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The Loan Process – How Does it All Work?

Pre-Qualification
It all starts with a Pre-qualification. Once a lender has gathered information about a borrower's income and debts, they can determine how much the borrower will qualify for. Mortgage companies look at two key factors: the borrower's ability to repay the loan, and the borrower's willingness to repay the loan.

The ability to repay the mortgage is verified by your current employment and total income. More often than not, mortgage companies prefer that you have worked for the same employer for at least two years.

The borrower's willingness to repay is determined by examining how the property will be used. For example, will this be your primary residence or will it be an investment rental? They also look at how you have fulfilled previous financial commitments by looking at your Credit Report and your rental payment history.

There is no “magic formula”. Every applicant is unique and is handled on a case-by-case basis. If you think you may appear weak in one area, you may actually be stronger than you think in another area. Remember that having you qualify for a loan is in the mortgage company’s best interest.

Mortgage Programs and Rates
The first thing you should ask yourself is “how long do I plan to keep this loan”? If you plan to sell the house in a few years, an adjustable or balloon loan may make more sense. If you plan to keep the house for a longer period, a fixed loan may be more suitable.

Shopping for a loan can be very time consuming and frustrating. With so many programs to choose from, each with different rates, points and fees, it takes patience, time and energy to go through the process. After all, you want to ensure that you are getting a good deal! Another good idea is to partner with an experienced mortgage professional. They can evaluate your situation, recommend the most suitable Mortgage Program for you, and generally, make things a lot easier.

The Application
Dealing with the application usually occurs between days one and five of the start of the loan process. The borrower completes the application and provides all Required Documentation.

The various fees and closing cost estimates will have been discussed while examining the many Mortgage Programs and these costs will be verified by the Good Faith Estimate (GFE) and a Truth-In-Lending Statement (TIL) which the borrower will receive within three days of the submission of the application to the lender.

Processing
Once the application has been submitted, the processing of the mortgage begins. The Processor orders the Credit Report, Appraisal and Title Report. All information on the application is then verified. Any negative credit issues such as late payments, collections and/or judgments require a written explanation. The processor examines the Appraisal and Title Report checking for property issues that may require further investigation. The entire mortgage package is then put together for submission to the lender.

Credit Reports
The first thing to do is get a copy of your Credit Report. That way, you can take steps to correct any negatives before making your application. Get yours here: https://www.myfico.com/suze/ficokit/web/

If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. They can assist you in writing a "Letter of Explanation." Many people have very legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had problems that have been corrected (reestablishment of credit), and your payments have been on time for a year or more, your credit may be considered satisfactory.

The most common score is called the FICO score.

Credit scores are based on five factors: 35% of the score is based on payment history, 30% on the amount owed, 15% on how long you've had credit, 10% percent on new credit being sought and 10% on the types of credit you have. The scores are useful in directing applications to specific loan programs and to set levels of underwriting such as Streamline, Traditional or Second Review, but are not the final word regarding the type of program you will qualify for or your interest rate.

Appraisal Basics
An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights to be appraised. The appraiser does not create value; the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. Considerable research and collection of data must be completed prior to the appraiser arriving at a final opinion of value.

Underwriting
Once the processor has put together a complete package with all verifications and documentation, the file is sent to the lender. The underwriter is responsible for determining whether the package is deemed an acceptable loan. If more information is needed the borrower is contacted to supply more documentation. If the loan is acceptable as submitted, the loan is put into an "approved" status.

Closing
Once the loan is approved, the file is transferred to the closing and funding department. The funding department notifies the broker and closing attorney of the approval and verifies broker and closing fees. The closing attorney then schedules a time for the borrower to sign the loan documentation. At the closing the borrower should:

Bring a cashiers check for your down payment and closing costs if required. Personal checks are normally not accepted and if they are they will delay the closing until the check clears your bank.
Review the final loan documents. Make sure that the interest rate and loan terms are what you agreed upon. Also, verify that the names and address on the loan documents are accurate.
Sign the loan documents.
Bring identification and proof of insurance.

After the documents are signed, the closing attorney returns the documents to the lender who examines them and, if everything is in order, arranges for the funding of the loan. Once the loan has funded, the closing attorney arranges for the mortgage note and deed of trust to be recorded at the county recorders office. Finally, after the mortgage has been recorded, the closing attorney then prints the final settlement costs on the HUD-1 Settlement Form. Final disbursements are then made.