THE LOAN PROCESS EXPLAINED

Steps in the Loan Process

Pre-Qualification

Pre-qualification is a comparison of income to debt, this step will only tell you the price range of the home loan you qualify for according to industry qualification standard ratios. A pre-qualification DOES NOT automatically give you approval status, in this process the lender gathers information about your income and debts and makes a financial determination about how much money you may be able to afford. Be sure to get a pre-qualification for each type of loan you are suited for different loans can lead to different values (depending on whether you are qualified for them).

Pre-Approval

Pre-approval is a more in-depth process than pre-qualification and it is highly recommended to get it early in the home buying process. Pre-approvals are conditioned loans from a mortgage provider and are typically submitted along with any bid you make on a property.

The application is actually the beginning of the loan process, The borrower (you) complete a mortgage application with the loan officer (or through mail or online) and supply all the required documentation for processing. The various fees and down payment are discussed at this time and you will receive a Good Faith Estimate (GFE) and a Truth-In-Lending statement (TIL) within three days, that itemizes the rates and costs for obtaining the loan. The following information will most likely be required for the loan application:

Personal Information

  1. Social security numbers of you and your spouse (or other co-borrowers),
  2. Age,
  3. Years of schooling,
  4. Marital status,
  5. How many dependents and their ages,
  6. Current address and telephone number.
  7. Your current housing expenses, including rent or mortgage payments, real estate taxes and insurance (your mortgage payment may include tax and insurance funds).
  8. Name and address of your landlord(s) or mortgage lender(s) for the past two years.

Employment History and Sources of Income

  1. At least two years employment history with employer's name and address, your job title or position, length of time on the job, salary, bonuses, commissions and average overtime pay.
  2. Recent paycheck stubs and Federal W-2 forms for two years (some lenders require full Federal tax returns).
  3. If self-employed, full tax returns and financial statements for 2 years, plus a profit and loss statement for the current year to date.
  4. A written explanation if there are gaps in your employment record, because of circumstances such as illness or - layoffs, or for any other reason.
  5. You will sign a Verification of Employment (VOE) form.
  6. If you are relying on income from other sources, such as rental property, social security or disability payments, child support, etc., you must provide adequate proof of the source. Appropriate documents could include canceled checks, copies of leases, certification of benefits, divorce decrees and similar evidence.

Personal Assets

  1. All bank accounts, checking, savings, and money market accounts, with the name and address of the institution, name(s) on the accounts, account numbers and current account balances.
  2. Recent bank statements for at least two months.
  3. Current market value of stocks, bonds, CDs and other investments. Vested interest in all retirement funds.
  4. Face amount and cash value of life insurance policies in force.
  5. Make, model, year and value of automobiles owned.
  6. Address and market value of all real estate owned along with the amount of rents collected, the mortgage on the property and the monthly mortgage payments (a profit and loss statement will be required for investment properties).
  7. Value of other personal property such as furniture.
    You will sign Verifications of Deposit (VOD) for each of the institutions (or a general authorization) where you have savings or checking accounts. Differences between the account balances reported by the institution and the balance you give for the loan application have to be reconciled. The lender will look for the source of funds which you will be using for the down payment and closing costs and fees. Gifts from a relative, church, municipality or non-profit organization may sometimes be used, but must be verified in writing. If you are providing less than 5 percent of the sales price, the donor must be a relative and must provide a letter stating the donor's relationship to you, the amount of the gift and the fact that no repayment is expected.

Personal Indebtedness

  1. In other words, how much you owe and who they are...debts include automobile loans, credit cards and retail store accounts, finance company, bank, credit union loans and existing mortgages, and/or home equity loans.
  2. You will need to provide current balances and monthly payments on all of your current bills, loans and other debts.
  3. You will need to give the account or loan number, the monthly payment, the number of payments remaining and the outstanding balance.
  4. This information will then be verified by a credit report ordered by the lender. If you have had credit problems, you should inform the lender. Lenders recognize that unemployment, illness, marital problems or other financial difficulties can temporarily impair your credit rating. Prepare a written explanation of the circumstances to be included with the loan application, the lender must consider this written explanation as part of the underwriting analysis. If the problem has been corrected and your payments have been made on time for a year or more, then your credit will probably be judged as satisfactory. If you have been through bankruptcy or foreclosure proceedings within the past seven years, be prepared to give full details and copies of any applicable documents.
  5. You will also be asked to explain the details if you are required to pay alimony, child support or separate maintenance, these obligations are treated like debt payments and will be part of the underwriting analysis.

Additional Information

  1. You will be asked to sign a section of the loan application which contains your certification that the information you have provided is correct to the best of your knowledge; your promise to advise the lender of any changes in the information on; and your consent to (1) verification of the application data, (2) submission of account history to credit reporting agencies, and (3) transfer of the loan or loan servicing to successors to the original lender.

The last part of the application requests information on the race and gender of the applicants, the lender is required by federal law to request the information, providing this information is completely voluntary on your part and has no bearing on your loan application. The Federal Government uses this data to monitor lenders' compliance with fair housing and equal credit opportunity laws. Loan officers make every effort to collect all data at the time of the loan application, but cannot foresee every circumstance. If there are particular circumstances surrounding a loan application, the lender may require additional information or documentation after the application has been submitted for approval. Requests for additional information are not necessarily bad omens and your primary concern should be in responding promptly with the information. At the time the application is taken, you will probably be asked to pay for the credit report and appraisal fees. Based on the information collected in the application, the loan officer may be able to pre-qualify you for the loan requested, but cannot approve the loan. Approval is done by the lender's underwriters after all documents and information have been received and verified. The lender must provide you with a Good Faith Estimate within three business days after completing the application, it will show costs associated with the loan settlement, such as origination fees, mortgage insurance, title insurance, escrow reserves and hazard insurance.

Loan Processing

After you have a contract on a home you should contact the lender/loan officer you have chosen and provide the following information:

1. The full property address.
2. Closing date as per contract.
3. If you are purchasing a Townhouse or Condo, have the name of the homeowner or condo association as well as the address, contact person, and contact number at the association.

You should ask your loan officer what the conditions of the loan are, make a note of the conditions you are responsible for, such as:

1. Asset verification.
2. Income verification.
3. Credit conditions.
4. Any other personal conditions that you are able to provide right away.

After you receive your loan package, review the loan documentation thoroughly, sign where it is indicated and return the package to the lender as soon as possible. You should receive a copy of all documentation in the loan package for your file.

Processing usually takes between 5 and 20 days of the application. The processor's job is to put together a package that can be underwritten by the lender. The processor reviews the credit reports, verifies the borrower's debts and payment histories, as well as reviewing the appraisal and survey. This step checks for borrower or property issues that may require further review.

Underwriting

Underwriting is the process of reviewing and evaluating the information provided on your application, then making a decision as to whether a borrower qualifies for a loan. Underwriters job is to answer basic questions such as:

  1. What is the source of your income, and is it stable?
  2. Is your income adequate to cover the expense of the new mortgage payment?
  3. How much long-term debt (debt that will take longer than 10 months to pay) do you have?
  4. How's your credit history - helps lenders evaluate your ability to manage debt. It reflects how you've handled repayment of bills in the past.
  5. What is the property appraised at - provides an estimated market value of the home that you want to buy, based on similar homes sold in the neighborhood. Lenders loan up to a certain percentage of the property's value, this percentage is called the loan-to-value (LTV) ratio. The rest of the property value is covered by your down payment.
  6. Do you have hazard insurance - or homeowner's policy, protects you and the lender from loss if the home is damaged or destroyed by fire, storm or other hazards. You're responsible for obtaining hazard insurance prior to closing and for providing proof of insurance to your lender. The lender may also require additional insurance against loss by flood or earthquake.

The underwriter is responsible for determining whether the combined package assembled by the processor is an acceptable loan. If more information is needed, the loan is put into "suspense" while the borrower is contacted to supply more documentation.

After approval

After the lender has approved the loan, you will receive a commitment letter which spells out the terms of the loan and how long those terms will be offered. Read it carefully, you may still have conditions to satisfy. Usually you accept the commitment by returning a signed copy to the lender within five to ten days and you may have to pay part or all of the origination fees at this time. If the loan does not close within the specified commitment period, the terms are subject to change.

In cases where aclosing is scheduled soon after approval, the lender provide verbal approval instead of a commitment letter. Make sure you understand the terms of the approval, ensure that the processor has scheduled the closing with the title company and that your loan has been fully processed and reviewed.

You are assured of the financing, once the commitment letter or approval has been received.

Mortgage Insurance

Mortgage insurance underwriting occurs when you have a less than 20% down payment. The loan is submitted to a private mortgage guaranty insurer, who provides extra insurance to the lender in case of default. If more information is needed the loan goes into suspense, otherwise it is usually returned to the mortgage company within 48 hours.

Pre-Closing

During this time the title insurance is ordered, all approval contingencies, if any, are met, and a closing time is scheduled for the loan. The purpose of the closing is to make sure the property is ready to be transferred to you from the seller. To ensure that the transfer can be made, the lender normally prepares the following items ahead of time:

Title search and report - Research of land records, court records and other legal documents to determine if the seller has a clear, marketable title to transfer to you.
Title insurance binder - Provides the result of the title search and assures the lender the title to the property qualifies for a title insurance policy.
Survey - (not required in all states) Confirms the property boundaries are as described in the purchase and sale agreement.
Termite, well, sewer or septic certificate - Certifies the property is free of termites and/or other wood destroying insects, and that the sewage and water supply work properly. The sales contract will stipulate who (you or the seller) is responsible for these inspections and certificates.
Title insurance - Title insurance protects the lender against losses that may be incurred because of a defect in the title, a forgery, a recording error, claims of undisclosed or unknown spouses or heirs, and other risks that did not appear in the public records when the title search was done.
Hazard insurance - Also referred to as a "homeowner's policy", protects you and the lender from loss in the event of damage or destruction to the home by fire, storm or other hazards. You are responsible for obtaining hazard insurance and providing proof of insurance to your lender prior to closing. The lender may also require additional flood or earthquake insurance.

Document preparation
Several other documents must be prepared by the lender before the closing:

HUD 1 settlement statement - based on the contract terms it is an itemized list of the credits and charges, for you and the seller.
Loan documents - that grant your lender a lien against the property in order to secure the repayment of your loan. These documents include a promissory note, your legal promise to repay the loan, and a deed of trust/mortgage which is recorded in the public records.
The deed -contains a legal and accurate description of the property and transfers ownership of the property to you.

Make sure you ask to review all your settlement documents and consider asking your attorney to review them, at least one day before you sign them.

Closing

Upon loan approval, a closing date is set, this is the final step, it's when the home is transferred to you. Depending on the laws of your state, the closing may be conducted by:

Your lender
A title or escrow company
Your real estate broker
An attorney who represents either you or the seller

At the closing, you will sign many documents, including:

Settlement statement
Note
Deed of trust/mortgage

You will probably be required to pay any remaining down payment and closing costs. The lender "funds" the loan with a cashier's check, draft or wire to the selling party in exchange for the title to the property. This is when you (the borrower) finish the loan process and buy the house. As soon as all the necessary documents and releases are recorded, you will receive the keys to your new home!

Your Rights As a Consumer

Every consumer has the right to equal access under the law, to credit and the right to full disclosure of all costs associated with obtaining a mortgage. The Equal Credit Opportunity Act (ECOA) provides for equal access to credit regardless of:

- Race
- Religion
- Age
- Color
- National origin
- Sex
- Marital status
- Income from public assistance programs

There are additional protections if you have a physical or mental disability.Additionally, the ECOA requires that you be notified within 30 days of the completed application that your application has been approved as requested, modified, or rejected. Specific reasons for rejection must be given to you, in writing, at the time of rejection or upon your written request for the specific reasons. An application is considered complete once the lender has received all the information necessary to make a loan decision. This may include the following information:

- Credit reports
- Employment/income verifications
- Appraisals
- Approvals by insurance companies
- Additional information, as required

Additional consumer protection laws include:

Real Estate Settlement Procedures Act (RESPA)
RESPA requires lenders to give you advance notice of estimated closing costs in purchase and refinance transactions.
Truth-in-Lending Act
The Truth-in-Lending Act requires all lenders to fully disclose, in writing, the terms and conditions of a loan including the Annual Percentage Rate (APR), which reflects the cost of obtaining credit.

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