For many buyers, the home buying process can be a daunting task. All the things involved in purchasing your home seem overwhelming to most first time home buyers. The tasks at hand include, deciding on a Loan Officer to work with, obtaining loan prequalification, selecting the right loan from the increasing barrage of loan products, and all of these activities must be completed before one ever finds a home. It is no wonder that so many people shy away from taking part in the wealth building process of being a homeowner. My plan is to help those going through this process or those contemplating the idea of beginning this journey make it a less stressful process by being more informed on how the process works. Hopefully removing some of the mystery and replacing it with knowledge will help all my readers work their way through the process with as little stress as possible.
We will begin the mortgage education series with the initial process of obtaining a first mortgage. The idea is that if you understand how the process evolves then you will be able to develop a master plan on how to approach your home purchase.
1. Prequalification - This is the process in which a homebuyer works with a loan officer to learn how much the homebuyer is eligible to borrow prior to filling out the application to apply for a loan. This is one of the most important parts of the home buying process. Many buyers have gone out and found their dream home only to discover later that they are unable to obtain a loan to purchase the home. You can save yourself a great deal of stress and disappointment by going through a prequalification appointment before you ever start to look at homes. The prequalification appointment will arm you with the knowledge of what price range you can comfortably afford, thereby helping you prevent yourself from being a casualty of foreclosure.
2. Application – The application stage is more of a formality for the lenders sake as it is an extension of the prequalification process. Most lending institutions will not give loan approval without a property, so once the buyer has found a property then a formal application is drawn. At this time, the buyer usually must make a decision of locking in their interest rate or letting it float. Locking in an interest rate is when the buyer and lender agree to a current market interest rate that the buyer is guaranteed to receive as long as they close on the home within a certain timeframe. Most interest rate locks last 30 days although longer interest rate locks are available. However, interest locks of greater than 30 days require the buyer to pay a higher interest rate. Even though it is a positive for the buyer to be assured that their interest rate will not increase, taking advantage of a lock also has a negative side. Market interest rates can fluctuate down just as easily as up and so locking in an interest rate can leave the buyer paying a higher than market rate. This is why some buyers choose to float (not lock in interest rate) their interest rate. If interest rates are low and inflationary pressures are rising, then it makes sense to lock a rate, as there exists a higher potential for the rates to rise rather than fall. This is a good scenario to lock your rate. If interest rates are higher than average and the U.S. economy is slowing than there is a greater potential for interest rates to decline. This scenario is a great example of a time where it would make sense to float your rate.
3. Processing Stage – During this stage of the loan process, the loan officer works with the processor to gather and organize all of the documentation needed for loan approval. An appraisal, title search, and survey report will be requested before the lender moves forward to loan approval. The processor will order all required verifications of employment, assets, and mortgage or rental history. This can be one of the most stressful times for buyers as it is a time period where all the buyer can do is wait.
4. Lender Approval – If the loan officer is working for a mortgage broker, the processor will submit all of the gathered loan documents to the lender for approval. If the buyer is working with a lender directly, the loan will begin the underwriting stage. Mortgage brokers typically send the loan packet to a lender and work as intermediaries between the lender and the borrower. This is referred to as wholesale lending. However, it is also common for lenders to have loan officers making loans directly to buyers. This is referred to as retail. In either case, the word lender is the member of the transaction that provides the money for the loan.
5. Underwriting Stage – The underwriter for the lender will review the loan file and will make a decision as to whether or not to make the loan. This is referred to as underwriting the loan.
6. Conditional Approval or Denial – The processor hears back from the underwriter with either a conditional approval or a denial. A conditional approval means that the lender is willing to make the loan provided that certain stipulations are met. If the processor receives a conditional approval, they will look over the items requested and advise the loan officer. The loan officer will then notify the borrower on what items must be provided to garner final loan approval.
7. Final Approval Stage – If all the conditions of the conditional approval are met, then the lender will issue a final approval. For most of us going through the home buying process, this is the second most exciting time. The first being when we are handed the keys.
8. Loan Doc. Stage – The loan processor coordinates the deliverance of the loan documents between the lender and the escrow or settlement company. An escrow or settlement company is an independent company that has been contracted to fulfill the requirements of the purchase contract and lenders demands approved by the buyer. The lender will either prepare the loan documents or order them through an independent loan document preparation company. Once these documents are prepared, they are sent to the processor who forwards them to escrow.
9. Signing Stage – This is another point in the process that can be very stressful for buyers. Very few people enjoy signing piles of legal documents written in legal jargon. A good tip to make this process less nerve racking is to request a copy of all these documents and go over them beforehand with either your attorney or your real estate agent. The signing stage plays out with the loan processor coordinating the date and time of the signing of loan documents between the borrower and escrow or Settlement Company. Once the documents are signed, they are returned to the lender for review. Another tip that might help ease your mind during this stage is to request both your real estate agent and loan officer be present at the time of signing in case you have any questions or just for moral support. Don’t feel funny about requesting them to be at closing as any good real estate professional will be more than willing to do so for you.
10. Review – As might be expected, this stage is when the lender receives the signed loan documents and reviews them to ensure that all necessary documents have been received and signed properly. The lender will then prepare to release funds on the day agreed to by both the buyer and seller as spelled out in the contract for purchase.
11. Funding Stage – During the funding stage the lender releases funds to the escrow or settlement company. The escrow or settlement company receives and disburses the funds to the appropriate parties as indicated by the lender instructions and the HUD-1 which is a government required accounting document signed by both the buyer and seller. The escrow or settlement company will instruct the title company to record the mortgage or deed of trust with the local public county recorder. The loan is funded and recorded, and all parties are notified. Typically at this point, unless the purchase contract says otherwise, the buyer experiences the most exciting part of the process that makes having to jump through all the hoops worth all the hassle. The buyer receives the keys to their new home.
12. Servicing Stage – The lender will set up the loan for servicing; this means setting up an account to begin collection of the mortgage payments. Lenders who do not service their own loans will sell the servicing rights to an outside company for a fee. The buyer then makes payments to the servicing company. It is not uncommon in the first couple of years to have your loan sold to different servicing companies. This can be frustrating for some people as they feel like they do not know who to send their payment to. But, don’t worry; just monitor your mail for letters that will explain how to make your payments. They are required to keep you informed on where you are to send payment. Now during this stage it is very important that you always stay on top of making your mortgage payments. Being late on your mortgage is the single most negative blemish to have on your credit. For good credit score management, it is vital that you never pay your mortgage later than your grace period. To find out more tips on good credit score management look for the link in the left hand navigation saying Credit Score Management.
Thank you for taking the time to read over my blog post. This post is the first in a series with the goal of educating my readers on the home mortgage process and how to determine what is the best type of mortgage for you. I hope you found this post informative and that it has made the mortgage obtaining process less mysterious.
