The Mortgage Loan Process
In general, the loan process is not nearly as complicated as people think. If you break it down into its core components, it’s actually fairly easy to understand and isn’t scary at all. However, every borrower and their purchase is unique with a myriad of nuances and a “plain vanilla loan” is truly rare, so it is extremely important that your loan officer knows what they are doing in order to provide you, the borrower, the best possible mortgage loan experience.
Step 1 – Prequalification: This is probably the most important step because it should literally determine whether or not you can buy a home, what loan program you qualify for and what size of loan you can get. This is also the most invasive part of the process because your loan officer will get to know nearly everything about you and your family. I will pull your credit which includes getting your social security number and date of birth, ask for everywhere you have lived and worked in the past two years, ask how much you make a year, ask for the sales price and how much you intend to put down, ask for your bank information and how much you have in savings, checking, and investments; I will dig into your investment properties and cash flow, I will ask about child support (both paid and received), alimony, bankruptcies, foreclosures, and if you have a co-borrower, I will require the same information from them as well. The following pages break down why I ask for all of this: Income, Assets, Credit. Having said all of that, please understand that everything we talk about is governed and guarded under extreme confidentiality laws.
I will type all this information into an electronic loan application while on the phone with you and then run it through an Automated Underwriting System (AUS) that matches everything you provided against Fannie Mae or Freddie Mac’s lending guidelines. Provided your AUS findings come back approved (results take less than 30 seconds to receive), you are good to go and nearly “pre-approved”. If for some reason they do not come back approved, then we get to work figuring out why and what steps we need to take to get you an approval.
Step 2 – Pre-Approval: In order to be fully “pre-approved” you need to back up the information you provided in your loan application with supporting documents; i.e., pay stubs, bank statements, W-2s, tax returns, etc.. Once I have them and can verify your information, you are officially pre-approved and I can provide a pre-approval letter to your agent.
Step 3 – Purchase Contract: Once you have a signed purchase contract on a house and send it to me, your application is complete and we move on to the next step in the loan process.
Loan Submission: Loan Documents, Title, Appraisal, and Home Owner’s Insurance
Step 1 – Initial Disclosures: Once you send me your contract, I review the entire document confirming the sales price, requested closing date, earnest money deposit (EMD), any negotiated seller concessions to help pay for closing costs and prepaids, if there is anything about a designated title company to be used, and anything else that may apply to your mortgage loan process. These final numbers go into your loan application. I then have to generate all of your loan documents which I send via DocuSign for electronic signature. A lot of lenders leave you to figure out what all of the documents mean and just want them signed and returned, but I will call you to review all of the loan documents so you know exactly what you are signing before you sign them. I want you to feel comfortable and I want to answer any questions you may have before you sign. It takes longer this way, but it is probably the single biggest purchase you will make, so I feel you deserve to have all your questions answered so that you are completely at ease with the process. After we review the documents and all your questions are answered, you can then electronically sign everything within seconds and it comes back to me via DocuSign without having to print, scan, or fax anything. There are a few documents I will create and send separately, and one form will need to be printed and hand signed, but I will explain all of that in detail when we review your documents.
(Note – Steps 2, 3, 4 & 5 should be happening as close to simultaneously as possible)
Step 2 – Submitting Your Loan to Underwriting: Every lender has their own submission and underwriting process, so I review all your loan documents and supporting documents to ensure we have a complete loan packet before I submit it to processing where a quality control check is performed and your loan is submitted to the lender for underwriting.
Step 3 – Home Owner’s Insurance (HOI): Remember that you shop for and choose your own home owner’s insurance and I cannot stress how important it is to do this as soon as humanly possible. Some borrowers don’t seem to have a sense of urgency when it comes to HOI, but please understand that your monthly HOI payment is part of your DTI calculation and your policy is paid up front which goes into your prepaids and escrow calculation; the underwriter needs to review this amount to ensure you have enough assets for your cash to close. So DO shop around for the best deal you can get on an HOI policy, but do so with a sense of urgency so you don’t end up inadvertently holding up your own loan process.
Once you have chosen your HOI, we need a point of contact (POC) so we can order the policy from them. They need our mortgagee clause to complete the policy, so the sooner you get us that POC, the sooner we can order it. IMPORTANT NOTE: Every HOI company is different; some allow you to finalize your policy on the phone, some want you to come in person to sign paperwork, some won’t finalize it until after we provide the mortgagee clause. Ask them what they need to finalize the policy and stay on top of it. If I ask you to please finalize the policy, that means we are really waiting on you before we can do anything else with your loan.
Step 4 – Title: Title work is probably one of the least talked about parts of the loan process, but a title company can literally make or break your loan. Title work is something you can shop for, but title companies are definitely not the same. A title company is a business and some are remarkably better than others. Costs tend to be very similar since they are competing against each other, but the key is to find a good price with a “reliable” company. If you find a great deal but they are slower than molasses in January, you may have just cost yourself hundreds of dollars–or the entire loan because of their delays. Remember that your rate is locked in for typically 30-45 days. If the title company is dragging their feet, poor title companies have been known to cost borrowers their rate lock. If interest rates are on the rise, losing your rate lock could literally be the difference between closing a loan or not.
So how do you know which title company is good? The first place to start is with your agent. They tend to have a preference because they want your loan to close and they understand not all title companies are equal. This is why sometimes the title company is written into the contract. If it’s not, then you get to choose. Ask your agent for a recommendation, but if they don’t care, I have several we use all the time that are awesome and priced very well.
A title company can provide what is called a preliminary Closing Disclosure (CD) which has all their title fees disclosed. Most companies are decent about getting that to us quickly (although some are painfully slow even on this simple task). But once the loan goes through initial underwriting, the loan cannot be resubmitted until we receive title work, meaning they have done their research, cleared liens, determined property taxes, etc.. This is where good title companies will make or break you. Bottom line: the faster they do their work, the faster you close. If the title company takes weeks to do their job, your loan may very well sit for weeks. I had a title company take nearly 30 days to complete their work one time, and it wasn’t until I convinced the borrower to fire them that they magically produced their title package. On average, it shouldn’t take a title company more than a week to get title back to us. Several can get it back to us in 2-3 days. Shop wisely.
Step 5 – Appraisal:
I will expound upon appraisals here: (Appraisals), but as far as the initial process is concerned, the sooner we order it, the sooner it gets done and you cannot be cleared to close without it. Although I need to order it as soon as possible, I will talk to you before I order the appraisal to make sure the inspection went well. Order and schedule that inspection quickly, please. Otherwise, I order the appraisal as soon as I can because in some places in this country, the appraisers take seemingly forever.
Step 6 – Submission to Underwriting: Once we have all we need, your loan docs are stacked, the processors review it for anything I may have missed depending upon the lender, add any necessary lender specific documents, and then off it goes to the lender for underwriting.
Once your loan is submitted to underwriting, each lender has their own setup process but it normally gets screened and reviewed by a junior underwriter before it is then passed on to the primary underwriter handling your loan. The time it takes to do this depends upon the lender, so I take this into account before I lock a loan and manage expectations accordingly. Some lenders are remarkably fast and have just a day turnaround, others can take several days. Timelines may get extended during the summer time, so I also monitor what are called “turn times” religiously to ensure I can avoid lenders with an underwriting backlog if possible. Sometimes I need to take a borrower to a specific lender because that lender will underwrite a scenario unique to a borrower who wouldn’t be able to get a loan anywhere else. Invariably in these cases the underwriting will be slower, but I will let both the borrower and the real estate agent know this at the time of prequalification. In this instance, it is better to have a slightly extended underwriting timeline as opposed to no loan at all. But on average, the initial underwriting goes quickly. It’s what happens after that which determines how long it will take to get a “clear to close” and get to the closing table.
After the initial underwriting, your loan will be “approved” with “conditions”. These conditions are what we now owe the underwriter in order to get a “clear to close” as soon as possible. We will get a list from the lender that states what documentation they want (there is always something) to clear the conditions. Underwriters underwrite loans based upon extensive regulations and guidelines. Some of these are black and white, some of these have multiple shades of gray. Some lenders have “overlays” which add lender specific conditions over federal guidelines. This is why being a broker is so helpful because once I know a borrower’s scenario, I match the borrower up with the lender who will help ensure the loan closes. Knowing this before locking the loan helps ensure the best mortgage experience possible. Every borrower is different. Every loan is different. Every lender is different. Every underwriter is different. This is why we wait to see what they ask for and we get it to them. As soon as humanly possible. Even when it seems completely ridiculous. Before I send you your conditions, I promise that I have reviewed the conditions and if there is anything that doesn’t make sense, I will fight the good fight to get the condition removed or clarified before I send it to you. But once I send the conditions, we just need to get them back to the lender even if they seem silly. Underwriters have a tough job and they aren’t trying to make people’s lives difficult, they are just trying to ensure all the i’s are dotted and t’s are crossed before issuing final approval with a clear to close… and we won’t get that clear to close until we get them exactly what they asked for.
At this point in the loan process I imagine four wheels of a “loan car” transporting the loan that are all working simultaneously to move the loan to the closing table. These wheels are: HOI, Title, Appraisal, and Underwriting. HOI is usually the least troublesome, but some insurance folks can be sticklers about their policies. We work with them behind the scenes, so you don’t need to worry about that. By the time initial underwriting is complete, we’re hoping the title company has completed their work and provided us their title package. If not, we’re in a holding pattern until they do. Again, we handle all that behind the scenes. We are also monitoring the appraisal process which should be well underway and due in soon. The appraisal is the “X” factor, but it doesn’t hold up underwriting unless it’s the only thing left. The only thing besides title that determines the next round of underwriting is the borrower. How quickly we get those conditions back from the borrower determines how quickly we can get the loan back to underwriting.
I want to take some time here to explain this because the borrower is an absolute critical determiner of their own lending experience. I have borrowers who get me back conditions in a matter of hours and their loans go right back to underwriting the same day or early the next morning. On the other hand, I have borrowers who get me their conditions several days later, or even take over a week! Think of it in these terms: conditions are like hot potatoes. I don’t want the conditions sitting in my inbox so I’m going to send them to you as soon as I get them. You don’t want to hold on to them, you want to give them back to me, and I certainly don’t want to hold on to them at that point. I want to give them back to the lender so they can clear them through underwriting ASAP. The faster conditions are cleared, the faster the loan closes, the happier the borrower and agents are. I like happy people. SO, for every day that goes by without receiving conditions back, there’s nothing I can do, there’s nothing the underwriter can do, and each day that goes by extends the loan process. On average, lenders take 48-72 hours to review conditions (although some will review them faster). So imagine a borrower with a complicated file who is dragging their feet with conditions, or not providing exactly what was asked for (which happens often). You can probably imagine that the back and forth between the borrower, me and underwriter can get dragged out. Especially if the borrower does something called “piece-mealing” where we might get one or two items today, one or two tomorrow, and so forth. In the borrowers mind I’m sure they think they are getting me their conditions quickly, but I usually have to have ALL the conditions back before I can submit them to the underwriter. So those last few bank statements the lender requested in order to verify assets that weren’t available online have now cost us a week of underwriting time because the borrower didn’t have a sense of urgency and waited until Friday when they got off a little early to go to the bank instead of taking a couple minutes of lunch break and getting them Tuesday. Now we have to wait until Monday to submit them to underwriting and this is how loans get dragged out.
Ok, so the underwriter asked for this, that and the other thing, and you get me everything including updated bank statements and the letter explaining that you lived at 123 Home Street over fifteen years ago even though it seems completely ridiculous. We submit it to the underwriter, it goes back through their setup process and the underwriter notices that you have large unsourced deposits on your updated bank statements because you transferred funds from your wife’s bank account (who is not on the loan). We never previously talked about money from her account, but you had to shift some funds around to pay bills and figured you’d just replace what was used so you would still have enough cash to close. So the lender reconditions us for sixty days of your wife’s banks statements to source those funds, a letter of explanation, and assuming the funds come from her job so we don’t have to trace or source the deposits in her account, we will need to provide a gift letter that has her gifting you the money from her account. But wait, you’re married!! That seems utterly ridiculous! It makes no sense! Yep. And thanks to the government we all know and love, it’s a lending requirement. But it takes me 30 seconds to produce and email the gift letter, and less than that for both of you to sign it. Three days later I get the bank statements, the gift letter, and the letter of explanation, and then after another 48-72 hours the underwriter clears the conditions. Since the appraisal just came in with no issues, we are now clear to close! Whoohoo! See how those days added up into a couple weeks? This is why time is of the essence. Hot potato! But we’re clear to close… now what?
We are clear to close. Congratulations! What happens next is also lender dependent. The key is the Closing Disclosure (CD) and each lender has their own way of getting it to the borrower(s). New lending laws that came into affect in October 2015 require a mandatory three day waiting period after you view/acknowledge the CD before you can close. So that adds more days onto your closing timeline. Or thinking from a different angle, if you have a hard closing date, the CD MUST go out and be acknowledged at least three days prior. If your CD doesn’t go out on time, or if you don’t acknowledge your CD on time, you CANNOT close. By law. So once the CD goes out, I am a big pest ensuring you do what’s necessary to acknowledge it. It is important to note that you are acknowledging that you saw it, not that it is necessarily correct. I’ll explain.
The purpose of the CD is to protect the borrower. On the initial Loan Estimate we discussed at the beginning of the loan, we estimated your closing costs, prepaids, and down payment to give you an estimated cash to close. Everything had to be disclosed at that time and acknowledged by you, the borrower. The CD cannot have any new fees slipped in and the terms of the loan should be the same as when you started. The CD will reflect this and if anything is amiss, you can point it out. You must acknowledge that you’ve seen the CD so that the three day waiting period clock can start, but do point out any issues because they absolutely will be fixed before closing. At the closing table you will hand sign a final CD that will be 100% accurate.
Each lender has interpreted the handling of the CD differently. Some lenders won’t send out the CD until you are clear to close and they know it’s 100% accurate, others sling it out there to start the three day clock before you’re even cleared to close, but most lenders are a mix somewhere between the two. There are pros and cons to each method, but the most important thing to know is that you need to acknowledge it, and it WILL be accurate at closing.
So how does this work? Once you are clear to close, it’s out of my hands and all about the lender’s closing department and the title company. This is when the title company decision will again make or break your closing. Some title companies are a pleasure to work with, others not so much. In fairness, the same can be said about the lender’s closing department. My role becomes more like a cheerleader/goalie/referee/quality control position. I’m encouraging the title company to verify their fees quickly, I’m bouncing emails to the lender that come to me because the title company doesn’t understand how the process works (scary but happens more often than you would think), I’m linking them together or calming them down when they disagree on how to balance the closing disclosure or providing supporting documentation that the title company somehow missed, and I’m verifying throughout this process that proper lender credits, seller credits, etc. are applied correctly. If things are going well, which they usually do at this point, I feel like I’m watching a tennis match via email as the title company and the closing department email back and forth balancing their numbers. At some point the title company will say, “We balance!” and that’s when I know the actual, final numbers for cash to close.
If the CD hadn’t gone out previously, it will go out shortly after they balance for you to acknowledge and the cash to close should be accurate. If they slung the CD out there to start the clock, I will see the revised CD after they balance and provide you the final numbers. Sometimes this happens the day before closing, but it won’t be too far off what they had you acknowledge earlier.
Once the CD goes out, I become a friendly pest until it is acknowledged, then we can address any issues (if any) with numbers and get it fixed. We only have to send the CD out once, so if it needs a minor correction, the three day clock does not start over.
The next question is how to pay the title company the cash to close figure on your CD at closing. You will pay by either cashier’s check or you will wire the money to them. Which one it will be is dependent upon the title company and the amount. Some title companies will only take a wire. So how do we know? I simply ask them and then let you know. If it’s a wire I will get you the wiring instructions.
If you are married and your spouse is not on the loan but is on title, you BOTH have to be at closing. There is paperwork for the spouse to sign.
Normally they will ask for just one form of ID and will need to make a copy at closing, but for some inexplicable reason, at about 20% of closings they will ask for two forms of ID. So bring two forms of ID to closing just in case so you don’t have to scramble if you are part of the mysterious 20%.
And last but not least, smile! You just closed on your new home! 🙂