Being in the dark about the application process can be a nerve wracking experience for many first time homebuyers. By learning exactly what happens from application to closing, you will gain valuable confidence and be ready to ask the right questions along the way.
Before you can submit an offer on the home of your dreams, you almost always have to show off your pre-approval letter. This piece of paper is supposed to prove to the seller that you will qualify for a mortgage - sellers need this assurance to avoid taking their house off the market for someone who can't purchase their property.
If you call or meet me for a pre-approval, I'll ask questions about your employment, income, bank account balances and your comfort range for a monthly mortgage payment. I will also ask your permission to pull a credit report.
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 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. 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 Comparing Mortgage Quotes)
It is important to keep in mind at this stage of the game that some information you have provided has not necessarily been verified. In most cases, we will still need to formally verify your rental history, bank account balances and your current employment. The pre-approval is just that: preliminary. Before you can count on full loan approval, you must submit a…
Where the Pre-Approval is something that can be handled relatively quickly, often over the telephone, the application itself is more involved. I like to meet clients in person, if at all possible, to make sure everything is filled out correctly and to give you a chance to ask questions in a face-to-face setting. For my out of town clients this is often not feasible, so I will typically overnight the application and go over everything on the phone.
In addition to filling out the standard mortgage application (external link), used by banks all around the country, you will also need to gather documentation to be submitted along with the file. The standard documents I usually require are:
These documents are usually the bulk of what we'll need. After your file goes through underwriting, we may require some additional documentation.
After the application is complete, it is also necessary to go over various disclosures associated with the loan program. There are disclosures that authorize the bank to do things like verify your employment and there are others that explain the features of your loan program.
Once everything is signed and completed, my job is to take your application to…
When your file is handed off to processing, their main job is to verify everything on the loan application. They will call your employer to verify your employment history and income. Your loan processor will also cross check your bank information, examine your tax documents, call your landlord and in general make sure everything is in order with your application and supporting information.
Sometimes there is a snag at this stage of the game. The processor may spot something like an item missing from the list of required documents. It is their job to contact you as soon as possible so we can collect whatever might be missing from the file, like a bank statement or a tax return. Only when that document is received and everything has been verified can the processor move your file forward to…
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. Sometimes a loan file won't quite meet a particular requirement here and there. Let's say your credit score is a 615 and you needed a 620 according to the standard guidelines of the loan program. It is sometimes in the underwriter's discretion to approve the file if there are compensating factors to make up for that score. 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.
Many of my underwriters often boil the whole process down to the phrase, "it has to make sense." If everything measures up, your file moves on to…
The closer's job is to tie up all the loose ends in your file and draw up the final set of documents to be signed at closing. Possible loose ends could include receiving information from your homeowner's insurance provider, title work from the title company and contract addendums from your real estate agent. Once everything has come in, the closer will send your file to the title company where it awaits your signatures.
The above sections describe the general steps involved with your mortgage application at the bank, but there are a few other things that need to happen before you can close on your new home.
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. The process usually takes at least a few business days.
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, 6.125% might go up 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 once you have a sales contract 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.
The title company works to make sure the property you are buying is free from liens and ownership interests held by previous owners. 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 also 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.
In order to close on a mortgage, 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 whom you talk to. Often, the agent who holds your car insurance will give you the best deal - but not always. You should do your research, but find a policy as soon as you can. Expect to pay your first year's premium either up front or at closing.
Prepare to sign your name more than you ever have before in a single sitting! Closing is the day you officially commit to purchasing your home with the loan program you selected at the beginning of the process. I attend all of my closings, unless they happen out of the St. Louis area. In that case, I leave my schedule open for the closing in case anyone has any questions about the loan documents.
The main items you will sign at closing are the note and the deed. The note is the legal instrument that binds you to repaying the loan with the terms and rates you locked in earlier. The deed shows that you own the property and that you took out a loan to purchase it.
You will also go over the final settlement statement at closing. This shows the breakdown of all the fees associated with closing your loan. If you notice any unexpected charges on the settlement statement, speak up! You should never have to pay for anything you weren't warned about on the Good Faith Estimate.
Once there are no more papers left to sign, you're all done. Everybody shakes hands, says congratulations and leaves you to focus on the fun stuff like moving in and enjoying your new home. I personally find closing with first time buyers to be very rewarding - there's nothing quite like being a part of such a momentous event.
To learn more about the application process or to schedule a consultation, contact me anytime.
