The Process of Obtaining a Mortgage
This article is written as a basic outline for the process of obtaining a home loan. The steps from application to signing settlement papers involves many details which can best be answered by contacting us directly. This outline will give you the necessary framework of understanding the mortgage process before contacting a real estate agent or loan officer to begin the purchase of your next home.
(1) Consultation with Loan Officer
We have worked with several loan officers for more than a decade. If you are ready to take the step toward purchasing a home we can can direct you to a loan officer who possesses the knowledge and abilities to find the best loan program, and execute all phases of the mortgage process in the best interests of our clients. Finding the right loan officer is as important as using the right real estate agent. The first discussion with your chosen loan officer will address financing needs, and require you to provide qualification information such as income, debts, and assets. You should be ready to supply the loan officer with income statements and financial liabilities listed below.
- W-2 forms & tax returns for the past 2 years.
- Current pay vouchers with social security number, and year-to-date earnings.
- Bank account statements from savings, checking, stocks and bonds, retirement accounts, and money market funds. This is necessary to verify cash reserves before and after closing.
- Canceled checks for recurring payments such as rent, mortgage, and child support payments. Include proof of minimum payments and current balances.
- Profit & loss statements, federal tax returns, and balance sheets (past 2 years for each) for business owners.
- List of creditors with account numbers and current balances. This includes monthly debts such as credit cards and student loans.
- Written explanations of more income such as commissions and bonuses, retirement and disability payments, social security and child support payments during the past year.
- Gift letters. If you needed a third-party (usually parents) to gift the funds necessary for a down payment, the lender requires a letter verifying the gift was not a loan requiring repayment.
Besides monthly income, debts and obligations, the loan officer needs verification of your employment history, and place of residence during the past 2 years. This also includes the amount of cash available for down payment and closing costs. This discussion usually takes no more than 15 minutes to produce a prequalification letter.
(2) Obtaining a Prequalification Letter
After supplying financial documents, the loan officer is able to predict a qualification range based on your credit worthiness. You are now able to search for available homes which can be financed in your price range. After a home search with a real estate agent produces the home of your choice, it’s time to submit a purchase agreement with a prequalification letter to the seller. It doesn’t make any difference if this involves an arm’s-length transaction or a new home from a builder, the process remains the same. The prequalification letter allows the seller to check your ability to get financing and purchase the home. Besides giving you some idea of the joint costs of monthly principal, mortgage insurance, interest, and taxes; the prequalification letter also allows you to decide the down payment, closing costs, and other terms and conditions associated with the loan.
(3) Mortgage Application and Underwriting
Finding a mortgage with the best rates and terms requires you to speak to more than one loan officer. We suggest you speak to 3 lenders to decide which can offer you the best lending rates through loan programs which best matches your needs. The next step is finding 3 lenders for comparison shopping. It’s simple. Find the right real estate agent to represent you during the home purchasing process. Most agents are recommended by friends, family, and coworkers. It’s a matter of finding an agent by listening to the past home buying experiences of those you trust. The agent recommended to you should be experienced. This is important because they will have a short list of recommendations after using several loan officers in the past. Like real estate agents, not all loan officers are the same. The lenders suggested by agents will be experienced and familiar with loan programs which meet the needs of their clients. The same is true for finding good real estate agents. Experienced loan officers can suggest agents who are a good match for finding your next home, and representing your interests through the home buying process. Listed below are questions to help you decide on a loan officer.
- Interest rates with loan programs.
- Closing costs of selected loan.
- Cost for interest rate lock, and the time frame for locking the loan.
- Discount fees and origination points associated with the loan.
- Minimum down payment for loan choices.
- The qualifying guidelines for loans.
- Penalties for prepayment of loan.
- Documents necessary for loan approval.
- Time frame for processing the loan.
- Issues slowing or denying loan approval.
After supplying all requested financial documents, and finalizing all necessary loan application paperwork, the lender has 3 days to give you a Good-Faith Estimate, Truth-in-Lending Disclosure Statement, and any disclosures associated with your loan choice according to the Real Estate Settlement Procedure Act. The Good-Faith Estimate of closing costs covers loan origination, and settlement fees. Expect these fees to average 3% of the sales price. You are not committed to a home loan until you have reviewed and approved these disclosures by signature. Once these disclosures are approved, and you have provided the lender with a ratified contract, the lender will order an appraisal of the home to satisfy meeting the market value of the loan. At this point the loan package is now complete, and passed to underwriting for approval. You will begin paying loan processing fees at this point as you begin working with a loan processor until closing.
The basic review standards of underwriting is best described by using the four C’s (listed below) in the process of mortgage approval.
Capacity – The analysis of comparing a borrower’s income-to-debt ratio.
Credit – The statistical prediction of a borrower to meet future payment obligations.
Cash – The review of a borrower’s assets after closing. The larger the down payment, the stronger the loan application.
Collateral – The appraised value of the home under contract. Factors determining collateral value include: (a) sales of comparable homes in the immediate area (b) the size, condition, and upgrades of the home (c) location of home (d) cost to rebuild the home (e) rental income options.
Depending on the type of loan you chose a down payment of up to 20% is required to buy a home. Less than a 20% down payment of the contract price will require you to get mortgage insurance to protect the lender. You can lower your payment and qualify for higher price ranges by providing a larger down payment. Click here for different loan descriptions, and this link will give you a simple description of the advantage and disadvantages of common types of home mortgages.
(4) Satisfying Loan Conditions A home must be in good condition to meet appraisal conditions required for loan approval. We always recommend a home inspection to help find lender required repairs. Close attention to the mechanical and structural condition of the home occurs during an appraisal. This includes the life-expectancy of the roof (3-5 years minimum for most loans), electrical wiring to follow building codes, mechanical components such as the heating and air-conditioning system(s) in good condition, and plumbing installed properly and functioning without visible signs of leaking. During this point in the loan approval process the underwriter will verify the information on the mortgage application, and may require you to provide more information to help verify information, explain past credit issues, or correct problems discovered on your credit report. The lender now directs the title company to conduct a title search for obtaining title insurance and protection against encumbrances attached to the home. These include liens, easements against the interests of the property, unpaid taxes, zoning problems, restrictive covenants, and pending legal actions. If the home is determined to be located within a flood zone the lender will also require you to get flood insurance. Several lenders will also require a survey for property line verification. The home inspector is paid immediately after the home inspection is complete. The appraisal, title, and survey fees are collected at closing.
(5) Receiving a Loan Commitment Letter After the underwriter has approved the loan package you will receive a loan commitment letter from the lender meaning your mortgage application has been approved. But there are usually terms and conditions which need to be met before the loan is funded. Items usually include proof of repaired items of deficiency, final mortgage conditions, proof of required insurance, completion of all required inspections, and certificates of occupancy on new homes. After all conditions have been met you will receive an updated Truth-In-Lending Disclosure Statement at least 3 business days before closing. If there are any inconsistencies (especially the annual percentage rate, and the amount of your finance charges) contact your loan processor immediately.
(6) Closing It’s important to select the right title company for closing. This decision should be made when signing the purchase agreement. Like selecting a lender, an experienced real estate agent knows the right settlement company to close on your loan, and complete all title work properly. As mentioned above, like lenders and real estate agents, not all title attorneys, title agents, and loan processors are the same. An experienced agent is the best person to select the title professionals who will protect you from processing mistakes leading up to closing. You are entitled to a walk-through inspection of the home before attending closing and signing required documents. This ensures the home has been left in satisfactory condition, and all repairs have been completed according to contract. If the seller has not followed these contractual obligations, your agent can delay closing or arrange for the seller to deposit funds into an escrow account to cover the cost of previously agreed repairs. Disagreements on repairs are usually settled at closing by reviewing a copy of the home inspection report, and the ratified contract including the home inspection addendum. It’s a good idea to have these documents available for review during closing. Also bring copies of the flood certification, good faith estimate, homeowners insurance policy, title insurance policy, and appraisal to help verify ownership requirements, and dispute accounting problems on the HUD-1. You will also be required to provide 2 months of real estate taxes and insurance payments into an escrow account at closing. This protects the lender by ensuring the property taxes and required insurance will be paid if you begin missing mortgage payments. All payments including contributions to an escrow account will be documented on a HUD-1, and the closing agent will provide a copy of the HUD-1 before closing. This is the settlement statement listing all accounting of real charges and adjustments for the buyer and seller. The closing agent will also tell you the exact amount of funds necessary for closing. Payment is due on the closing date by cashier’s check or certified funds. The settlement agent will also provide you with automatic payment options. After signing your name repeatedly on loan and title documents you are now a homeowner. The title company will complete the filing of all legal documents including land records at the courthouse. If further details are necessary you can find a glossary of mortgage terms, and more information about the mortgage process in the Freddie Mac Mortgage Guide.
Finding a mortgage program which qualifies you for your target price range, depends largely on finding the right lender. We have worked with several loan officers during the past 15 years. We feel we have found the best in the mortgage industry serving Northern Virginia. When it comes to finding the best loan programs, returning money to our clients by reducing fees and closing costs, we work with the best. Contact us to put you in touch with the best mortgage professional to work in your best interests.
About the authors: Dwayne and Maryanne Moyers are residential real estate agents in Northern Virginia (Fairfax County, Prince William County, Stafford County, and Spotsylvania County). We are affiliates with Long and Foster Realtors. We are the largest independent real estate company in the nation.