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Being in the dark about the application process can be a nerve wracking experience. By learning exactly what happens from pre-application to closing, you will gain valuable confidence and be ready to ask the right questions along the way.

The Pre-Approval

Before you can submit an offer on the home of your dreams, you absolutely must have a pre-approval letter.  Sellers need this assurance to avoid taking their house off the market for someone who cannot purchase their property.

The information we need to process your pre-approval includes income/employment information, a description of the assets you have available (including cash on hand for down payment) and authorization to run a credit report through all three credit companies.  Also, rather than simply determining the maximum loan amount you can qualify for, I will work with your monthly payment comfort range.  Often, I can technically approve someone for a much larger loan than they could comfortably afford.

To process your pre-approval, I'll input all of your information into an automated underwriting program.  This piece of software analyzes everything from your income and assets to your employment history and credit.  The program then determines your eligibility for a wide variety of loan options.  

If you receive an approval, the program will tell us what documentation we need to support your formal application. If you receive an ineligible rating, the program will tell us why - this is an excellent tool because we can then formulate a specific strategy to receive the approval we need in as little time as possible.

If all this computer underwriting sounds cold, it's important to keep in mind that we also have several human beings that can perform the same function as the program.  The difference is that by putting your information into the computer at the beginning of the process, we can receive a detailed analysis of your loan file very quickly!

Assuming the underwriting program approves your file, I will issue a pre-approval letter. I will also give you a rate quote along with a Good Faith Estimate of closing costs.  To learn more about comparing rates and closing costs, read How To Compare Mortgage Quotes.

It is important to keep in mind at this stage of the game that most of the information you have provided has not been verified through paper records and statements.  The pre-approval is just that: preliminary.  Before you can count on full loan approval, you must submit a…

Loan Application

The purpose of the loan application is to formalize all the information you provided for the pre-approval and to document everything disclosed in the application itself.  

In addition to signing the application, it is also necessary to have you sign government required disclosures, including some that explain the exact features of your loan program.  These disclosures include the federal ‘Truth-in-Lending’ statement and a form that authorizes us to verify your employment.

This process of signing the formal application and disclosures can be done in person, but is often handled through overnight shipping - we will always send you a pre-paid envelope so you can send everything back at no cost.  While this is important, and ultimately needs to occur as quickly as possible, the most vital part of the loan application process is for you to provide all of the supporting documentation we will need.

The number one reason that my clients consistently experience a smooth transaction is that I request as much documentation as possible upfront, rather than waiting for my processor/underwriter to request them later.  A copy of the basic letter I use for my initial documentation request can be found here.  This letter is expanded to cover proper documentation for gift funds from parents or other special circumstances on a case-by-case basis.

It may not sound like much, but it is a very common problem for people to enter into the loan process without receiving a full, detailed list of the items needed.  What is worse is that the strict rules that we all have to follow in the industry for the formatting of bank statements and the types of supporting documentation that we can use is often left out, causing damaging delays and frustration.

After receiving at least most of what we need the file moves on to...

Loan Processing

(Below, I describe the two roles of ‘processing’ and ‘underwriting’ separately, but one advantage I have at Pulaski Bank is that my processor also acts as my main underwriter, making the overall process much more efficient!)

When your file goes to your processor, their main job is to verify everything on the loan application with the documentation you have submitted.  In addition, they will often need to call your employer to verify your employment history and income. Your loan processor will also cross check your bank information, examine your tax documents, potentially call your landlord and in general make sure everything is in order with your application and supporting information.

The processor may spot something like an item missing from the list of required documents.  They may also determine that we need more documentation in special situations.  It is their job to contact you as soon as possible so we can collect whatever might be missing from the file. Only when that document is received and everything has been verified can the processor move your file forward to…

Loan Underwriting

After the processor certifies that your loan file has been checked over in full, they will submit the whole package to a living, breathing underwriter.  The underwriter performs a wide variety of functions related to loan approval.  In some cases, all they need to do is double check the computer program against the processed file to issue their own final approval.  In other cases though, particularly with files that don't precisely meet the letter of the law, the underwriter must perform a detailed evaluation before issuing an approval.

The underwriting process at this point has a distinctly human aspect to it - it's not all about numbers.  For instance, if there was a recent late payment or a collection account on your credit report, the underwriter could request a letter explaining the circumstances behind it.  If there turns out to be a legitimate, understandable reason, the underwriter may, with discretion, approve the file.  There are many similar situations like that, which require the underwriter to analyze the file and determine what documentation is needed.

Closing

Once your file is approved by underwriting, the loan closer’s job is to prepare all the documents you will sign on the day of closing.  It is also their job to work with the title company and prepare your final settlement statement.  The HUD-1 Settlement Statement will itemize all of the actual costs associated with your loan and tally up the amount due from you on the closing day.  

For my local clients, I personally attend closing, where we will sign your final paperwork.  Most folks come prepared to sign a huge amount of documents, but we try to keep our stack as light as possible.  The most important document you will sign is the actual ‘note agreement’, which spells out your exact interest rate and the terms.  

After everything is signed, including my documents and a few from the title company, your work is done.  For a purchase, once the sellers sign their documents, you will officially own YOUR new home!

Other Parts of the Process

The above sections describe the general steps involved with your mortgage application but there are a few other things that need to happen while your loan is being processed and underwritten.

Appraisal

An appraiser's job is to make sure the property you are purchasing is not being sold above its true market value. To do this, they take a look at the property itself and research comparable properties that have sold within the last several months.  For FHA and VA transactions, the appraiser will also take a close look at the condition of the property.  If anything affecting the livability of the property looks questionable, they will request a licensed professional to certify the condition of whatever might be wrong.  This could require a heating and cooling contractor to look at an old furnace, or a roofer to examine your...roof.  

The process from appraisal order to completion usually takes at least 5 business days.  New disclosure rules require us to deliver a copy of your appraisal to you either by phone or email within 3 days from closing.

Loan Rate Lock-In

Interest rates change every day. They might go up or down depending on what the mortgage bond market is doing. For this reason, a loan officer's initial quote of, say, 5.125% might go up or down unless the rate is locked in.

Once you have an accepted sales contract on a property, you have the option of locking the interest rate - preventing changing market conditions from affecting your rate.

The only advantage of waiting to lock in is the possibility that interest rates will go down. Once you've locked the rate, even if rates go down, it stays locked. Personally, I'm not much of a gambler, so I usually encourage my customers to lock the rate early in the process. I do keep up with the market, but even the smartest analysts often miss the mark with their predictions.

Title Work

The title company works to make sure the property you are buying is free from liens and other ownership interests. Although they perform an exhaustive 'title search' for the home you are about to purchase, they cannot guarantee a perfectly free and clear title. For this reason, they issue title insurance, protecting you from unexpected ownership disputes. Around St. Louis, we usually close the loan at the title company. It is their job to process the disbursement of funds and to prepare the final settlement statement. 

Homeowner's Insurance Search

In order to close on a home loan, you will have to select an insurance agent and sign a policy. I encourage my customers to shop around for the best rates as they vary wildly depending on who you talk to. You should do your research and call a minimum of three providers, but find a policy as soon as you can.  Your first year premium will be paid upfront at closing.