinancing should take note that according to the Truth in Lending Act, borrowers who refinance a property which is their primary residence (other than with the existing lender) have the right cancel the deal within 3 days of closing at no costs.
This 3-day rule extends to 3 years if the lender had not delivered a closing disclosure form to the borrower before closing as required by law.
While it’s not often that this right of the borrower is exercised, it’s good to know that you have the law for protection from unethical lenders.
While the bulk of the mortgage loan process goes into underwriting (which don’t involve the borrower), remember that it is the borrower’s decisions that direct where every action leads to.
You are not as powerless as you think.
If getting a good mortgage is on your mind, do check out some of the tips mentioned here.